MVIl TRanSITIonInGI nTo a PuREPlay REal ESTaTEFoCuSED CoMPany
Exit of Specialty packaging films business: Max Ventures and
Industries Limited (MaxVIL) was formed in 2015 following the demerger of Max India with
the legacy business of Max Speciality Films Limited (MSFL). In the same year, MaxVIL
decided to venture into the Real Estate business. The company has always firmly stated
that the future growth driver for its business would be the Real Estate vertical with the
maximum capital allocation.
The year 2021-22 (FY22) was transformational wherein MaxVIL
restructured its portfolio by announcing an exit from the Specialty Packaging Films
business to focus on Real Estate. The company divested its 51% stake in MSFL for 628
crore to its partner Toppan
Printing. Toppan, which already held 49% stake in MSFL, will now become
100% owner of the business after the closure of the transaction.
The rationale for the exit is as follows:
Emerge as a pure-play Real Estate (RE) business entity with a deep
focus on creating value
Generate capital necessary for scaling the RE business.
Attract strategic and financial partners to scale the RE business in an
asset-light manner.
Moving forward, MaxVIL will be rechristened as Max Estates Limited
through a proposed reverse merger subject to approvals. The Company will focus on the RE
business in the premium residential and commercial space in Delhi-NCR.
Divesting the packaging business will generate additional growth
capital of 600-650 crore to be deployed in the RE business. The Company has received the
first tranche payment of ~494 crore with the second tranche of payment of about 132-135
crore expected to be received before June 2023.
Following the completion of the divestment, the Company will be able to
create a war-chest of more than 1000 crore funded from sale proceeds, internal accruals,
and potential commitment from financial investors. It will look to expand its RE business
through strategic & financial partners akin to Max Estates partnership with New
York Life for its Max Square project. We are in advanced discussions with nearly half a
dozen landowners to acquire and develop prime land parcels in the Delhi-NCR.
Reverse Merger: The Companys Board has approved the Composite
Scheme of Amalgamation and Arrangement whereby Max Ventures & Industries Limited
(MaxVIL) will merge with Max Estates Limited (MEL), the wholly owned subsidiary of MaxVIL.
The new listed entity, named Max Estates Limited, will truly reflect our vision, the
nature of our business and aspirations to scale the RE footprint in Delhi-NCR. The merger
would enhance MELs balance sheet flexibility to further expand and grow the RE
business and the company also expects time and cost synergies through streamlining of
administrative operations.
Renewed Purpose and Mission: With an undivided focus on RE, the
Company has a renewed purpose to "Enhancing quality of life through spaces we
create". It aims to achieve this through:
Focusing on exceptional design, sustainability, and experiences
Being the most preferred choice for all stakeholders including
customers, communities, shareholders, and employees
Building a great place to work that attracts, nurtures and retains
exceptional people
Leading the market in harnessing technology to deliver world class
spaces
Maintaining cutting edge standards of governance
Being agile in adapting to the evolving external environment.
Strategy in Real Estate: Last year marked a strategic shift in our
RE strategy. While we continue to focus on expanding the Companys commercial office
footprint and building a portfolio of annuity-yielding assets, we also began exploring a
foray into the residential segment in Delhi-NCR in line with our mission – One
region, multiple asset classes.
The decision to enter the Residential asset class is based on several
positive factors, including but not limited to all-time high affordability, low-mortgage
rates (under pressure in the recent months), fiscal incentives, changing consumer
preferences, flight to credible corporate developers who can execute and deliver projects
on time with an ecosystem of promised amenities, among others. Besides, we also intend to
leverage the groups brand equity, its strength in terms of landbank, partners, and
network for a successful foray. Within residential, we intend to focus on mid-to-high-end
income segments providing a ‘LiveWell experience to positively impact the lives
of our residents.
Our commercial and residential portfolio is targeted towards expanding
at an average of approximately 1 million sq ft each per year for the next five years. We
are confident to make Max Estates one of the leading multi-asset class RE developers in
Delhi-NCR – a market that has a huge vacuum of credible and reputed developers
despite its mammoth size.
GloBal EConoMy
As per the International Monetary Fund, global growth is projected to
slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. Beyond 2023, global growth
is forecasted to grow at 3.3% per annum over the medium term. Crucially, this forecast
assumes the ongoing conflict remains confined to Ukraine, further sanctions on Russia
exempt the energy sector1, and impact of the COVID-19 pandemic on health and
economy abates over 2022.
The war in Ukraine has triggered a costly humanitarian crisis that
necessitates a peaceful resolution. The economic damage from the conflict will contribute
to a significant slowdown in global growth in 2022. A severe double-digit drop in the GDP
of Ukraine and a contraction of the Russian economy are more than likely, along with
worldwide spill overs through commodity markets, trade, and financial channels.
Even as the war hinders growth, inflation is expected to shoot up.
Besides increase in cost of living, the surging prices of the raw material for
construction and the development industry have increased pressure on the margins of
developers. Further, as central banks continue to raise interest rates to thwart
inflation, it will increase pressure on the emerging markets and developing economies.
Driven by war-induced commodity price increases and broadening price
pressures, inflation is projected at 5-6 percent in advanced economies and 8-9 percent in
emerging market and developing economies.
INDIAN ECONOMY
The National Statistical Office (NSO), in its second Advanced Estimates
of the national accounts pegged the countrys growth for FY22 at 8.9%. In April 2022,
The Reserve Bank of Indias (RBI) Monetary Policy Committee (MPC) estimated the GDP
growth rate for FY23 would be at 7.2% assuming crude oil prices at $100 per barrel during
the financial year. The projection of the GDP growth for FY23 is estimated at 16.2% in Q1
(Apr-Jun 2022), 6.2% in Q2 (Jul-Sept 2022), 4.1% in Q3 (Oct-Dec 2022), and 4% in Q4
(Jan-Mar 2023).
The headline CPI inflation breached the upper tolerance threshold of 6%
at the start of the year 2022. Pick-up in food inflation, including those of cereals,
vegetables, and spices, etc. contributed the most towards this breach. The inflation
trajectory will critically depend upon the evolving geopolitical situation and its impact
on global commodity prices and logistics. Considering these factors, and on the assumption
of a normal monsoon in 2022 and average Brent crude oil price of $100 per barrel,
inflation is projected at 5.72% in 2022-23.
The India government has implemented a range of policy initiatives in
the areas of sustainable development, infrastructural improvements, ease of doing
business, banking and financial services, job creation, digital transformation,
manufacturing, and services industries to build a strong base for the Indian economy. This
is reflected in the FY23 Union Budget which provides a framework for propelling growth by
focusing on four key themes: (i) public investment for building modern infrastructure
under PM Gati Shakti (ii) inclusive development (iii) productivity and investment, sunrise
opportunities, energy transition, and climate action and (iv) financing of investment.
The macroeconomic stability indicators suggest the Indian economy is
well-placed to take on the foreseen challenges. The growth in FY23 will be supported by
widespread vaccine coverage, gains from supply side reforms, easing of regulations, robust
export growth, and availability of fiscal space to ramp up capital spending. The year
ahead also looks poised for a pickup in private sector investment, with the financial
system in a good position to support economys revival.
Real Estate Sector in India
2021 was a watershed moment for Indias RE sector as the sector
continued to show resilience and steady rise in demand for office and residential spaces
despite the exigencies originating from the pandemic. The first wave of COVID-19 had
brought the sector to a relative standstill for a while. However, by the last quarter of
2020, the market picked pace, particularly owing to an increase in demand for residential
spaces. The second wave of COVID-19 hit the sector just as it had begun to revive itself.
Unlike the first wave, the ramifications of the second wave were not as prolonged. Despite
a devastating second wave, investments into the RE sector have been unwavering, especially
from domestic and global investors.
While domestic capital led to completion of deals in the residential
sector, foreign investors were largely seen focusing on commercial assets. The sector
attracted investments worth $9433 million during Q4FY22 – a 41% jump in
institutional investments over the previous quarter – led by the office segment and a
comeback of retail RE with several large deals in the pipeline. The CY2022 investment
volumes are likely to be on a par with 2018 and 2019 (pre-COVID-19) levels.
From the RE sector perspective, the escalation in commodity prices is a
serious cause of concern, and is expected to stabilize in FY23. With healthy recovery in
end-user-led demand, which is expected to continue, the developers hope to pass on a part
of the escalation by increasing the sale prices while continuing to optimize costs.
Residential Real Estate
The residential market turned a corner in FY22 with sales momentum
consistently improving over the year. The COVID-19 pandemic turned into a strong factor by
supporting housing demand and resulted in a paradigm shift in the attitude of end users
for residential properties. These users, perhaps due to the uncertainty caused by the
pandemic, started gravitating towards the security of home ownership.
Improving economic/business environment post the COVID-19 second wave,
increased understanding and acknowledgment of the pandemics challenges and focus on
vaccinations had helped the residential market stage a smart recovery in Q2FY22, and the
third and fourth quarter held the promise of a sustained recovery.
The growth in sales was, of course, aided by the decadal low home-loan
interest regime, falling house prices coupled with the demand stimulant measures
undertaken by some of the state governments. Sales4 in FY22 were 34% higher
than the year-ago period. Market traction did not disappoint in Q4FY22 despite concerns of
the Omicron variant, which ultimately had very little impact on the residential market.
While ready inventory remains a strong preference for homebuyers, established developers
with a robust execution record are increasingly finding a market for their
under-construction inventory, too.
According to the CBRE India Market Outlook 2022, capital values are
anticipated to witness an uptick due to factors such as robust sales and rising material
costs forcing developers to pass on the costs to the buyers. Additionally, with home
schooling and remote working likely to continue (if not continuously, but sporadically),
location is no longer the single most important factor while making home-purchase
decisions. Factors such as larger homes, flexibility on configuration and robust ecosystem
of amenities enabled by technology are likely to remain key focus areas for the
developers.
Over the last couple of years, the residential sector has undergone
structural reforms that have improved transparency and access to quality information, and
led to consolidation in the industry. Buyers have also become more informed with end-use
taking the lead over speculative investments. With recent headwinds in terms of surging
inflation and hike in interest rates, sales are expected to come under pressure. Further,
this coupled with interim escalation in commodity prices will also add pressure on the
margins for the developers. Hence, going forward, developer reputation, execution
capability and financial position would gain even more prominence in determining the shift
of the market share. This is reflected in the doubling of the market share of 10 listed
developers over the last five years and the gap has accelerated over the recent quarters.
Commercial Real Estate
Commercial office space has witnessed a strong revival in leasing
activities in FY22 leading to better absorption and lower vacancy. Fresh leasing was the
primary driver of leasing activity and the momentum is expected to continue in FY23. The
occupancy would involve a combination of pent-up demand and expansionary/consolidation-led
leasing as the occupiers start to re-align their business strategies after a
pandemic-induced hiatus. According to an analysis published in JLLs Office Market
Update, Q1, 2022, net absorption across seven cities stood at 11.6 million sq ft – up
by a significant 113% y-o-y.
For Delhi-NCR as well, the market is in recovery mode with pent-up
demand for office spaces coming from different sectors. The region recorded a net
absorption of 4.95 million sq ft in FY22, up 75% y-o-y and new supply addition
was recorded at 6.05 million sq ft, down 20% y-o-y. The gross leasing activity
was much higher driven by pre-commitment activity, while a significant number of renewals
were also recorded during the year.
For 2022, Grade-A supply of 50-525 million sq ft is expected
to be completed across the top seven cities, with net absorption to be around 36-385
million sq ft – a 35-40% y-o-y growth. For superior grade supply (institutional and
top
5 Source: JLL Office Market Update – Q4 2021 developers), the
pre-commitment rate rise is as high as 35%, clearly signaling the demand of
flight-to-quality assets from major occupiers, and the long-term confidence in India with
offices remaining central to their workplace strategies.
According to the CBRE India Market Outlook 2022, occupier appetite for
office expansion is strengthening. Technology firms, flexible space operators and
manufacturing sector would continue to dominate the leasing activity. IT/ITES players in
India have benefitted in terms of demand on the back of acceleration in digital
intervention and have been on an unprecedented hiring spree. They continue to account for
35-40% of the demand for commercial office spaces. Having said that, the margins have come
under pressure in recent months due to rising salaries and headwinds in the global economy
which may lead to companies revaluating their spends. We will need to carefully watch how
this pans out in coming quarters.
As economic recovery gains momentum, companies from all key sectors are
shifting away from negative views on office leasing, once held at the onset of the
pandemic. With offices set to be centers of collaboration and improved productivity
levels, the workplace designs will be recalibrated accordingly.
Following their pandemic experience, the occupiers started to demand a
more sophisticated RE offering that is capable of meeting both employee satisfaction for a
safer and healthier working environment as well as companies need for flexibility.
The ESG measures coupled with our focus on holistic well-being of the employees as well as
the WorkWell philosophy driven office developments will continue to fare well.
This is evident from the strong traction witnessed by Grade A+
developer-owned and developer-managed office spaces like the ones from Max Estates, which
has further accelerated the impetus on ‘Flight to Quality.
BUSINESS PERFORMANCE
The year gone by was a transformational one for the company where it
narrowed down its focus from dual businesses of Real Estate & Specialty Packaging
Films to only the Real Estate business. The Company divested its 51% stake in the
Specialty Packaging Films business for
~ 630 crore to its existing partner – Toppan Printing. Toppan,
which already held 49% stake in MSFL, will become the 100% owner of the business post the
successful closure of the transaction.
Since its inception, the leadership team had indicated that Real Estate
would be the companys long-term focus area. Following this divestment, we are glad
the companys entire focus and energy will now be dedicated into growing and scaling
up the RE business.
Within the business, we announced our intention to foray into the
residential business – a strategic move after firmly establishing our feet in
Commercial Real Estate (CRE) thereby cementing the legacy of the Max Group. The leasing in
CRE business was impacted during the start of FY22 on account of the deadlier second wave
of COVID-19. However, as the year progressed and the intensity of pandemic reduced, the
industry witnessed strong traction in leasing. With a strong portfolio of direct
initiatives, including digital outreach, the teams at Max Estates were able to deliver
spectacular results.
Currently, Max Estates includes two completed commercial projects
– Max Towers & Max House Phase-I. The total leased area for Max Estates increased
36% during the year to 4,00,433 sq ft in FY22 as compared with 2,95,232 sq ft in FY21. The
lease rental income for Max Estates increased 109.88% during the year to 37.36 crore in
FY22 as compared with 17.8 crore in FY21.
At Max Towers, the occupancy for the area owned by MEL increased to 98%
in FY22 from 91% in FY21. The leased area increased by 19,194 sq ft to 295,137 sq ft in
FY22 from 275,943 sq ft in FY21. The lease rental income from Max Towers increased 45.89%
to 30.2 crore in FY22 from 20.7 crore in FY21. Max Towers top notch clients such as
Khaitan & Co., Emerson, Indian Energy Exchange, YES Bank, Veolia, and Cyril Amarchand
Mangaldas, among others.
At Max House Phase 1, the occupancy reached 100% in FY22 from just 18%
in FY21. The leased area increased by 86,137 sq ft to 1,05,426 Sq. Ft in FY22 from 19,289
sq ft in FY21. The lease rental income from Max House increased 789% to 7.1 crore in FY22
from 0.8 crore in FY21.
Between Max Towers and Max House, both of which are fully leased, we
have been able to curate a very healthy and balanced mix of client across sectors –
both leading domestic players and multinational companies. Some of them are Samsung,
Target Sourcing, Nykaa, Emerson, Cyril Amarchand Mangaldas, Indian Energy Exchange, YES
Bank, JC Penney, Veolia, Delhix, Udacity, DBS Bank and several more. In addition, we have
been able to curate a unique mix of F&B, retail, sports, and other amenities across
our portfolio to deliver on our WorkWell promise as a key differentiator to the
overall experience.
The revenue pool will continue to grow once Max House Phase-II and Max
Square get completed and the leasing commences. Significant addition to the cash flow
streams will begin when we start launching residential projects. Max Estates cash
flows will gradually build-up over time from only leasing inflow to leasing income plus
residential cashflows – both of which will build-up over time as we move to a greater
number of projects.
Having demonstrated success with our initial developments, all of which
command a significant premium of 25-30% to the micro market rates, we are confident to
recreate the same in our residential RE journey and create value for our customers and all
stakeholders.
Our managed office offering – ‘WorkWell Suites
at Max House Okhla – offer flexible office space to the occupiers who do not prefer
to have a long-term lease commitment. It saves a huge upfront cost for the companies and
prevents the hassle of maintaining the office space. We have created a 200+ seats managed
office space at Max House which is 95% signed up. We are extremely encouraged with the
response and will strongly evaluate launching WorkWell suites at our upcoming
projects as well.
Revenue for Max Asset Services (MAS) increased 87% in FY22 to 23.9
crore from 12.8 crore in FY21. We expect the facility services business of MAS to pick up
strongly in FY23 as offices reopen.
Key Focus Areas for FY23
Cultivating Talent: While maintaining a lean corporate set-up, we
will continue to invest in building organizational capacity, including leadership
bandwidth in cohesion with the scale and scope of our current and aspired RE portfolios.
The focus will remain on strengthening land acquisition, liaisoning, construction,
sales and marketing and asset management capabilities to effectively serve across a range
of micro-markets within Delhi-NCR through a wide spectrum of product, price, demand mix
and regulatory landscape.
Environment, Sustainability and Governance (ESG): ESG issues such
as carbon emissions, use of sustainable materials, energy efficiency and wellness
enhancements are becoming important for both occupiers as well the investors of Real
Estate. We, even at a nascent stage of our growth journey, have taken small yet
significant steps in the right direction. Our first sustainability report, based on the
Global Reporting Initiative framework, was published in November 2021. We prioritized our
goals over short-term (6 months), medium-term (3 years) and long-term (5 years) across the
ESG category basis our detailed gap analysis across all verticals. For the next year, we
are targeting to be ranked on the Global Real Estate Sustainability Benchmark (GRESB)
scale. This would enable us to benchmark ourselves against the best practices of leading
players – domestic and global. We view this as a long-term journey of continuous
improvement.
Customer Experience: We always strive to enhance the experiences of
our tenants and have managed to do so by integrating the following WorkWell
elements into our approach:
Physical Well-Being
Air: We provide the freshest air in our buildings with HEPA
Grade advanced filtration.
Water: An intelligent water harvesting & recycling strategy
enables us to provide clean water, while lowering our impact on the environment.
Sanitation: We go beyond the ‘required standards of
sanitation and cleanliness to provide the highest quality of care and germ-free
environment across all our developments.
Nutrition: We attempt to provide seasonal-first fresh produce,
portion-controlled, well-sourced food options to our tenants.
Comfort: Accessibility, ergonomics, acoustics, and thermal
considerations with humidity control have been optimized to deliver distraction-free,
productive, and comfortable spaces to our tenants.
Technology: Our technology assisted workspaces pave the way to
marry modernity with the conventional engagement with office spaces.
Emotional Well-Being
Recreation: Abundant amenities to ensure balance between work
and play have been created, along with restful spaces for recreation.
Nature: Access to green spaces and abundant daylight is ensured
in the developments, along with integration of biophilic design.
Culture: A power-packed PULSE calendar of events across various
genres – music, wellness, culinary arts and cuisines, art & more – fosters a
sense of cultural immersion and provides a welcome and invigorating break from the daily
routine.
Community: The events held regularly at our premises foster
organic community building across building occupants.
Spiritual Well-Being: Incorporating features such as biophilia,
beauty and design, our developments provide an environment that optimizes cognitive and
emotional health.
Additionally, for our upcoming residential communities, we intend to
integrate additional elements that ensure the holistic well-being of residents through the
concept of LiveWell:
Safety and Security: Multi-tier security and high standards of
cleaning/sanitization.
Intergenerational Living: Age-inclusive design; provision for
dedicated amenities for each age group for recreation and comfort.
Light: Abundant natural light utilization in units to reduce
energy consumption. Developments designed in a climate-responsive format to ensure thermal
comfort and control over micro-climate.
Sustainability: Close attention paid to use of sustainable
materials, conservation, recycling, and efficient use of resources.
Health and wellness: Promoting a healthier lifestyle through
agile design interventions encouraging physical activity.
Biophilia: Incorporating features such as green design for
better cognitive and emotional health, and native species that are conducive to the local
biodiversity.
Design and Technology: Max Estates has proven its capability on
design-led differentiation with its assets and will continue to leverage its design
capabilities to cater to each micro market, anchored around the customers needs and
well-being. As an illustration, we have installed four levels of air filtration at Max
House, a first in any of the multi-tenanted buildings within an office space.
In terms of office spaces, we will be focusing on creating flexibility
around tenant space requirements (floor plates that can cater to both initial and
subsequent expansion needs), longevity and futureproofing the products for technology
innovation and work culture, sustainability, and tenant experience. Further, Max Estates
will continue to employ best-in-class technologies to streamline execution and design
development and minimize execution risk in terms of cost and time.
Efficient capital management: With focus on two asset classes, Max
Estates will efficiently allocate capital between the two while ensuring that a
well-diversified portfolio in terms of footprint is developed. This will be across
multiple markets within Delhi-NCR, including business models that are outright purchase
and joint developments. We will leverage our strong balance sheet in a timely manner to
secure growth opportunities at the right price. Further, to continue our asset-light
approach and diversify capital exposure, we will continue to bring in equity partners as
we have done with New York Life for the Max Square Project. We are in discussion with
several funds and equity capital investors for future co-investments in our upcoming
projects.
Cost Stewardship: While good demand conditions prevail, rising
material costs have been a concern for the realtors and other stakeholders. Key building
materials like steel, cement, and labour charges continue to face inflationary pressures
and may stabilize, albeit at a higher level in FY23. Despite these headwinds, we are
within our escalation budget for our upcoming project – Max Square – which is
due for completion in FY23 driven by design-led interventions and procurement
efficiencies. We have adopted technologies like building information modelling to
streamline the construction process, projecting costs and assisting the various teams in
managing the timelines. We are studying innovative construction technologies such as
prefabrication, lean design, and other measures to curb costs.
While we are in active discussions regarding several opportunities in
the Residential Real Estate sector across Delhi-NCR, we believe the space is fraught with
developers who have overpromised but underdelivered leading to several distressed assets
and huge customer dissatisfaction. Owing to a sound understanding of the sector, the trust
of marquee investors, a sturdy performance in the Commercial Real Estate over the years
and backed by the overall impeccable corporate governance track record of the Max Group,
Max Estates is well poised to make a mark in the Residential Real Estate space as well.
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