Godrej Properties – In thirst to dominate Indian Real Estate industry
Godrej Properties Limited (GPL) is the real estate development arm of the Godrej Group, which was started in 1897 and is today’s one of India’s most successful conglomerates. While the real estate in India is usually a local play, GPL is one of the few players in India which has nationwide presence. The company is currently developing residential, commercial, and town ship projects spread across approximately 13million square meters (113 mn.sft.) in 12 cities. And also GPL stood as the largest publicly listed developer in India by booking value in the last two years.
In the times of rapid changes in the industry, company’s executive chairman Pirojsha Godrej, in the latest released annual report, outlined company’s strategies and strengths to achieve a leadership position over the next decade. The following are the key highlights from the company’s annual report.
The real estate sector is going through a critical transition phase. A cyclical downturn combined with demonetization and the implementation of the Real Estate Regulation Act has created short-term uncertainty in the sector. However these same factors will lead to consolidation and improved governance in the sector, which in turn will drive improved consumer confidence. The implementation of RERA and Benami Transactions (prohibition) Amendment Act will lead to an increase in compliance costs for unorganized developers. This will pave way for consolidation in the sector as land owners seek to partner with reputable developers through the joint development model, and cash starved developers monetize their land banks by selling it to developers with strong balance sheets having access to institutional funding.
The long term outlook for the Indian real estate sector is bright. India’s economy with the benefits of rapid GDP growth, favorable demographics, and transformational urbanization, is rife with opportunity. And within this context, we believe the Indian real estate sector is likely to be the fastest growing major sector in the country over the next decade. A recent Morgan Stanley report predicted a 16% compounded annual growth rate in the Indian real estate sector over the next decade; the analysis drew a comparison between China in 2004 and India in 2015, when on many important economic indicators the two country’s economies were very similar. In China, the value of real estate sold between 2004 and 2015 has grown at 22% annually and has created a property sector worth $1.3 trillion in 2015. Compare this to the estimated 2015 size of $105 billion for the Indian property sector, which Morgan Stanley estimates will exceed $500 billion over the next decade.
Nearly 5 million Indians move into urban areas every year. Families are increasingly choosing to live in nuclear family units with dual incomes, thereby increasing each family’s disposable income, and the demand for housing. Already, in the past decade, these demographic changes, along with others, have pushed the average age of first time homebuyer in India down by more than ten years to about thirty. In the coming decade, GDP growth and the resulting income growth, combined with an improving moderate to GDP ratio and lower interest rates will make property prices more affordable to a larger number of Indians.
The improved consumer confidence with far improved affordability that is the result of rising incomes, stagnant prices, and reduced interest rates will propel the sector in a very positive direction over the next several years. The government has put in place many policy reforms to encourage real estate development, especially in the affordable housing space, which will lend further impetus to the growth of the sector. We expect 2017 to be a transition year but the years ahead are likely to be very exciting for real estate development in India. Company’s brand, national presence, demonstrated track record and capabilities put GPL in a strong position to remain on a high growth trajectory.
While the opportunity is immense, the competition from capable peers, both domestic and international, will be strong. To emerge as a clear leader in this sector company said it has to focus on delivering excellence across various aspects of its operations. Three fundamental areas of focus will be customer centricity, employee engagement and operational scale and efficiency.
Company is already the largest listed player in terms of booking value over the last two years. Its goal is to consistently be amongst the top three developers by booking value in each city it operates, but especially in Mumbai, NCR, Bengaluru and Pune. These four markets represents half of India’s real estate market by value. As one of the only developers with a strong presence across each of these markets, it can achieve the goal of largest real estate developer by booking value. The scale coupled with strong efficiency metrics will provide huge value creation opportunity.
Given the company’s strong brand coupled with unique business model (i.e. partnering with land owners for developments) company can generate returns much above the industry averages. In the medium term, company is targeting to generate RoE of 20%. The combination of largest player by booking value, trough leadership in each of the four largest markets and also delivering 20% RoE can generate powerful and self-sustaining value creation engine for the company.
FY17 has been a strong year for business development. GPL has added 7 new projects with a saleable area of 18 mn.sq.ft. It also delivered 4.55 mn.sqft. In FY17, which includes 3.27 mn.sqft of residential and 1.28 mn sq.ft of commercial space across four cities. For full year FY17, company’s total income decreased by 24% and stood at INR1733cr, EBITDA increased by 42% to INR401cr, and net profit is increased by INR207cr. Given its strong future potential, its share price also doubled in the last six months.