The picture is becoming bigger for the core sector. Lower margins from infrastructure projects and expectations of a higher yield from real estate projects have seen many a core sector company jumping on the realty bandwagon.
Over half a dozen infrastructure companies laid their hands on the realty sector either with their own land or through acquisitions in recent months.
They include: Garnet Construction, Hindustan Construction Company, Valecha Engineering, KSL Realty and Infrastructure, Unity Infrastructure and Patel Engineering.
According to industry estimates, infrastructure projects have margins between 4 per cent and 5 per cent, while realty projects provide returns in the range of 20-25 per cent; and in certain cases this can go above 40 per cent.
Garnet Construction has announced a Rs 1,200-crore (Rs 12-billion) residential-cum-commercial township project at Panvel near Mumbai on its own 400 acre land. To woo international buyers, it has tied up with the Dubai-based real estate developer Sternon group. Besides, Garnet has announced a Rs 800-crore (Rs 8-billion) residential project in Nasik, for which it will acquire the land soon. It is also planning a JV with Sternon to develop and market properties in Sweden and Mauritius.
To focus on diversification, companies such as HCC and KSL Realty have floated subsidiaries. HCC announced its real estate foray through its 100 per cent subsidiary, HCC Real Estate, which will invest Rs 1,000 crore (Rs 10 billion) initially. The firm is developing a 150-million sq ft hill town project at Lavasa, Pune, on 12,500 acres.
From its land bank in Vikhroli in Mumbai, the company is building a 1.7 million sq feet corporate park and two slum-rehabilitation projects on 25 acres of land. It is acquiring land for a 1,000-acre special economic zone in Nashik, a 300-acre township in Pune and a 200-acre township in the Mumbai Metropolitan region. The total value of all the projects is pegged at Rs 28,760 crore (Rs 287.6 billion), the company said.
KSL Realty and Infrastructure is investing Rs 450 crore (Rs 4.5 billion) and Rs 225 crore (Rs 2.25 billion) in Nagpur and Kolhapur respectively through its wholly owned subsidiary, Reward Real Estate Company. The company is also planning to develop properties in Gujarat, Punjab, Himachal Pradesh and Dadra & Nagar Haveli, a company spokesperson said.
Patel Engineering, which has also forayed into power generation, has around 500 acres of land across the country. It has 350 acres in Hyderabad and 80 acres in Mumbai, Panvel and Karjath near Thane. It is likely to take up commercial development projects in Mumbai. "We plan to go for development in a phased manner. With land bank in hand, construction is a small component," says a official from the company.
Infrastructure development company Valecha Engineering has taken the SPV route for its realty foray. It also plans to make the owner of the land a partner in the project. The company will invest Rs 100 crore (Rs 1 billion) in the venture. It recently acquired 21 acres in Pune.
Explaining the rationale behind the new-found love of core sector companies, Naveen Jain, an analyst with Emkay Shares and Stock Brokers, said, "You cannot do projects with 4 to 5 per cent net margins. Even if real estate projects strain the company's financials in the short term, they yield results in four years," he says.
Agrees Arun Kumar Kedia, director, Garnet Construction, "Post-2006, infrastructure companies want to capture the real estate boom. Huge capex and lower margins in core sector projects and higher dependence on government agencies have made the companies look to real estate."
"The positive side is that when these corporates enter the sector, they bring in professionalism, technology and land bank, which small players lack. Transactions take place on paper and in cheque, which are not the hallmark of real estate players," says Rajesh Mehta, chairman, Raha Realtors, said.
But there is a word of caution for the companies rushing into real estate. Analysts feel companies may burn their fingers if they buy the land at post-peak prices and could not generate reasonable rate of returns due to fluctuating realty prices.
"Real estate and infrastructure are two different businesses which require varied skills. While real estate is a commodity, infrastructure is a contracts business. Realty is cyclical with the fluctuation in prices, depending on the demand-supply interplay. As long as companies strain their balance sheets with the debt and rising interest costs, realty forays make sensible business preposition," says Amar Ambani of India Infoline, a brokerage firm.
