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Mahindra War Room 2018 Realty & Infrastructure Caselet



The Indian Real Estate sector provides the second largest employment after agriculture,
and is set to grow at a rate of 30% per annum over the next decade. The key growth
drivers of this sector are rapid urbanization, infrastructure development and
demographic changes that are taking place. The term ‘Real Estate’ broadly
encompasses 4 major segments - housing, hospitality, retail and commercial. India’s
real estate market, is featured at 9th position, out of 55 international markets ranked in
the Global House Price index published in Q2 FY17, propelled by surging residential
prices across the major cities of India.

Mahindra Group first forayed in realty business in 1994 as Mahindra Realty &
Infrastructure Developers Limited (MRIDL). In 2001, MRIDL merged with GESCO
Corporation’s real estate development business to form Mahindra Gesco Developers
Ltd., which was renamed as Mahindra Lifespace Developers Limited (MLDL) in
2006-07. Mahindra Lifespaces’ mission is “Transforming urban landscapes by creating
sustainable communities.” A pioneer of green developments in India, MLDL has created
a balanced business model across residential developments, integrated cities and
industrial clusters.

Residential Developments: MLDL began its journey with residential developments –

offering customers with trust and transparency at a time when the industry was largely
opaque and customer centricity was unheard of. The company focused on the mid and
premium segments, targeting salaried professionals and business owners who put a
premium on transparency, financial security, timely delivery, quality and experience.
Over time, MLDL developed projects in Mumbai Metropolitan Region, Pune, Delhi-
National Capital Region, Bengaluru, Chennai and Hyderabad. MLDL developments offer
world-class modern living in gated communities, with large open green areas for
recreation. MLDL also made limited forays in luxury and second home segments.
Premium properties offer amenities such as swimming polls, squash courts,
gymnasiums, jogging tracks, community halls, creches, club houses and party facilities
as standard. In 2014, MLDL entered the affordable housing segment under the brand
‘Happinest’, with the goal of providing quality housing at affordable prices to the
emerging middle class of India. MLDL has launched 3 affordable housing projects
across India so far - two in Mumbai Metropolitan Region (Boisar and Palghar) and one
in Chennai (Avadi). Over the last 2 decades, MLDL has established a development
footprint of over 13 million square feet of completed residential projects and another 9.5
million square feet of on-going and forthcoming residential projects.

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Mahindra War Room 2018 Realty & Infrastructure Caselet

Integrated Cities: In 2002, MLDL launched their first large format integrated business
city under the brand ‘Mahindra World City’ in Chennai. The idea was to provide
integrated infrastructure for companies in manufacturing and services sector under SEZ
and Domestic Tariff Areas with Residential and Social infrastructure i.e. Livelihood,
Living & Life all in one place. Spread over 1550 acres, besides the industrial
development, Mahindra World City Chennai includes residential areas, schools, medical
facility, retail mall, business hotel, a club and other recreational facilities, all located
amidst wide open green spaces. In 2006-07, MLDL launched the second World City, in
Jaipur. Spread across 3000 acres, Mahindra world city Jaipur is located on the Golden
Quadrilateral and is within the Delhi-Mumbai Industrial Corridor (DMIC) influence zone.
Both the World Cities have been developed in a public-private partnership model with
the respective state governments. Today Mahindra World Cities house over 130 global
and Indian companies and provide direct employment to more than 47,000 people.

Industrial Clusters: In 2017, the company launched “Origins by Mahindra World City”-
small format industrial clusters of 250 to 600 acres in proximity of high growth corridors.
The core focus is on providing industrial infrastructure with supporting residential and
social infrastructure. These clusters offer higher level of productivity-enhancing value
added services for businesses.

Since inception, Mahindra Lifespaces has embraced sustainability and green living
philosophies, using Green architecture and design in their approach to buildings,
enabling healthy living and efficient use of resources. MLDL attempts to safeguard air,
water and earth by choosing eco-friendly building materials and construction practices,
and MLDL’s developments have several green credentials over time: All of MLDL’s
residential developments are certified by the International Green Building Council
(IGBC). The Mahindra World City in Chennai is the first township to win IGBC Gold
Stage 1 certification, is India’s first ‘zero food-waste city’ converting food waste into bio-
CNG & organic fertilizer and is a pioneer in off-grid solar power, offsetting 60 tons of
CO2 annually through their power plant. Mahindra World City Jaipur is the only private
city to be included in the C40 Clinton Initiative and among the first in Asia to be certified
as Stage 2 of C40.



If we look at the evolution of industries, there is a period where unscrupulous suppliers

& fly-by-night operators take advantage of gullible customers. This period is usually
followed by Government regulation, which brings a certain stability and standardization

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Mahindra War Room 2018 Realty & Infrastructure Caselet

of practices and processes over time. Then as markets develop further, the Government
tends to step back as the Industry begins to self-regulate. The Indian Real Estate Sector
has been witnessing a similar evolutionary trend. Over the last 2 decades, as real estate
across India started booming, a large number of unscrupulous developers emerged,
who launched and sold projects without having the necessary approvals or the financial
and technical resources to complete them. In many cases, their ownership of the land
itself was disputed. Some developers sold the same apartment to multiple buyers.
Thousands of innocent customers lost their life savings as many of these projects got
stalled or inordinately delayed due to regulatory or financial reasons.

Such instances hurt consumer confidence and ultimately the growth of the economy
itself. In response to the increasing number of such cases, the present government
passed the Real Estate Regulatory Authority (RERA) Act in 2016, the provisions of
which came into effect in 2017. Under this act, it is mandatory for all commercial and
residential real estate projects where the land is over 500 square metres, or eight
apartments, to register with the Real Estate Regulatory Authority (RERA) before launch.
The project can be launched only after all necessary approvals are obtained and
submitted to the RERA authority. All information regarding projects should be
transparently available for everyone to see. Real estate agents who facilitate buying or
selling of properties are also required to register themselves and quote their registration
number in every sale facilitated by them. The RERA act brought the much-needed
protection to the customer as well as greater transparency in this sector. It is interesting
to note that Mahindra Lifespaces was already following similar processes in the best
interests of the customer, well before the implementation of RERA. Therefore unlike a
large number of developers, MLDL did not face financial or process challenges owing to
RERA compliance.

Along-with RERA, the government has been announcing other policies that have a
significant impact on the sector, encouraging home ownership among low-income
segments by prioritizing development of affordable housing. The government has
provided tax incentives for developers under 80IBA and subsidy incentives to buyers
through the Credit Linked Subsidy Scheme (CLSS). In its budget for 2017, the
government withdrew tax incentives available to owners of multiple homes that are
rented out in an effort to reduce speculative buying and encourage first-time buyers.

These changes in the sector are expected to drive out a large number of fly-by-night
operators and smaller developers as they deal with the costs and processes of
compliance with these laws. The sector will likely see consolidation, with the emergence

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Mahindra War Room 2018 Realty & Infrastructure Caselet

of large, well-organized local developers and a number of corporate-backed developers.

Thus, these changes offer an opportunity for MLDL to grow rapidly.

Growth, however, has to be balanced with returns. In the last decade, the profitability
and return on equity (ROE) for the sector have dropped on account of longer launch
and completion cycle times, up-front land costs and reduced demand. Average PAT for
the industry has dropped from 16-17% in 2008 to 7-8%, and average ROE from 15% to
to 5-6% in the same period. MLDL’s own ROE has been in the range of 5-7% for the
last few years. The challenge for MLDL is thus driving growth while achieving high
returns on equity.

There are opportunities open up across 3 areas for MLDL could grow with a significant
improvement in ROE: the first is through Greenfield developments. Towards this end,
MLDL has sharpened its focus on the top 5 cities of operation, rather than being present
across all major cities, and prioritized land acquisition with a “one land and one launch
per quarter” goal in the residential space. The second is through acquisition and
turnaround of distressed real estate assets, which has got a greater momentum due to
the implementation of the Insolvency & Bankruptcy Code (IBC). The third avenue,
specifically for Mumbai, lies in the redevelopment of slums, older structures and ceased
buildings. Each of these opportunities have their relative merits and demerits that need
to be taken into account.

In Integrated Cities & Industrial Clusters, MLDL’s priority is to sell land in existing
developments and drive future expansion in an asset-light manner. The success of two
World Cities has encouraged other state governments to approach MLDL for similar
developments in their states. While pursuing these opportunities, MLDL aspires to
leverage its capabilities as a Development Partner. The Government can own the land
and find a finance partner, while Mahindra will bring expertise in conceptualizing,
designing, developing, selling and maintaining such integrated cities for a fixed fee and
a variable bonus. This “asset light” model will help improve Mahindra’s return on equity
by not committing to very large investments with long gestations.

In addition to regulatory changes and changes in the business model, the sector is also
affected by changes in technology, customer preferences, financial markets and so on,
which also offer opportunities for MLDL to drive profitable, high-return growth.

Given this spectrum of opportunities, evolve a strategy for MLDL to realize

growth with significantly improved return on equity.

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