Indian Institute of Management Ahmedabad

PGPX PGP 2018-19

Real Estate Management Course
Articles for End Term Case Analysis

Why Realty Did Not Bite Piramal

by Samar Srivastava, Pravin Palande (Source – Forbes India)

When Khushru Jijina, 49, took over the reins at Piramal Fund Management (known as Indiareit
Fund Advisors Pvt Ltd till May this year) in 2012, one of his first moves was to stop raising
money for the Mumbai Redevelopment Fund. On the face of it, his decision was confusing,
perhaps even flawed. Mumbai, with its teeming slums, had large tracts of land that could be
cleared for housing. And with the Piramal brand name attached to the fund, there was no
shortage of investors. Given all that, why did he stop raising money, we ask him.

Because these were not conventional realty projects, Jijina tells Forbes India, pointing out that a
redevelopment project can get stalled due to a number of factors. For instance, the slum land
may not get cleared for development. Or slum-dwellers, with the help of political backing, could
halt work on an under-construction project. The risk was higher and this needed to be
communicated to the investors. “This fund was not meant for someone who is nearing
retirement given that we are underwriting redevelopment risk,” says Jijina, who returned those
investors their money and made a fresh start at building the fund.

The Mumbai Redevelopment Fund was set up a couple of months before Jijina took over in
September 2012 and was in active fundraising mode when he assumed charge. And, by
December 2012, it did raise its target of Rs 500 crore—despite the change in course. Only this
time, the investor profile was right. Earlier, many people who were nearing retirement had put
in money. Now, pension funds and family offices comprise the investor base—these are entities
that can take on more risk.
 This is the kind of smart thinking that has
catapulted Piramal Fund Management—set up
in 2006—to the upper echelons of the realty
fund business. Its name is now mentioned in the
same breath as HDFC, Kotak and Red Fort, three
other companies that have managed to carve
out a profitable niche for themselves. Putting it
in context, consider that over 90 percent of the
160 realty funds that set up shop since 2006
have gone belly up. Marquee names such as
ICICI were unable to even return the principal
amounts to their investors.

So what has worked for Piramal Fund

Management? That it is the only player in the
industry that focuses on all aspects of the value
chain. “Theirs is an interesting model,” says
Shobhit Aggarwal, managing director (capital markets) at real estate services firm Jones Lang
LaSalle. “It provides growth capital in a variety of forms to promising, upcoming developers—
something they would find hard to raise from banks.”

For instance, if a developer wants equity finance, Piramal Fund Management takes a stake in
the project. It also provides debt financing at predetermined coupon rates. Then, through a
non-banking finance company arm, it offers construction finance.

A recent addition to its services is an apartment fund that buys under-construction apartments
from developers who can later sell these at rates, and to buyers, that are controlled by it.
Piramal Fund Management also owns a development arm, The Address Makers, which has
established three properties in Bangalore.

Given the scope of its services, while all realty funds have a takeover clause in their contracts,
Piramal Fund Management has the actual capability to do so if a developer reneges on his
commitment. Take, for instance, the fact that no other fund offers construction finance or has
funds for specific situations like the apartment fund or the Mumbai Redevelopment Fund.

As a result, Piramal Fund Management has Rs 12,000 crore to invest in real estate across the
country. It helps that Piramal Enterprises is flush with funds and has over Rs 4,000 crore of
investment riding on the venture.

Deploying Rs 12,000 crore in a slowing real estate market is no easy task. Under the leadership
of Khushru Jijina, Piramal Fund Management may have cracked the code
His backing has helped seal marquee deals like a $500 million (Rs 3,000 crore) commitment
Piramal Fund Management signed last January with the Canadian Pension Plan to invest in the
residential space—this is likely to take place in large metros. According to Andrea Orlandi, head
of real estate investments at the Canadian Pension Plan, it had considered over 20 partners in
the Indian market. “But it was an alignment of Piramal’s long-term vision with ours that made
us sign the deal,” says Orlandi. Pension funds typically invest with a decade-long time horizon.

A large part of Piramal Fund Management’s success, though, can also be attributed to Jijina’s
wealth of experience as a finance manager which has manifested in a fresh approach to running
the real estate fund.

Unlike his predecessor Ramesh Jogani, Jijina doesn’t have any background in the private equity
business. That, he says, helps him assess the job with a different perspective. Before joining
Ajay Piramal, Jijina had worked for two decades in the treasury department of agricultural
products company Rallis. In 2001, he parlayed this experience into running treasury operations
for Piramal.

After he proved instrumental in securing debt at the lowest cost for the Piramal group, he
became managing director at Piramal Realty where he spearheaded the group’s interest in the
real estate business. This experience provided him with a sound understanding of how the real
estate business works. (It is at present run by Piramal’s son Anand while Jijina reports directly
to Ajay Piramal.)
After he transitioned to Piramal Fund Management, he started to fix a few niggles.

He saw that the rapid growth—it had raised five funds and was at Rs 4,000 crore at the time—
enjoyed by the fund had also come at a cost. Since bonuses were aligned to how a particular
fund fared, the individual manager would want to keep the best deals for himself. This created
an unhealthy competition among the teams. Jijina decided to tie bonuses to how all the funds
performed, thereby aligning the fortunes of the fund managers.

He also realigned the incentive structure. “Industry players were more bothered about the two
percent management fees than the 20 percent share of profit that they are entitled to,” he
says. Once money was raised, people seemed to lose sight of the fact that they needed to make
a profit on it as well. Jijina ensured the focus shifted to profit-making.

“Real estate is a very locally nuanced business and therefore it is imperative to have people on
the ground—the telltale signs of a developer’s default are visible much before the actual
default,” he says.

This is particularly relevant since, as Jijina points out, work doesn’t end once the money is lent.
It is important to track the investment, he says, because, for instance, the telltale signs of a
default with a developer start to show far before the actual non-payment issue crops up. For
instance, if cement is being diverted from one project to another, Jijina expects his employees
on the ground to communicate that fact. Or if a developer is not honouring his commitments to
suppliers, that must be reported back too.

In addition, there are some stressed assets from the time the first fund was raised in 2006.
These relate to investments in Hyderabad where real estate prices have been stagnant since
the creation of a separate state of Telangana gathered heat in the region. Jijina has
communicated a plan to investors and says that the return of the principal amount to the
investors will be prioritised.

Deploying Rs 12,000 crore in a slowing real estate market is no easy task. Under the leadership
of Khushru Jijina, Piramal Fund Management may have cracked the code

Piramal Fund Management now has a robust number of developers on its client list, including
some with whom it has dealt with on multiple occasions. The result: A solid pipeline of projects
is now available for review. In 2014, 75 projects were reviewed and 13 approved. Because
these relationships tend to be long term, they also allow the fund to get better deals out of
their partners. On one project Jijina declined to name, he lent money at 24 percent with a 7
percent extra kicker if the project does well. These rates are at the higher end in the industry.

But it is in the project selection stage that Jijina showed he was a measured manager. And this
has held the fund together in a slowing real estate market. His philosophy is simple: It is better
to walk away from deals if one is not sure about them.
When approached to finance a slum redevelopment project in Powai, Jijina asked the developer
to do some work and only then would the fund consider committing money to the project. “Any
other fund would have entered the project at the initial stage of development. With Piramal
fund, it wanted us to do some work before the fund could commit,” says Babulal Varma,
managing director of Omkar Realtors, the developer behind the project.

As a relative outsider to the real estate industry, Jijina isn’t bogged down by a conventional
lens. He does not view the sector like a developer would. His approach, instead, is more akin to
that of a banker. He monitors the progress of the project at every stage, in terms of both
execution as well as return on investment. “His background is finance. So he looks at everything
with a return perspective. More importantly, he wants a developer to show some progress
before he gets into the game completely,” adds Varma.

And Jijina is in no hurry either. He believes there is enough work in metropolitan India to keep
the fund active, without having to take unnecessary risks. Already present in Delhi, Mumbai,
Bangalore and Chennai, Piramal Fund Management plans to enter the Pune market soon.
Smaller towns in India are not on the fund’s radar as of now. The promoter is convinced about
the efficacy of the model. “We have laid the foundations for a uniquely integrated financing
platform thereby positioning ourselves to gain valuable skills and insights—all of which greatly
enhance our ability to forge lasting relationships with both our investors and development
partners,” says Ajay Piramal, the Piramal group chairman, who has even visited some of the
slum redevelopment sites where the fund has invested.

Jijina’s future plans involve a focus on raising money from institutional investors—or “smart
money”, as he terms it. This includes family offices and pension and endowment funds. Under
him, the approach is also more patient with a willingness to wait for 5-7 years for returns.

Recently, Piramal Fund Management received an exclusive mandate to manage Rs 350 crore
raised by India Infoline. Karan Bhagat, managing director of India Infoline Wealth Management,
says, “Not only does the team bring to the table real estate expertise, but also extremely strong
relationships and constantly evolving investment ideas optimising returns.”

Jijina, clearly, has done little wrong. And his freshness has been the difference. Now, as the
“rookie” becomes a “veteran”, he will have to safeguard that his approach, at least, does not
get jaded.
 Article 2

Oberoi Realty: Brick by brick

The real estate market is depressed, but Oberoi Realty has bucked the
trend because of its financial discipline and its adoption of best practices.
By AVEEK DATTA, Jul 25, 2018 8 min read
Vikas Oberoi, chairman and managing director, Oberoi RealtyImage: Oberoi Realty

The Glitzy Oberoi Mall in Mumbai’s suburb of Goregaon is pretty much the only shopping mall
worth its real estate on the road stretching from Bandra in the south to Dahisar in the north.
The 500,000 sq. ft. retail destination, built by Oberoi Realty in 2008, isn’t the largest in Mumbai,
but has enjoyed a near monopoly in the area since it opened.
Despite steady footfall, Oberoi Realty isn’t afraid to toss things up once in a while. Coffee shop
Starbucks, which was near the entrance, was shifted to the first floor and its earlier premises
given to Calvin Klein and Tommy Hilfiger; multi-brand apparel retailer Central, one of the
anchor tenants on the ground floor, made way for Zara; Forever 21 exited the building in favour
of Marks & Spencer; and toy store Hamleys replaced Home Centre, a furniture and home décor
retailer.
“Churn is important. Customers want churn. We want the mall to be the centre of attraction
and not any individual store,” says Vikas Oberoi, chairman and managing director of Oberoi
Realty. “I am very clear on one thing: The customer is my master. I only serve my customer and
everything revolves around him.”
This is the business ethos with which Oberoi, 49, has built on the foundation laid down by his
father Ranvir Oberoi, who founded the company in 1980. In doing so, he has built India’s
second most valued realty firm with a market value of more than Rs 17,000 crore.
OberoiRealty, which posted revenues of Rs 1,160.92crore in FY17, was ranked 218 on the
Fortune India Next 500 for 2018. It earned a total operating revenue of Rs 1,215 crore in 2017-
18.
After Oberoi took over the reins of the company in 2007, Oberoi Realty has built and delivered
projects in diverse parts of the city, including Goregaon East (the site of its flagship mixed-use
development called Oberoi Garden City) and Andheri East. The company, which reported a net
profit of Rs 460 crore in 2017-18, has 28 million sq. ft. of ongoing and planned projects across
the residential, commercial, retail, and hospitality verticals. But Oberoi isn’t stopping there. It
has ambitious plans—including for a new township in Thane, more retail projects, and entering
relatively affordable homes—as it seeks to quadruple in size over the next few years.
In Oberoi’s own words, his company’s success is the result of building the business “brick by
brick”, an apt analogy for a real estate company. Oberoi Realty takes up projects in a phased
manner and has built a strong brand in Mumbai’s real estate market, allowing it to charge a
substantial premium compared to other projects in the same area. According to property
search portal Magicbricks.com, a three-bedroom apartment measuring 1,491 sq. ft. in Oberoi
Esquire in Goregaon East commands a price tag of Rs 5.70 crore; a similar apartment by
another builder in the same area is selling for Rs 4.80 crore.

Exquisite, a residential project in Oberoi Garden City, Mumbai.

Image : Oberoi Realty

Oberoi Realty has also benefited from certain strategic decisions over the past few years. For
instance, long before the Real Estate (Regulation and Development)Act, 2016 (RERA) came into
effect in April 2017,the company was following best practices, which later became the law.
These included bringing a project into the market only after securing all necessary approvals
and using cash generated from sales of apartments in one project to fund the construction of
that specific project.Customers have come back to the developer for more. Suresh Pareek, a
Mumbai-based businessman, first bought a house in Oberoi Woods in Goregaon East in 2004.
He has since bought another flat in Oberoi Exquisite, in the same neighbourhood, and one each
in Oberoi Realty’s under-construction projects in Mulund and Borivali. “Oberoi’s properties
generally appreciate more than others and there is good demand for rentals as well,” says
Pareek.Customers such as Pareek have helped Oberoi Realty keep its nose above water despite
a depressed real estate market. Demonetisation and GST, along with dim prospects of job
creation, low salary hikes and unaffordability due to high ticket prices, have cast a shadow over
homesales. After declining in 2016, sales of housing units rose a mere 3% year-on-year to
62,256units in calendar year 2017, while new launches dropped 32% to 23,253 units.
It isn’t as if Oberoi Realty hasn’t been affected by the sluggish market. According toan April ICICI
Direct research report, the areasold by the developer fell from 1.3 million sq. ft.in 2015-16 to
0.6 million sq. ft. in 2016-17, and remained at the same level in 2017-18. But the strategy of
holding only as much land as needed to execute planned projects and low leverage have given
Oberoi Realty a lean balance sheet and the ability to tide over the lull. “We don’t do land
banking and don’t have the problem of timing the market. For us land is raw material,which we
process and sell,” says Oberoi. When it comes to leverage, Oberoi Realty’s net debt stands at Rs
1,561 crore with a conservative debt to equity ratio of 0.28.
“The long-term winners in the current real estate market will be those companies that are
fiscally disciplined and maintain a low leverage,” says Pankaj Tibrewal, senior vice-president at
Kotak Asset Management. “With a strong brand, a real estate firm can still hold its own in this
market with right pricing.”
Sunil Singhania, founder of Abakkus AssetManager and former chief investment officer of
Reliance Capital’s equities business, says many real estate companies in India have made
money on account of appreciation of land, but not by selling real estate. This, according to him,
is the wrong model because it has also led many of them to become overleveraged. “A real
estate player should either hold rental-yielding assets in its portfolio or develop apartments and
sell them.”
The challenges of the past two years notwithstanding, analysts expect sales to gain momentum
in 2018-19 and 2019-20 on account of new projects in Goregaon, Mulund, and Borivali in
Mumbai. “Oberoi scores high on operational transparency and disclosures—key differentiators
in the sector,” say analysts Param Desai andAarti Rao of Elara Securities in a research report.
“With around Rs 5,800 crore of revenue recognition (sales from existing projects that can only
be accounted for in the profit and loss account upon completion of a certain proportion of the
project) pending and a growing number of projects (Mulund, Borivali and Worli)reaching
revenue recognition threshold, we expect a 75% earnings CAGR (compound annual growth
rate) over FY18-20.”
Oberoi’s willingness to adapt to altered market realities makes analysts optimistic. For the first
time, the realty firm announced flexible payment plans for its new projects. At the Eternia and
Enigma projects in Mulund, for instance, buyers can pay 10% and book their home, pay another
15% at the end of one year, and the remaining 75% at the time of possession. Similarly, at its
projects Exquisite and Esquire in Goregaon, a customer can pay 25% and move into his new
home immediately and pay the rest over the next three years.
The response has been phenomenal, says Oberoi. “I only wish we had done this earlier,”
headds. So why didn’t he? “Earlier we were small.Today we have a lot more developments
coming into the market and we need to adapt to the way the market works.” At the end of
2017-18, the total estimated area of Oberoi Realty’s residential projects under development
was 13.65 million sq. ft., more than double that at the end of 2014-15’s figure of 6.25 million
sq. ft.
A real estate industry source, speaking on condition of anonymity, indicates that Oberoi Realty
sold more units in between April and June than it did in the entire last fiscal year.Around 80-
85% of Oberoi Realty’s sales come from apartments priced between Rs 2.5 crore and Rs 4.5
crore. Then there is a super-premium project coming up in Mumbai’s Worli area called ‘360
West’, which will feature high-end residences and a hotel managed by Ritz Carlton. Though
sales have been slow at this project, it has attracted interest from some marquee buyers. Some
of them are reported to be Bollywood actors Amitabh Bachchan and Akshay
Kumar;industrialists Niraj and Madhur Bajaj; and the Chauhan family of Parle Agro.
But Oberoi, an alumnus of the Owner/President Management programme at Harvard Business
School, knows his ambitions demand massand that can only come from buyers scouting for
properties with a ticket size of Rs 1 crore to Rs1.5 crore. To cater to them, Oberoi Realty has
decided to come up with a new brand of residences called Aspire. Though it will come up in
various parts of Mumbai, Aspire’s largest destination will be in Thane, where Oberoi Realty is in
the process of acquiring a 60-acre land parcel from GlaxoSmithKline Pharmaceuticals for Rs 555
crore. “These apartments will be lower on specifications but not lower on quality,” says
Oberoi.The sales from Aspire could potentially equal Oberoi Realty’s current residential sales,
he adds.
Acquiring land at reasonable rates and extracting its full potential over a period of time has
been one of Oberoi Realty’s specialties. A fund manager who has tracked Oberoi Realty for
years says much of the developer’s growth is on account of a land parcel itbought from
pharmaceuticals company Novartis in 2002 for around Rs 100 crore (on which Oberoi Garden
City stands); its development potential is pegged at around Rs 15,000 crore.The land acquisition
in Thane could prove to be similarly fortuitous as it offers Oberoi Realty the scope to develop
another township along the lines of Oberoi Garden City.The other pillar on which Oberoi
Realty’s future growth strategy stands is its retail business. After tasting success with Oberoi
Mall,the company is looking at a five-fold increase in its retail business by building 1 million
sq.ft. of retail real estate space each in Worli and Borivali. Though Oberoi Mall accounts for a
little less than 10% of Oberoi Realty’s turnover,it is a highly profitable business with an Ebitda
margin of close to 95%.The real estate market in the country might still be depressed, but
Oberoi Realty has managed to buck the trend. Based on prevailing market rates, the 28 million
sq. ft. of real estate the company is developing has are venue potential of Rs 40,000 crore.
Clearly, Oberoi has neatly stacked the bricks of his company on a robust foundation; and like
the houses he builds, his company too commands a premium.
(This was originally published in the June 15 - September 14 special issue)