DLF figures out recovery path

This year could turn out to be a watershed for the country's largest real estate developer, DLF, as it seeks to monetise its huge portfolio of residential and commercial property to raise funds, which will enable it to reduce its debt (Rs 21,600 crore at the end of June) and tackle the slowdown. All told, the company wants to mop up Rs 10,000 crore from strategic sale to private equity.

Earlier this month, DLF announced that it will set up an equally-owned venture with GIC, Singapore's sovereign wealth fund, to develop two residential projects in New Delhi. GIC will invest $300 million (around Rs 1,990 crore), while DLF will develop the projects. The venture, however, needs to be approved by the Competition Commission of India.

Before that, in August, DLF said it will seek shareholders' approval to pledge more than 50 per cent of the shares in three wholly-owned units (DLF Cyber City Developers, Caraf Builders and Constructions and DLF Assets) through which it runs its annuity or leasing business of office space, information technology park, and malls.

DLF, which has faced the wrath of investors for long because of the massive debt on its books, has taken these steps at a time when developers across the country are finding it difficult to sell apartments. Barring a few micro-markets, residential real estate has seen dwindling sales for several quarters; as a result, most markets have huge unsold stock. Commercial real estate too has been impacted by the slowdown. Only office space seems to be doing well because of the boom in technology startups.

That's why many developers have put their properties on the block. Some believe that in this market, sellers are unlikely to get good value for their assets. Undeterred, DLF plans to sell more strategic stakes in its residential projects going forward.

And with rental assets of about 28 million square feet in its kitty, the company is keen on getting investors in the commercial projects too and launch REITs (real estate investment trusts). DLF has also received proposals from other developers to take over their distressed commercial projects. "We are exploring the proposals. DLF has a strong hold over managing commercial assets, we can bring our expertise in managing other developer's commercial projects," a person involved in the process says.

"Such project-level investments will lead to unlocking of embedded value in many of DLF's development projects. This investment is the beginning of a new relationship with GIC at the project level. We look forward to working together with GIC in many projects, both residential and commercial," Saurabh Chawla, senior executive director (finance), DLF, had said when the deal with GIC was announced.

In spite of the slowdown, in the first half of this year, private equity funds have invested Rs 11,180 crore in commercial and residential real estate, compared to Rs 4,002 crore in the previous year, according to data from real estate research firm Cushman & Wakefield.

The deal with GIC could well just be the start of DLF's recovery, according to an analyst based in Mumbai. "Private equity funds will be a substitute for cash flows and give enough (funds) to DLF to meet the construction cost without any investment of its own and help in paring debt as well. This is definitely the best way forward for the realty major," the analyst adds.

The company has already said it is going slow in launching new projects. In an analyst presentation, DLF said it plans to focus on finishing existing projects, and once demand revives, the company shall be able to sell completed, finished products.

For the last few years, DLF has been selling its non-core assets such as hotels and land to pare debt and focus on its core business of real estate. According to experts, the company has projects worth Rs 15,000 crore in its hands. Out of this, projects of Rs 4,000-5000 crore are completed, while the rest is unsold in under-construction projects.

With two upcoming retail destinations in and around Delhi - in Noida and Chankya Puri - to become operational soon, DLF expects to increase its rental revenues from Rs 2,400 crore to Rs 3,000 crore by the end of this financial year.