Caveat investor: DLF and listed realtors have destroyed Rs 3,30,000 cr wealth

Reuters

• 
  

 IT is common wisdom that you can’t lose money in real estate, given that land is always in short supply. But then, how does one explain the humongous wealth destruction by real estate companies that are listed on the stock markets? If real estate can only go up, how come real estate shares only go down?

Take the case of DLF, the biggest daddy of them all. According to Firstbiz calculations, from its all-time high price of Rs 1,205 a share in January 2008, DLF has plunged more than 90 percent to Rs 109 today (27 October). This means in six years, just one real estate company has destroyed shareholder wealth to the tune of Rs 1,86,000 crore, falling from a high of Rs 2.06 lakh crore to just Rs 19,502 crore now.

Firstbiz added up the wealth destroyed by six listed realty companies from their peak prices and today’s values, and the total loss to investors adds up to Rs 3,30,792 crore. Clearly, realty companies are not worth investing in at all.

Of course, measuring share prices from their peaks may sound unfair, but it is worth noting that the stock market as a whole has not only regained its peak, but is heading for new peaks now. So, the real estate sector – at the very least – should have regained at least its old values. Far from it, it is destroying further value.

What explains this anomaly?

The answer has to lie in the peculiarities of the real estate industry, including the following.

One, most of the wealth is created in cash, and thus the listed shares do not participate much in any of the wealth created during the boom years of the realty industry.

Two, the real estate industry simply does not follow the best accounting practices and may, in fact, be doing funny numbers. As this Firstbiz report in 2011 noted, the reported cost structures of any two real estate companies are so divergent as to be meaningless.

A Citigroup report on Oberoi Realty and DLF in June 2011 showed widely divergent cost structures, that it made no sense. According to the Citi analyst, steel and cement accounted for 40 percent of DLF's total construction cost. Adding labour, we arrive at 70 percent as the total civil construction cost as a proportion of the total cost (excluding land, one presumes).

But in the case of Oberoi Realty, a Mumbai-based realtor, the Citi report mentions steel and cement cost as just 16 percent of the total, and overall civil construction costs at 46 percent. Assuming that steel costs cannot vary so much across the country, why does a builder in Mumbai have far lower costs than DLF in Delhi? Is it only the higher land cost that explains it all?

One can only speculate that at least one of these numbers is not quite what it seems.

Three, it is also obvious that realtors make money at the expense of the consumer by changing delivery schedules, reducing carpet areas, and generally loading the purchase contract against the interests of the consumer. But this is now being challenged by the regulators, with the Competition Commission of India (CCI) coming down heavily against DLF for cheating home buyers in Gurgaon. In August, the Supreme Court asked DLF to pay up Rs 630 crore as penalty while it heard the company’s appeal. Sebi has also come down on DLF for allegedly not making full disclosures at the time of its IPO.

Four, realty prices have less to do with real demand and supply and more to do with political manipulation of prices, given that real estate is where crooked politicians, businessmen and bureaucrats stash their wealth. This was demonstrated clearly during the last elections, when realty prices mirrored political need for money during election-time.

The same point came through in a recent Times of India report, which noted that builders in Mumbai pay “anywhere between Rs 5-30 crore per multi-storeyed building…bribe demands in the island city are a whopping Rs 1,200 per sq ft, Rs 800 per sq ft in the Bandra-Andheri belt and up to Rs 600 per sq ft in the city's eastern suburbs. Compare this with basic building costs of Rs 2,500-3,000 per sq ft.”

Since all these payments are outside the balance-sheet, it is highly unlikely that the correct costs and revenues are captured by listed real estate companies.

So it is caveat investor: it is simply too risky to invest in listed realty companies. Stay away.

 by R Jagannathan: FP :27 Oct 2014

DLF plans to sell non-core assets to reduce debt

Source : :17 May 2010, 0057 hrs IST,PTI


NEW DELHI: Realty giant DLF plans to raise Rs 2,700 crore this fiscal year through sale of non-core assets to reduce its debt of over Rs 16,421 crore by about one-third.

The country’s largest realty firm plans to cut its debt by Rs 5,000 crore, of which it plans to raise Rs 2,700 crore from sale of non-core assets and the rest from internal accruals. DLF had decided to raise Rs 5,500 crore last fiscal via sale of non-core assets, but was able to raise only Rs 1,800 crore.

“We are not only confident of managing our liabilities during the fiscal. We will also reduce our debt very comfortably,” DLF executive director (finance) Saurabh Chawla said.

... The debt will come down by about Rs 5,000 crore from the current level,” DLF executive director (finance) Saurabh Chawla said. Half of the planned repayment will come from non-core asset sales, while the rest will be funded through revenues from operations, he added.

DLF has to repay Rs 2,500-2,700 crore in debt this fiscal and an additional Rs 1,800 crore as interest. “Divestment of non-core assets as a strategy is to focus more on the core business operations and not merely as a means to reduce debt.

However, all-cash flows from this process will be utilised to bring down debt,” the presentation made to analysts said. DLF repaid about Rs 5,600 crore of debt in the last fiscal against a mandatory debt repayment of Rs 3,549 crore.

Mr Chawala said the current debt equity ratio stands at 0.53:1, which will increase to about 0.75:1 in this quarter, but come down during the fiscal. DLF’s net profit declined by 61% to Rs 1,730 crore in 2009-10 against Rs 4,469 crore.

The total revenue during fiscal 2009-10 fell by 25% to Rs 7,855 crore from Rs 10,431 crore in fiscal 2008-09.
In the last fiscal, the company had sold 12.55 million sq ft area across different locations.

DLF arm buys out PE stake in group firm for Rs 3085 cr

 
Source:TNN, Apr 26, 2010, 12.44am IST

MUMBAI: In a move that could have far-reaching positive implications on the revenues of real estate major DLF, it has announced that Caraf Builders & Constructions, a fully owned subsidiary of the Gurgaon-based company, has raised its stake in DLF Assets (DAL) to 91%. The deal was done through the purchase of convertible shares from private equity firm SC Asia for Rs 3,085 crore.

Caraf, which has recently been merged into DLF, is the holding company of DAL that was set up by DLF promoters to buy commercial properties of DLF. ‘‘Caraf Builders & Constructions, a subsidiary of DLF, has purchased 24.52 crore compulsorily convertible preference shares (CCPS) issued by DAL and held by DSIPL (a company owned by SC Asia), for a consideration of Rs 3,085 crore,'' DLF said in a statement to the BSE.

Compulsorily convertible preference shares are those which have to be converted into ordinary shares after a predetermined date. The transaction is in line with DLF's overall strategy to consolidate its holding in DAL. Post this deal, SC Asia will continue to hold 4.6% in DAL.

Caraf is engaged in the business of acquisition and development of real estate properties in India and presently holds four rent-yielding properties in Gurgaon, Kolkata and Chandigarh. DAL is a co-developer for four IT/ITES Special Economic Zones (SEZs) based in Gurgaon, Chennai and Hyderabad, the DLF release said.

PVR terminates deal with DLF

February 16, 2010 02:10 IST


PVR Cinemas has decided to terminate its agreement
 to acquire real estate developer DLF's exhibition
hall business, DT Cinemas. PVR informed the stock
exchanges today that, 'the conditions precedent for
the acquisition have still not been satisfied'.

The two companies had sought an extension till February
15 to conclude the deal. "The parties to the acquisition
agreement have mutually agreed not to further extend the
period for completion of the conditions precedent under
the acquisition agreement," said PVR to the Bombay Stock
Exchange . Initially, the PVR shares were to be allotted in January.

Nitin Sood, CFO, PVR, said: "We will continue to look at
inorganic growth in the domestic multiplex space. DT Cinemas
was one such option which we were exploring and, unfortunately,
it didn't work out. On the organic front, we intend to open 70 to 80
screens by 2011."

According to industry sources, DLF does not want to sell its theatre
 business. "DLF has mall properties coming up and they believe they
 can manage the cinema exhibition business on their own .

 As a result, they changed their mind," said sources.

In November 2009, PVR had announced a cash-and-stock deal to
buy out DT Cinemas. Under the deal, PVR would issue 2.5 million
shares to DT Cinemas, representing 10 per cent of PVR's fully
diluted paid-up capital. Its market capitalisation at that time
was around Rs 322 crore. In addition, PVR would also pay Rs 20.2 crore
for the acquisition, putting the total deal value at roughly Rs 50 crore.

DT Cinemas has a portfolio of 29 screens located in Delhi
, Gurgaon and Chandigarh. All the acquired cinemas
are on long-term lease in various mall developments owned and
 operated by the DLF Group. This acquisition would have
 strengthened PVR's presence in the National Capital Region.
 PVR currently operates 108 screens and the DT deal would have
 raised this to 137. Further, under the alliance,
 PVR would have had exclusive rights to operate as a key
anchor multiplex partner in all future mall developments
by the DLF Group. DLF had a slew of future mall developments
planned in key markets in Delhi,  Mumbai  Chennai,
Hyderabad, Noida, Jalandhar  and Lucknow

At the time of the announcement, industry experts had raised
 questions on whether PVR's revenues wouldn't be cannibalised, since
 PVR screens are located close to DT screens in many areas.
Even without DT Cinemas coming into its kitty,  PVR controls 60-70 per
 cent of screens in the Gurgaon-Delhi region. The oldest multiplex player,
 it was ousted from its second position by the INOX-Fame India  deal.
 INOX's  acquisition of Fame has increased its screen count to 204
screens, almost double of what PVR operates at the moment.