Real estate firms take land route to shed debt

Real estate developers are increasingly selling land to generate cash. Most of them have huge debt and are facing sluggish sales, even as the cost of construction loans has reached as high as 14 per cent.

For instance, DLF, the country’s largest developer, sold 12 million sq ft, or 275 acres, in the fourth quarter of 2010-11. Emaar MGF and Omaxe have also sold land or are scouting for buyers.

In a recent presentation to analysts, DLF said it raised Rs 1,270 crore from selling non-core assets, including land, in 2010-11. It plans to raise Rs 6,000-7,000 crore by selling non-core assets in the next two-three years.
 

WHO’s SELLING WHAT

DLF (Rs 1,270 crore)

Sold 12 million sq ft land in Q4, plans to raise Rs 6,000 crore to Rs 7,000 crore through sale of non-crore assets, including land parcels, in next 2-3 years

Emaar MGF

Is in final stages of selling a plot in Gurgaon to a US firm for Rs 220 crore; sold land in Kolkata last year

Omaxe

Raised Rs 60 crore by selling small land parcels in towns like Ajmer, Raipur, Kanpur and in Punjab in FY 2011. Plans to sell more in Tier-III towns

These sales are crucial as DLF needs to repay Rs 2,700 crore debt by 2011-12. It plans to reduce its net debt of Rs 21,424 crore to become a net debt-free company in the next three-four years.

“We will reduce debt by strengthening operational cash flows, enhancing focus on non-core divestments, moderating investment in land aggregation and capex on rental properties,” Saurabh Chawla, executive director, finance, said in a conference call with analysts.

Emaar MGF, whose initial public offer (IPO) is awaiting clearance from the Securities and Exchange of India, is in the final stage of selling five acres in its Gurgaon township, Emerald Hills, to Tishman Speyer, a US-based developer, for Rs 220 crore, according to a person close to the development. Last year, it sold a land parcel in Kolkata. It is also looking to sell majority stakes in some yet-to-be-developed projects.

Anuj Puri, chairman of property consultant Jones Lang LaSalle, said apart from reducing debt, the developers wanted to book profit by selling land that did not fit into their strategy. Many developers had bought huge land parcels to go pan-India but decided it did not make sense to develop these tracts.

“Such sales by builders have gone up by 15 per cent in the first five months when compared with the entire 2010,” said Puri.

According to Emaar’s draft red herring prospectus filed in September 2010, its over Rs 4,500-crore debt has to be serviced by payment of Rs 1,199.8 crore by March 31, 2011, and Rs 796.8 crore and Rs 142.6 crore by March 31, 2012 and March 31, 2013, respectively. An e-mail to Emaar MGF did not elicit any response.

This week, New Delhi-based Omaxe said it raised Rs 60 crore by selling small land parcels in small towns in 2010-11.

“Omaxe could also sell smaller land parcels in Tier-III towns such as Visakhapatnam, Bahadurgarh and Sonepat this financial year to raise additional resources,” said Sumit Arora, vice-president, investor and strategic relations, Omaxe.

Pune-based Kumar Urban Development, another IPO aspirant, was also planning to sell stakes in some undeveloped land parcels, said a person in know of the development.

Suman Memani, a real estate analyst with Mumbai’s PINC Research, believes that selling land has become a quick-fix way to generate cash as bank credit to the sector has become tight and lending rates are going up.

“Today, any new debt does not come for less than 14 per cent. It does not make business sense to raise funds at 14 per cent and develop properties. That is why many of them are selling land parcels and generating immediate cash flows,” said Memani.