Mumbai-based realty cos prosper without being over-leveraged

At a time when India’s top real estate companies are exploring options to reduce their debt burden, a number of Mumbai-based companies, including Oberoi Realty, Hiranandani and Peninsula Land, have very low, or zero, debt on their books.

Consider this: The top three real estate companies — DLF, Unitech and HDIL — had over Rs 36,550-crore gross debt on March 31. DLF, which plans to raise Rs 6,000-7,000 crore by selling its non-core assets in two-three years, accounts for more than half, or Rs 23,990 crore, of this.

According to RBI estimates, developers had piled on a debt of around Rs 75,000 crore, mainly due to aggressive land buying between 2005 to 2008, in the aftermath of opening of foreign direct investment in the real estate sector and in the run-up to their initial public offers.

But many struggled to repay debt worth Rs 25,000 crore in 2010-11. Realty developers borrowed money from non-banking financial companies at 18 to 22 per cent and raised structured debt from private equity firms at 16 to 21 per cent to repay what they had borrowed from banks.

There is a common thread linking property developers like Oberoi, Hiranandani and Peninsula: these companies were largely conservative in buying land during the property boom of 2005-08.

Oberoi and Hiranandani, both unlisted, bought lands in their respective home turfs, Goregaon and Powai in Mumbai, at a fraction of today’s market rates. Land costs constitute 50 to 60 per cent of a project’s overall costs, if a developer has to buy land in South Mumbai. For Mumbai suburbs, it could range between 30 to 40 per cent.

For instance, Oberoi bought a 60-acre land in Goregaon from pharmaceutical company Novartis for nearly Rs 100 crore in 2002. If one has to buy the same quantum of land in Goregaon, he has to shell out Rs 1,200-1,400 crore, says a veteran realty developer.

Apartment prices in Goregaon has gone up four times since 2002. Today, apartments are sold at around Rs 10,000-12,000 a sq ft in Goregaon East.

Hiranandani also did the same. Known for large townships in Powai in Mumbai and Thane, it bought land in Powai in 1984 at throwaway prices. In Hiranandani township in Powai, new buildings command a price of Rs 20,000-24,000 per sq ft.