Landbank logic vaults real estate shares

Parsvnath scrip zooms 75% on Day One; bulls outnumber bears for now

A little more than a decade ago, 42-year-old Pradeep Kumar Jain was a real estate broker for Delhi-based builders such as DLF, the Ansals and Unitech. On Thursday, when his real estate company Parsvnath Developers was listed on the National and Bombay Stock Exchanges, he ended up becoming a dollar billionaire.

Today, the self-made real estate baron, who’s been in the business for 23 years, saw his shares hit the stratosphere, rising 75% from its issue price of Rs 300 to close at Rs 526.30 a share. The company has on Day One crossed the $ 2 billion market-cap mark, with a valuation of Rs 9,715 crore.

With the promoters owning 80% of the newly-listed company, Jain and family are thus worth over Rs 7,800 crore.

Parsvnath’s listing marks a new high in the rapid unlocking of real estate values in grow-grow India. Between January, 2006, and November 30, real estate companies have added around Rs 54,000 crore of market-cap, two-thirds of it by Unitech alone. With Parsvnath

now getting listed, and Sobha Developers seeing a huge 108-fold oversubscription, and big daddy DLF waiting in the wings for a possible January issue, it is only a matter of time before the sector will top the Rs 200,000 crore market-cap mark.

Quite clearly, investors believe the real estate has nowhere to go but up. As Mark Twain said many eons ago: “Buy land, for they ain’t making any more of it no more.”

But not all are believers. “We are building towards a bubble”, says Jigar Shah, director of KR Choksey Shares and Securities. “When landbank valuations get reflected in share prices instead of cash flows and profitability of realty companies, share prices get inflated and then create a bubble,” warns Jigar.

In Parsvnath’s case, for example, the market is excited by the fact that the company acquired 108 million sq ft of land at an average cost of Rs 200 per sq ft whereas built-up property will be sold for an average of Rs 2,000-2,500 per sq ft. Even after construction and related costs, the margins will be nothing less than 100%.

Investors are jumping the gun, too. They have started discounting companies such as Century, Godrej Industries and Bombay Dyeing not for the businesses they are in, but the land they hold under their belt.

But if it’s primarily landbank logic that’s driving real estate valuations, there are two other reasons why bulls outnumber bears for now: limited supply of real estate scrip, and the sheer amount of money being raised for real estate investment. In January this year, the value of listed real estate companies was not even 1% of the BSE’s total market-cap. After the listing of Parsvnath, it’s closer to 2%, with the collective market-cap crossing Rs 73,000 crore.

Real estate buffs expect this to rise to 10% or thereabouts over the next four years as more real estate companies list themselves. And that’s merely what’s happening in India. Many realty companies are also listing subsidiaries abroad to raise funds for domestic investment.

Unitech, which is planning to raise $ 750 million, is the latest to seek a listing on the Alternative Investment Market (AIM), a subsidiary of the London Stock Exchange. Together with three other listings, the money raised is set to top $1 billion. And this does not include the billions raised by other global realty funds for investment in India and other emerging markets.

With that kind of money flowing into real estate, and given the kind of growth in infrastructure, hotels, retailing and special economic zones envisaged over the next decade, the bulls are carrying the day.

International hospitality majors such as Hilton and Accor are playing footsie with DLF and GMR. Bharti Wal-Mart, Kishore Biyani’s Future Group and Reliance are also wooing real estate developers with mind boggling lease rentals.

Jigar also admits that the strength and buoyancy of the Indian economy may act as a cushion and any bubble may be time to develop.