The Wall Street Journal-20080117--Building India-- DLF-s Big Gamble- Firm Plans Flurry of Housing Projects- Will Demand Keep Up-
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'Building India': DLF's Big Gamble; Firm Plans Flurry of Housing Projects; Will Demand Keep Up?
New Delhi -- Amid an unprecedented building boom in India, DLF Ltd. has dominated the field. Now, the country's biggest property company is making a big bet on a hot new market: houses for the middle class.
With land holdings of almost 750 million square feet spanning the country, about 20% more than its next-biggest competitor, DLF's corporate slogan is apt: "Building India."
But the company is taking on a tough challenge in meeting its growth goals while counting, in part, on a relatively unknown and unpredictable market -- residential developments for India's growing number of middle-income families.
These are heady times for India's real-estate sector. Stock-market values have soared. Since DLF's initial public offering last July, its shares have more than doubled in value, giving it a market capitalization of about $49 billion on the Bombay Stock Exchange and India's National Stock Exchange.
New office complexes with indoor "green" zones and condominiums with back-up power supplies, swimming pools and even private fire brigades are springing up. In many cases, the developments are sold out before they are built.
Reliable industrywide data on how many homes and apartments are slated to be built in India in coming years are hard to come by. But one estimate, by Mumbai-based ABN Amro analyst Harshad Arole, says DLF and its rivals combined promised to build about 10 times what they have built so far.
Some companies also are rushing to list real-estate investment trusts in Singapore as a means of cashing in on assets and lowering their costs of capital, as REITs tend to offer lower returns there. DLF itself plans to list a REIT valued at more than $2 billion in Singapore soon and will invest in the trust itself.
But amid this rush to build, some industry analysts worry that even DLF -- considered India's most experienced property developer, with joint ventures with international names -- faces risks from the size of its plans. They fear that DLF and other developers might not be able to deliver projects on time and on budget. Adding to these concerns are a tight market for skilled labor and rising raw-material costs.
DLF Vice Chairman Rajiv Singh acknowledges that DLF's growth plans are a challenge, but in an interview he said "we are quite confident this will be done." He says DLF's national network of management teams and its relationships with contractors and consultants, in some cases affiliated concerns, can support the planned expansion. In early 2006, for example, DLF concluded a 50-50 joint venture with British construction group Laing O'Rourke PLC to undertake building projects in India and possibly elsewhere.
To combat the tight labor market, DLF is hiring expatriate Indian workers back from construction jobs in the Middle East, said DLF Group Executive Director Rajeev Talwar. In response to rising prices for raw materials such as steel, DLF has been buying in bulk to earn discounts and coming up with innovations such as construction methods that require less steel.
DLF is facing another potential risk in diversifying deeper into middle-class residential projects, a business that has taken a back seat to the company's focus on commercial property and luxury-end residential developments in recent years. DLF's goal of building 350 million square feet of residential properties over the next 10 years represents about 55% more residential space than the company has built since its founding in 1946.
About 90% of the additional building will be in what the company calls the "affordable" category, aimed at buyers with a net annual income of about $30,000. Goldman Sachs analysts expect one DLF middle- income housing project, in the southern state Tamil Nadu, to go for 3,100 rupees to 3,300 rupees per square foot. Consultants McKinsey & Co. calculate that in 2005, 54% of India's population had an annual household income of less than 90,000 rupees, or about $2,300.
Residential sales currently account for 36% of DLF's net-asset value, Goldman Sachs analysts calculate. They expect that to rise to 49% by 2010. In the first half of the financial year ending March 31, residential-property sales contributed 20% to DLF's revenue; in the 2009 financial year, they are expected to contribute 25%, according to a person familiar with company projections. In the quarter ended Sept. 30, DLF reported net profit of 20.19 billion rupees on revenue of 33.49 billion rupees.
The strategy will be key to meeting DLF's growth goals. "DLF's large-scale expansion in the middle-income housing segment will be key over the next three to five years, in our view," Goldman Sachs analysts said in a recent note to investors.
DLF isn't the only company placing a bet on middle-range developments -- and that could be a problem. A fragmented market for residential properties makes new-build data unreliable. That could mean companies could get blindsided by an glut in the sector down the road, some analysts warn.
In recent times, easy credit and low interest rates, combined with an economy growing at 8% to 9% a year, have encouraged a surge in residential-property sales aimed at the middle class. But some property-sector watchers caution that demand could moderate, with the Indian government acting to control inflation and hitting house buyers in the pocket.
"What we feel right now is the opportunity is not the same as it was two years back," said Shailesh Kanani, at Angel Broking Ltd., a Mumbai-based brokerage. Property prices have shot up two to three times in the past two years, which has begun to damp demand in certain income brackets since salary increases haven't kept up, he noted.
Despite such concerns, Mr. Singh argued that "demand is strong and people are keen to buy a home, irrespective of the credit conditions in the market today." He pointed to a trend toward more single-family homeownership and away from India's long tradition of extended families living under the same roof.
Catering to the middle class harks back to DLF's roots more than 60 years ago, when the Singh family, which owns 88.2% of the company, began selling land around New Delhi to refugees fleeing Pakistan when the subcontinent was divided into predominantly Hindu India and Muslim Pakistan with independence from Britain.
Later, DLF expanded into the nearby area of Gurgaon, first selling land and then, as the Indian economy liberalized, building offices for multinational clients. Gurgaon is now the center of New Delhi's hot high-tech zone.
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Krishna Pokharel and Vibhuti Agarwal contributed to this article.
