The HBS story: making distressed assets a saleable business model

The HBS story: making distressed assets a saleable business model
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First Published: Mon, Nov 16 2009. 09 14 PM IST

Young Turk: HBS Realtors’ Sandeep Shah at the firm’s Whitefield road project site in Bangalore. The firm scouts for prime land, buys when the market is down and then develops and sells when the market
Young Turk: HBS Realtors’ Sandeep Shah at the firm’s Whitefield road project site in Bangalore. The firm scouts for prime land, buys when the market is down and then develops and sells when the market
Updated: Mon, Nov 16 2009. 09 14 PM IST
Bangalore: Real estate developer Sandeep Shah bought his first piece of land in 1996. It was a 6-acre plot in Mumbai and he paid Rs16 crore for it. The seller was the Board for Industrial and Financial Reconstruction, that deals with and manages companies in poor financial condition. 
Since then, Shah has made many such deals in Mumbai —where large manufacturing units of industrial houses and defunct cloth mills have closed over the past two decades —and in Bangalore. Shah, now 41 years old, either sells such land at a profit to other developers, or develops them himself.
Young Turk: HBS Realtors’ Sandeep Shah at the firm’s Whitefield road project site in Bangalore. The firm scouts for prime land, buys when the market is down and then develops and sells when the market is up. Gireesh GV / Mint
In India’s real estate business, dominated by firms that have built their fortunes on so-called legacy land banks—land acquired by these firms when prices are low, and developed many years later when prices have increased—Shah’s firm HBS Realtors Pvt. Ltd is unique. The firm scouts for prime land with a clean title, buys when the market is relatively down and out and then, develops and sells (or just sells), when the market rises.
“HBS has an ability to source interesting land parcels, but it never got into the landbank valuation game which everybody indulged in. HBS took on what it could deliver and didn’t spread itself too thin,” said Shahzaad Dalal, vice-chairman and managing director, IL&FS Investment Managers Ltd. IL&FS Realty Fund has invested close to Rs230 crore in two HBS-promoted projects and Rs61 crore as equity in an HBS-promoted special economic zone in Gujarat.
Dalal’s reference is to the practice by some real estate firms, over the past few years, of having themselves valued, ahead of either a share sale to the public or to strategic or financial investors, on the strength of their landbanks.
In contrast, HBS’ primary focus remains on acquiring the right piece of land. “There are just two things in real estate business—getting the right parcel of land and get it funded,” said Shah, adding that real estate, despite the simplicity of this statement, remains a complex business. HBS has around 8 million sq. ft of development under way and aims to add another 3.2 million sq. ft by 2010. By then, the firm, which operates out of Ceejay House in Worli, Mumbai’s most expensive office address, would have ventured into unchartered territory—the redevelopment of three big housing societies with 15 buildings in Mumbai, and building luxury residences in Dubai. 
After a spate of acquisitions of sick industrial units in the late 1990s and early 2000s, HBS made a big ticket acquisition in 2005 when it bought 25 acres of industrial land in suburban Mumbai, from Mukand Ltd, a speciality steel manufacturer, for Rs221 crore. That’s an ideal strategy for a firm such as HBS, said an expert.
“A first generation developer, who doesn’t have a landbank in place, either looks for cheap land in peripheral areas or scouts for good deals from city-centric industrial parcels. Mumbai still has a fair amount of industrial land that would come up for sale, but one needs to get the price right,” said Ashutosh Limaye, associate director (strategic consulting), Jones Lang LaSalle Meghraj, a property advisory.
HBS’ focus on pricing was evident in the Mukand deal. It was far cheaper than the other land deals in Mumbai and happened the same year as DLF Ltd’s purchase of the 17-acre Mumbai Textile Mill for Rs702 crore, in one of the five mill auctions, a move that set off a four-year property boom. The Mukand deal also marked Shah’s association with Atul Ruia, director, Phoenix Mills Ltd. Ruia, who pioneered the high street shopping concept in Mumbai by developing High Street Phoenix, and Shah conceived the idea of a “Market City”. 
“The concept was to build an open campus environment in city-centric locations on large land parcels. These would be planned developments on the lines of a Leicester Square or Oxford Street,” said Ruia.
The two Phoenix Market City projects promoted by Phoenix and HBS together cost around Rs2,000 crore. The first project in Mumbai is a joint venture between HBS, Phoenix Mills and the Kishore Biyani-promoted Horizon Venture Capital Fund. The second Phoenix Market City, a 900,000 sq. ft of retail and hospitality space in east Bangalore, is slated to be the city’s biggest mall once complete in June 2010.
Shah carried his land-buying streak to Bangalore when he picked up the 17-acre Whitefield project there. It was a portion of a rundown steel factory of Mittal Steel Ltd owned by I.S. Mittal, steel baron Lakshmi Mittal’s uncle, and Shah bought the property from Krishi Technologies Pvt. Ltd in 2006, which had earlier bought it from Mittal Steel.
HBS doesn’t seem to be crimped for money. It typically raises money at the project (or special purpose vehicle) level. In 2007, Chicago-based realty firm First Rockford Inc. picked up a 2.7% stake in HBS Realtors for Rs12 crore when the firm was valued at Rs440 crore. Shah wants to raise another Rs250 crore via a share sale by selling a further 10-12% stake at a current valuation of Rs2,500 crore.
HBS also wants to develop a mid-sized hospitality chain and affordable homes, but its focus, Shah said, would remain land parcels. Dalal said HBS has a model that could work in the long run. “Sandeep is a Young Turk who is hungry. If he is careful and sticks to his core competence, HBS has a long-term sustainable business model.”
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First Published: Mon, Nov 16 2009. 09 14 PM IST
More Topics: HBS Realtors | Real Estate | Realt6y | Land | Assets |