Cheques and IPOs

The entry of DLF in the stock market will mark a shift in the way developers look at wealth creation

Inittially I thought it applied only to small and upcoming builders — essentially, brokers who having ridden the high velocity of real estate transactions, churning a 2 per cent commission on Rs 50 lakh plus deals every other day for three years in a row, had turned builders. Their entire income in cash, there was not much they could do to grow. So, from buying small plots and building four cubby holes, their enterprises have grown into brands. Since the medium of transaction was cash, their businesses were relegated to the unaccounted backwaters of the economy. Statistically, they are out of the 6.1 per cent share that housing commands in India’s trillion-dollar economy. But Indian economic governance is soft on “livelihood” issues — a person with no education, no skills, no capital could only rely on enterprise for sustenance and the booming real estate sector provided that aplenty and towards whom the state turned a blind eye.

But over the months as our journalists uncovered this area and brought in reports of a booming sector and the nuances it carried within its growing area of influence, I found that it was not a livelihood issue at all and the state needed to sit up. Many of the top ranked names, many top brands in Delhi and Mumbai, sold part of their apartments and commercial space in the crude medium of cash. Of course, you didn’t walk into a plush office, sit before blue-grey pinstripes, as workers turned into “real estate professionals” matching the swagger and the style of investment bankers, and negotiated a 70-30 cheque-cash deal. No, sir. That menial activity was relegated to the upcoming “company agents”, brokers if you please, who sold the apartments in what is known as “second sale”.

The cash assembly line from the builder to the buyer was fairly smooth. In Delhi, developers would announce a new project. Over the weekend, consumers would go to investigate. The apartments would then be sold out in as little as three days. In one case, they sold out in one day. End-buyers would have to buy the apartment not only at a premium to the developer’s price, but pay that in cash. The returns were as high as 100 per cent in a couple of months (an ‘investor’ needed to put up just 10 per cent as down payment, on which even a 10 per cent premium doubled his returns). In Mumbai, as recently as a year ago, the builder would ask for up to 5 per cent to be paid to the mafia. In cash.

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What did this mean? It meant that for every Re 1 the developer put into the project, the market was willing to give him another Re 1 as premium, in cash, ostensibly for providing two kinds of services: housing or commercial space, and speculative opportunity. Since there was no organised speculative market for real estate, despite the sector being ripe for it, this inefficient method — creating wealth through the medium of unaccounted cash — gained currency. You may say that each 100-1,000 apartment project or scores of shops and office spaces attached to malls turned into a sort of real estate exchange, with builders, investors, speculators and end users as participants. Since players in this market were few and the stakes very high, we all know who lost this zero-sum game.

But the honest consumer need not be a loser any more. There is a new market for real estate now — stock exchanges. It has a regulator — Securities and Exchange Board of India. It has a huge number of participants — companies, merchant bankers, brokers, analysts, the media and, of course, millions of speculators and investors. The currency of cash is not accepted here. And while each project may not have a watchdog, the group itself will function as guardians, watching each company’s activities. A growing constituency of investors who know their rights will be nipping at the heels of listed real estate companies. A flourishing media will compete for stories, the best of which lie on the regulatory radar. All told, a huge, organised market that will evolve as it goes forward.

This market is sending a message of wealth to real estate companies, too. It is saying that for every rupee in profits you make and show, we will give you Rs 50 in wealth. In this market it is the price earnings (PE) multiple (the market price of a company’s share divided by its per share earnings) that broadly governs wealth creation, with other tributaries and ratios adding their bit. How is it that Unitech, with net profits of Rs 984 crore, is more valuable than ICICI Bank, whose bottomline at Rs 3,110 crore is more than three times Unitech’s? The humble PE multiple gives us the answer: at 40 times, the market is valuing Unitech’s profits about 1.5 times more than ICICI Bank’s 27 times. This higher valuation is based on the expectation that Unitech as a company and real estate as a sector will grow faster than ICICI Bank as a company and banking as a sector; the numbers broadly show that to be true.

Nothing is permanent in this market, however. There was a time when, like Unitech six months ago, Infosys and Bharti Airtel were trading at triple digit multiples. They have settled down since. So will real estate. But with one major change — by entering this market that is influenced by retail and institutional players not only in India but the world over, DLF as a proxy and the sector in general have opened their books. With the economic incentive gone, there is no space left for unaccounted transactions any more — this market seeks clean books, creating stress-free wealth that is a huge multiple of what real estate companies can squeeze out in cash. More than anything else, the entry of DLF in the stock market will mark a shift in the way developers look at wealth creation.