B&E: The cost of funding is going be higher as banks are bound to increase their lending rates, the industry is facing a crunch and the fund gap over the next five years alone as high as as $70 billion. Don’t you see these as ideal conditions for consolidation? What could be the potential targets?
SK: As for current valuations and potential targets, I do not foresee mergers & acquisitions kind of consolidation taking place in the real estate sector, so I am not commenting on valuations and targets. As a matter of fact, bank funding is still the cheapest source of funding for the realty industry.
With the prospects of raising funds from an IPO pretty much bleak, the industry is compelled to look at much costlier private equity, private finance, and NBFC’s to fund the land costs. The problem that sucks the industry is the denial of bank funding for land, which is an intrinsic raw material for the industry. Price/earning ratio of the real estate sector is 18 times the earnings per share. I don’t foresee any takeover targets.
B&E: What are the challenges to consolidation in the real estate sector? How relevant is it to the target of fulfilling the additional housing demand of 37 million units in the next Five-Year Plan, which would need around $3.2 trillion in investments?
SK: I reckon that industry players with the capacity would look at project acquisition opportunities rather than at M&A opportunities. It may be more prudent to do this rather than attempt wholesale takeovers and acquisitions of companies. The latter option could tag along lot of baggage that the acquirer may really not want or like. The chaos of urban explosion is already a reality. Chaos is very much a clear and present adjunct of economic growth story of India. So slums and high rises inevitably coexist in Mumbai. Traffic is and will continue to be a nightmare in all the metropolitans. The metros will arrive 5 years too late, except in Delhi, which alone has received a generous dose of infrastructure and was planned for rather well. Capacities of Indian real estate players may not be adequate to meet the overwhelming needs of housing & urbanization if the supply needs to be ramped up on a radical basis. FDI participation is forthcoming in FDI compliant projects, so there is already some degree of offshore participation. Urban developments may be small in size but they can involve huge investments.
SK: As for current valuations and potential targets, I do not foresee mergers & acquisitions kind of consolidation taking place in the real estate sector, so I am not commenting on valuations and targets. As a matter of fact, bank funding is still the cheapest source of funding for the realty industry.
With the prospects of raising funds from an IPO pretty much bleak, the industry is compelled to look at much costlier private equity, private finance, and NBFC’s to fund the land costs. The problem that sucks the industry is the denial of bank funding for land, which is an intrinsic raw material for the industry. Price/earning ratio of the real estate sector is 18 times the earnings per share. I don’t foresee any takeover targets.
B&E: What are the challenges to consolidation in the real estate sector? How relevant is it to the target of fulfilling the additional housing demand of 37 million units in the next Five-Year Plan, which would need around $3.2 trillion in investments?
SK: I reckon that industry players with the capacity would look at project acquisition opportunities rather than at M&A opportunities. It may be more prudent to do this rather than attempt wholesale takeovers and acquisitions of companies. The latter option could tag along lot of baggage that the acquirer may really not want or like. The chaos of urban explosion is already a reality. Chaos is very much a clear and present adjunct of economic growth story of India. So slums and high rises inevitably coexist in Mumbai. Traffic is and will continue to be a nightmare in all the metropolitans. The metros will arrive 5 years too late, except in Delhi, which alone has received a generous dose of infrastructure and was planned for rather well. Capacities of Indian real estate players may not be adequate to meet the overwhelming needs of housing & urbanization if the supply needs to be ramped up on a radical basis. FDI participation is forthcoming in FDI compliant projects, so there is already some degree of offshore participation. Urban developments may be small in size but they can involve huge investments.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
