Typically, real estate companies are evaluated on the quality of the land bank they own. However, in its forthcoming public issue, Mumbai-based real estate developer Godrej Properties Ltd has a different, asset-light business model.

The company is developing projects over a land bank of around 80 million sq. ft in the next few years. However, while most large real estate companies buy the land upfront, Godrej Properties is playing the realty game through joint venture development with land owners. In other words, the land bank is shared with the original owners of land. Unlike most real estate companies, a substantial amount of the land bank is not owned by Godrej Properties. Large players with strong realty brand equity such as DLF Ltd and Unitech Ltd have land banks in excess of 400 million sq. ft.

The asset-light model is a good way to spread risk in an overheated market as the company need not lock up funds upfront to buy property at sky-high prices. However, it stands to lose during good times since the profits will have to be shared with the land owner. With real estate prices just beginning to look up, acquiring a land bank for future development will reflect more positively in terms of the asset value.

In media interviews, the company has stated it is “region agnostic" and would invest based on the potential of the project. The company has a presence in 10 cities. But at present nearly 40 million sq. ft is under development in Ahmedabad alone. The company has drawn up plans to develop 15,000-20,000 homes in the “affordable" segment.

On the financial front, the company will use around Rs170 crore from its total issue size of about Rs500 crore to retire part of the Rs800 crore debt on its books.

The debt-equity ratio will drop from 2.2 to around 0.6 thereafter. A major portion of the money raised would be used for land acquisition and construction. There are some concerns on execution abilities, with the company having so far developed only 5 million sq. ft of property since 1991. One positive factor, however, is the memorandum of understanding that the company has signed with some of its group companies to develop their properties.

While this could translate into quick asset monetization, the share of Godrej Properties is still a grey area.

But several analysts feel that the initial public offering price band of Rs490-530 per share is steep considering an estimated 2010-11 earnings per share of around Rs17, implying a price-earnings multiple of around 30.

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