‘Down syndrome’ grips real-estate firms

MUMBAI: A ‘down syndrome’ seems to be sweeping real-estate firms tapping the markets.

From DLF, which recently came out with the mother of all initial public offerings (IPO), to Omaxe, the latest entrant, real estate companies are failing to raise amounts they had initially targeted.

On Monday, Omaxe said that that it’s issuing 1.77 crore through its IPO which opens for subscription on July 17, 2007.

At the upper end of the price band of Rs 310 per share, the issue will be worth around Rs 551 crore, less than half of what it had targeted about six months ago, when it filed its draft red-herring prospectus with the Securities and Exchange Board of India (Sebi).

“While our initial target had been Rs 1,200-1,300 crore, our merchant bankers advised us to lower our expectations, especially in the scenario of harder interest rates and softening property prices,” said Arvind Parakh, chief executive officer (corporate strategy and finance) of Omaxe Ltd.

Parakh’s explanation sounds logical, but what he and other real-estate developers tapping the capital market fail to mention is how market regulator Sebi has been tightening the screws as far as disclosures are concerned.

“Sebi has issued new guidelines that lay out how the land reserves of real estate companies can be valued.

The companies that want to issue shares, must own the land and must have paid for it, and the land must be capable of doing what they project it to do in the prospectus,” said Pranay Vakil, chairman of Knight Frank.

For example, a no-development land cannot be marked in the prospectus as land that can be developed as an IT park.

These stringent norms from the market watchdog have put a full stop to the rampant jugglery issuers were resorting to in terms of valuation.

Of course, interest rates and property prices have also lent their fair share of trouble to market-bound real-estate companies.

“Investor sentiment is much more conservative these days, and therefore, real demand has dropped. When real demand drops, value of property comes down, and valuations have to be adjusted accordingly,” said Gaurav Deepak, managing director of Avendus Advisors.

With harder interest rates, he feels that speculative demand has also come down. DLF, which hit Rs 1-lakh crore in market capitalization just four days after listing, raised Rs 9,187.50 crore against the targeted Rs 13,000 crore.

Of course, DLF had issued far less shares than it had initially planned. But its land bank was almost double (at over 10,200 acres) when it filed its prospectus with Sebi the second time, based on which the valuations were worked out.

Ditto with Housing Development and Infrastructure Limited (HDIL), which planned to raise over Rs 2,000 crore, but had to be content with Rs 1,710 crore. The shares of the company are yet to be listed.

“Valuation of a company at the IPO stage is done by working back the cost of the finished product.

Therefore, when real estate prices are softening, and people are not willing to pay as much for the finished products as the developer demands, the valuations will have to be adjusted downwards to that extent,” added Vakil of Knight Frank.
— with inputs from Tinesh Bhasin