While 2007 will be remembered as the year when soaring real estate prices hit a speedbreaker, it will also be remembered as a year when developers decided to diversify into related and sometimes unrelated businesses.
Flush with funds from at least three years of explosive growth that saw real estate rates in many cities tripling, firms spent much of 2007 deciding where else they could put their money. DLF Ltd, Unitech Ltd, Indiabulls Real Estate Ltd, Ansal API Ltd, Parsvnath Developers Ltd and a few other developers announced in 2007 that they would diversify into businesses such as telecom, non-banking financial service, airport development and power transmission.
DEVELOPERS DIVERSIFY (Graphic)
This is probably the first time that developers have looked to diversify into businesses as diverse as this. And the pace at which they have diversified has come as a surprise—even to some developers.
“We were confident that the real estate industry would show growth and (that) the industry would diversify and expand,” Arvind Parekh, chief financial officer, Omaxe Ltd, said. “But the pace at which it has happened was not expected.”
Developers and industry experts believe that much of the diversification that has happened has been logical and along expected lines.
Diversifying into businesses such as airport development and infrastructure projects is natural for developers, Pranav Ansal, vice-chairman of Ansal API, said.
“In airport development, there are a lot of opportunities for real estate development around the airport,” said Ansal. “So, except for telecom, most sectors (developers have diversified into) are in some way related to the real estate industry.”
Some of the related diversification stems from the fact that local administrations often drag their feet over providing basic utility services in new townships being developed by real estate companies.
When they finally provide the services, it is not of a level that makes the townships attractive to customers.
To address this problem, developers often provide these services themselves. As a result, some of the diversification has come in areas such as construction, property management and power business, so they can have better control over their projects, said Ganesh Raj, partner and national head, real estate practice, Ernst and Young India.
Omaxe and Ansal API are among the companies that have entered the power and wind energy businesses.
“Every sector is seeing double digit growth and especially the infrastructure sector is booming and is expected to be on a high for a few decades,” Sanjay Chandra, managing director, Unitech, said.
“It is therefore obvious for established industry players (not just real estate developers) to diversify into newer sectors. A diversified portfolio helps in enhancing the company’s brand image.”
However, the entry of realty companies into the telecom business surprised most experts.
Property developers lined up to apply for telecom licences because there was a possibility that the government could free up spectrum for new telecom operators. There is a shortage of spectrum, or radio frequency, which is needed to connect mobile calls, making it an expensive and tradable commodity.
India is adding around eight million mobile phone subscribers a month and this has led to a scarcity of spectrum for telecom operators.
The issue will be fully resolved only after the defence ministry vacates 55MHz of spectrum. Of the more than 45 new applicants for telecom licences, the majority are realty companies.
DLF, Unitech, Parsvnath, Indiabulls and Omaxe have all applied for pan-India telecom licences and they claim to be in talks with international telecom operators for possible joint ventures.
“Telecom is not exactly an allied area,” Raj said. “But probably developers might have felt that when they are developing large integrated townships where 5,000 people can live, they should be in a position to provide telecom services to the residents,” he said.
Parekh agrees that this is one of the reasons why developers applied for a licence. “We want to make sure we are in a position to provide all services to our customers.”
The telecom business, however, requires huge investments and to even obtain a licence, potential telecom operators will have to shell out more than Rs1,500 crore. New operators will have to spend hundreds, maybe thousands, of crores to set up a basic telecom network. The market is also highly competitive and is dominated by large players such as Bharti Airtel Ltd, Vodafone Essar Ltd and Reliance Communications Ltd. But the rewards might be compelling.
“India is a market which is highly under-penetrated in terms of the number of operators,” Chandra said. “The tele-density by operators is one of the highest in the world so we feel there is zone for more operators and we feel it is a viable high growth market.”
While developers believe in the potential of the telecom sector, no company has given any details about its plans or potential partners.
Though there is no synergy as such between telecom and real estate, it is possible that developers who are sitting on huge cash reserves want to invest in a sector that is also growing at a fast pace. In 2007, developers raised billions of dollars from the market as traditional sources of funding, such as bank loans, dried up. India’s central bank, the Reserve Bank of India, increased its key lending rate several times and placed curbs on developers raising external commercial borrowings.
India’s largest developer, DLF, came out with one of the biggest ever IPOs by raising around Rs10,000 crore from the market. Omaxe, Puravankara Projects Ltd, Akruti Nirman Ltd and Housing Development and Infrastructure Ltd all raised money from the market.
“Many companies are flush with funds through their IPOs,” Ravi Rao, president, Prestige Constructions, said. According to Rao, real estate companies are generally run by families and some have partially professionalized their operations. “More family members have started to participate in the companies’ affairs. Independent spaces need to be created for the family members. Diversification is the outcome of a combination of some or all these factors,” he added.
Interestingly, only north India-based developers have shown interest in the telecom sector. The one large developer in the region that has not done so is Ansal API. “We do not want to be in a business we do not understand,” Ansal said.
Ansal believes the reason for developers diversifying into sectors such as telecom could also have something to do with the state of the real estate industry. Parekh agrees that developers are looking for revenues elsewhere. “Real estate market is in a flux right now. Prices are neither rising nor decreasing. So, developers are looking at growth elsewhere,” he said.
But Raj does not agree that real estate prices have much to do with diversification. It is more about opportunity, he said.
“I think the diversification happened mostly because there was an opening available like in the case of telecom where the government decided to open up the sector to new operators.”
In the south, however, developers have taken a conservative approach. The only diversification that the developers in the south are looking at is the infrastructure and construction business. Bangalore-based Prestige Constructions “will look at construction as it is related to our current business,” Rao said.