The Wedding Singer – A journey unto itself

What a wedding was it? Was it a wedding or a carnival? I wonder many a times on the hollowness of human intent around us, most times.

You must be wondering who I am? I am just like you, a slightly over-weight, mid height, average looking “Dude” tag aspirant, who gets invited to mingle with the ‘haves’ and pretenders both.

Was I happy attending the marriage drama of Rocky and Samantha on that desolate Tuesday, the 19^th February? – I decided to rewind my memory to reflect on what I read in the eyes at the wedding.

“It was rockin, a la Rocky”, was all that I heard about the party. Amidst the cacophony of the music, shielded bear-hugs and firm gritty handshakes, I meandered towards the platform where there was a band playing love songs. Dolly, or was it Polly… don’t exactly remember the name of the lead singer…… but here, let me call her Dolly. I planned to nurse just a glass of French wine for the entire evening, and stood leaning onto the giant speakers, and tried snooping into her soul, her heart, her mind and her being through the vacant excitement in her eyes.

She was good! Not mellifluous, but pleasant on the eyes and ears. Elegant, smartly attired, nourished, tall, not heavily bejewelled, but smacked of a rich educated lineage.

There was one big giveaway, though. THOSE BLANK EYES, which wasn’t anywhere participative in the wedding happiness of Rocky & Samantha.

Contrasts emerged when I felt (not heard, but felt it through all my 5 senses together) her first song – “I am happy for you, with everyone around us”.

She was lying like the rest of us in the party. That is when I saw every thought darting away from what was being seen. Rocky, unless drunk, couldn’t have ever felt Samantha to be his soul mate, the ‘happy guests’ were congratulating Samantha more to get away from the chore, the kids running around couldn’t give a damn on who was footing the bill for the feast, the chef took off his hat oblivious of the tiny sweat bead slipping onto the dough… Me, cold as a chiller, refrigerating my feelings, and Dolly was “Happy for you, with everyone around us”.

An Indian Shayar (Poet) once famously remarked – Songs are not to be heard, then need to be felt, by the one who sings, and who hears, for both to really enjoy”.

Was it why everyone was into the silly chitter-chatter? Was it why I asked for a refill, albeit for a more acrid alcohol? Was it why Dolly was uttering the words, but not really “Happy for you, with everyone around us?”

I tried to sneak further into Dolly… this was just a job for her. Not really something that made her happy. My mind wandered to my initial years in odd jobs.. was she paying her rent, fee, education, drunk husband’s bail, kids growing up expense etc. through this? Wasnt this what she always wanted to do? Is she also going through the motion like I was driving the delivery truck? Was she “Happy for you, with everyone around us?

I must commend the strength of her appearance…. not one hair out of place with a plastic grin… Those high cheek bones forcing her eyes to squint through the classy glasses, the microphone snuggling comfortably into the gently grip at the base, and the effervescence she spread through the band made music, and everyone was “Happy for you, with everyone around us”

Though she was grossly out of place as far as the revelry was concerned, it wasn’t discernible. Her strength of character emerged strongly visible. Her easy gait reminded me of Gabriela Sabatini walking like John Wayne, fully aware of the contrasts. She smiled as coyotely confident like the pick-up girl in Pretty woman. Words flowed in tandem with the music, and did make sense to everyone; however engrossed were they in their own fluids. She genuinely pretended “Happy for you, with everyone around us.”

As I walked through the party, exchanging pleasantries with all and sundry, I realized that Dolly was probably who would draw ‘gratifications from a job well done’ by “Happy for you, with everyone around us”; the rest of us were there for pretensions sake.

How I wish none of us were dollies in our existence. How I wish I were myself. How I wish Rocky n Samantha were not what they were pretending at this instance to be. How I wish, it were the dollies of the world who got paid better from the cost of the carnival.

I remembered then – Deserve before you desire. I tend to remain a Dolly as I flow with the tide !

Delhi master plan 2021 – why is it attractive?

Impact of the May 2009 Elections on Indian Real estate Industry

Often, I am asked about the Delhi master plan 2021, its connotations, fine print etc. In the last few weeks, most questions seemed to be centred around the “Indian Elections and the impact on the Real estate, especially on the Delhi master plan”.

Instead of putting together a structured flow chart type of a report, I thought I could share some of the inputs in a more conversational manner. (Not to mention that our research division also has the reasons documented in a very scientific manner. Institutional investors, large investors etc. can surely subscribe to it by sending a mail to us).

After many years, we have an extremely conducive and favourable eco-system for the real estate in Delhi NCR. The draft master plans for Delhi master plan 2021 are under review. The same should get approved in the next 6-9 months (if not earlier), for the following reasons:

Political Eco-system: Delhi state is governed by the Congress. The central government also is led by the Congress party. The congress has won 7/7 MP seats in these elections. Most stakeholders within governance have an interest to see through the same, and roll out the master plan.

The Political will and players: The last one week has displayed specific Intent and purpose from the stakeholders in the government to hasten the pace of development within India. If one looks at the cabinet formation and ministers in charge of the growth in the next 5 years, it indeed is a cause for rejoice. Mr. Jaipal Reddy, in his second term as the urban development minister would provide continuity and pace. Most other ministers who would have a say on the Delhi master plan also are in key portfolios, and intend to hasten development.

Demand: The demand shortfall / Demand projection for Delhi state, till the year 2021 is estimated as follows:

Residential 1 million Units

Commercial 38 million sq. ft

Warehousing* 16 million sq.ft

*Includes wholesale markets

The recent DDA allotment of approx. 5500 apartment saw a response from more than 1.2 million investors and home-seekers. Isn’t that proof enough of the captive demand for housing in Delhi?

Administration: Delhi has many civic agencies like DDA, MCD, Delhi Police etc. which do currently have a dotted line reporting to the government. Hopefully things would change and a more accountable system is likely to be put in place. Positive noises and actions are already visible since the last few days.

PPP - The whole essence of the Delhi master plan is on the Public-Private-Participation model, and we would see tremendous amounts of private capital being infused into the development of Delhi. Let us also not ignore the fact that multiple agencies like the Central govt, State govt, private enterprise, World bank and other aiding agencies, individual investors etc.would be investing into the infrastructure and other growth in Delhi.

Events – Commonwealth games, the bid for other games by 2020 etc. would bring in infrastructure investments into Delhi in the short & mid term. Besides, Delhi would always play host the visiting state heads, dignitaries, seminars, conventions etc. wherein the who is who of the global policy heads would be participants.

There are a deluge of reasons why one must invest into Delhi, including reasons for shifting investments from the NCR area into Delhi.

As an organization, we have invested more than 5 years into the Delhi master plan, and can be helpful for other members/readers of this content. I can be connected with on menon@certesrealty.com

Our research findings (only a miniscule portion of the same) are already posted on www.delhi-masterplan.com

A week back, a journalist with a leading business newspaper in India, connected with me on the subject. Knowing the sensitivity of the subject, I realized that many a sources the newspaper would tap would not be honest & direct. I requested the journalist to send me a brief questionnaire on the story line so that I could share my opinion on the Operations, justifications and handicaps around the subject.

I thought it prudent to share my opinion, and encourage debate, irrespective of the story which might get featured in the business newspaper. This is how it went. (my answers are in red, against the questions from the business paper.

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Hi Sir,

I am writing a story on the significance of having escrow accounts for a real estate project.

Please share your views on the following:

1. Do you think the realty developers should have an escrow account for their projects (especially residential) ? – In the best interest of the consumers, each developer should have a project specific escrow account, to ensure that the payments made by the buyers against their specific property is utilized towards the development of the said project. However, since the operation of the account is solely undertaken by the developer, there are no checks & balances on the pay-outs. For e.g.: The developer can pay the bills incurred for the project “A” from the escrow account of project “B”, since the payouts are towards vendors, contractors and suppliers, who might be common.

The consumers invest into projects with an escrow account since they feel confident that they are funding their own acquisition, and their purchase / investment would not be slowed down by the overall financial condition / Wrong investment strategy of the developer in multiple projects, elsewhere.

2. If a developer does have an escrow account can a customer rest assured about the timely completion of the project, such that the funds will not siphoned off for construction of other projects or for purchasing land? – Not always. Currently, the announcement of the Escrow account is only a confidence building tool to communicate to the buyers that the payments made against a certain project is not being diverted. However, the reality defies the promise. The buyer(s) have no direct access to the operation of the account, and have absolutely no say, control or even information about the flow of funds. Contrarily, in a group housing society, the society members can seek information about the details of receipts & expenditure, and can raise objections / views on the same. Many developers did communicate the escrow accounts almost a couple of years back, and the ground realities do not really point to the restrictive use of funds in the said accounts. (The projects are not moving at the same pace as it should have).

Escrow accounts are not the solution to the problems anticipated in many projects. The consumers should be wary of developers who have announced a large number of projects, and do not have the wherewithal to complete them. There is no current mechanism to govern the cash flow of the accounts, since the management teams, suppliers, contractors, vendors, employees etc. of multiple teams remain the same, and that the buyer has no window of periodic interaction / review of his own funds.

2. With a large number of developers announcing less-than-Rs 20 lakh houses, is it legally possible for them to siphon off the funds collected from the customers to other project of theirs? - I cannot comment on the legal possibilities. Operationally, it is possible to pay-out vendors of project “A” from the collections of project “B”. The management team operating either accounts remain the same. As for the many “low cost housing projects” under announcement, I would watch it with a lot of scepticism. There are two things I would microscopically view amongst the developers announcing such projects – “INTENT & ABILITY”. Had they had the right combination of both, the earlier projects would not have been stuck, and new projects cannot be used as a ‘bail-out’ or avenue for collection of funds.

Low income or low cost housing Projects which are stand alone, and would not be burdened by earlier projects are the ones which I would bank & invest in. The consumers have to ensure that they don’t get carried away by the million dollar announcement of “Budget homes” from the larger developers, but depend on credible, cash positive local developers who can complete the projects in the shortest possible time. Also, consumers better invest in smaller projects, rather than large projects, since the chances of problems are always larger bigger projects.

3. The realty sector got into the current crisis after a majority of the developers diverted large chunks of money into building land banks; how do you see the present hysteria over building “affordable” houses by the same set of builders. – The land banks which many developers announced were not always valued at the announced value. Many a developers did not really have the physical possession of what they announced. Many investors were the first ones targeted by the developers to get them a start in projects, and then the end users used to filter in. Currently, the investors or speculators are staying away from the “affordable housing” as their investment would not grow at the same pace as it would have on a mid-high end housing. Hence, the lack of start up capital. End users as such are awaiting competition to hot up in the segment for better deals, as well as to assuage themselves of their continual cash flow status over the next few years, before committing themselves to pay for an asset.

I view many a recent announcements with scepticism and am not convinced about the “Intent & ability” of the promoters in completing and handing over the housing units to buyers. If you analyze, the markets flocked to the private developers since the govt. Agencies like DDA, HUDA etc. weren’t producing enough, OR, delivering on time, in spite of the payments being made on time. The time delays by the private developers, on account of their own management follies are not really building the consumer confidence, in spite of the big ticker announcements. I would still bank on smaller projects, which operate on a strict delivery schedule and don’t carry a debt burden. On a smaller project, the buyer can easily track the progress of the project on a periodic basis, to assess on the proper utilization of the funds.

There is so much interest on the “Ill-health” of the real estate industry, that almost everyday I get a couple of queries from the print media, for “bytes” on some story they might be doing.

Knowing some of the compulsions of the media, I am sure that the story in entirety is not always published. I thought a good idea to carrry my answers on my blog, without any pulls & pressures.

Here was my e-mail reply to a Journalist from a leading business daily.

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A large number of developers have opted to to sell off their hotel projects, land assets or other commercial projects in order to raise funds. The list includes the realty biggies like the DLF, Unitech, Parsvnath as well as other smaller developers.

Most developers, during this liquidity crunch, would like to either defer development, or encash the land / Project assets which are locked in, and seek further infusion of funds. To our assessment, projects which would not generate positive cash flows, during the construction phase would be the first to be exited. Hence, residential projects would still move forward, depending on the projected demand and consumer interest in the particular locality / vicinity. Hospitality projects announced by developers, either as part of their larger development, or stand-alone, would be sacrificed as it is capital intensive, and would not deliver cash flows for the construction and development. Also, most of these assets would have been capitalized based on an inflated revenue assumption earlier. Those assumptions are no longer relevant.

Let us not forget that the valuations and investments into Hospitality projects are based on the revenue flow & cash flows projected over a 5-7 years window. Those numbers are being furiously re-calibrated downwards from the assumptions pre-2008.

However, in the ongoing economic slowdown, do you think there are enough buyers who would be interested in buying out these assets. Further, even if there are buyers will the developers get correct valuation? (is it not possible that the properties get grossly undervalued) – Like in any market, there would be buyers for deals at the correct OR distress valuation. A fair valuation would take into account three important factors – Cost of land, cost incurred towards approvals, projected cash flow. Developers who entered into the projects between the last qtr 07 to Jun 08 would be the most seriously hit. Their valuation would be eroded by more than 30% over the business plan numbers. Hospitality projects, part of larger townships, instead of standalone acquisitions, would still fetch reasonable returns to the developers. (since the land would have been acquired at a better average price. On a realistic basis, most acquisitions during these times would get acquired at a value lower than the expectations of the developers / Land owners. Let us also not forget that the reason for putting these assets on block is liquidity. Hence, the investor / Liquidity provider would build in a safety net for their IRRs in the transaction, which would bring down the valuation lower than the expectation of the developers.

Also, besides the developer and the investor, there is the third partner in the hospitality project, namely, the Operator OR hotel brand. The valuation is dependent on their outlook, projections, character of the product and the strength of the brand.

Most operators are re-calibrating the average Tariff per room nites & occupancy rates downwards, which would negatively affect the valuations expected by the developers.

Do you think that putting assets on sale is the right strategy for a developer to tide over the present crisis? If not, then what should they do to improve their finances?

Though there can’t be one thumb assumption for all projects, it would be a wise strategy to sell out assets and not incur the cost of money towards the same. The strategy followed / to be followed by each developer would be unique, depending on the projects awaiting funding for completion, and the cash flows from existing projects. There are indications that even residential projects are on the block, wherein the developers are willing to guarantee an IRR or safety net on the top line realization in excess of 25%.

I do not think that developers under liquidity squeeze should equate the sales of these assets akin to selling of family silver. They should view it as sell off of surplus availability, or sales of non strategic assets.

Mark Twain very famously remarked once – “Buy land, they are not making it anymore.” Personally, I feel, never has any real estate investments been better advised than above.

My good friend, Ajay Dabas returned from the USA in 2005, and we huddled together to identify the areas where he could invest his hard earned money. The brief was clearly to focus on three factors, on which to scale the investment strategy.

RISK On a 5 year horizon, how much would each investment avenue Grow / Stagnate / or depreciate

TERM & TERMS Entry level pricing to be benchmarked against the stay-in period of investment over a 3-5 year window

LIQUIDITY How easy would it be to PROFITABLY EXIT, in parts or in whole?

Our detailed study & exercise led us to the conviction that LAND IS LESS VOLATILE compared to mutual funds, stocks, equities, Investment trusts etc. Haven’t we all experienced and witnessed the massive erosion of wealth & valuation in the past few months, on most investment instruments mentioned above?

Ajay Dabas is not one of them. He is rather happy for his strategic decision to choose land over the other mediums, as the preferred investment three years ago. As for valuations, his investments have already appreciated over 300%, and still going strong.

It would be a good idea to share the seven reasons why we feel that investing in land is the best option within real estate compared to the much more “touted & publicised options” of built up spaces in buildings.

Reason # 01 Land is an evergreen, ever-growing asset. Brick & mortar assets like buildings (mall space / office blocks) deteriorate with time, whereas LAND DOES APPRECIATE, with time. Remember, some studies confirm that the value of any commercial building becomes ‘Zero’ in 27 years. Even when the building is useless & demolished, what is left behind is LAND.

Reason # 02 Land is an asset from day one. It has very little lead time to mature from purchase to progress. For e.g. If you are an early bird buyer for a residential or commercial property, it typically takes 3-5 years for your asset to be registered in your name, and to draw returns from them. One keeps investing money & time for 3-5 years, without returns. Land can be registered immediately, and can start delivering returns.

Reason # 03 Land is one asset which affords the most flexible options, within the real estate products. You can choose to buy any size & dimension, any value, anytime. Besides, land can be put to multiple use during the period of ownership. Let me elaborate. Agricultural land if invested into; can be used for farming. Post zoning, land use can be changed and commercially used. Anything build on it can be redeveloped, for e.g. the same piece of land could end up being used as warehouse premise, commercial, residential, etc. etc.

Reason # 04 Land affords simple investment management. Once bought, it doesn’t incur high costs compared to built-up products. It is most likely that the land bought is self sufficient in deriving the maintenance cost, whereas, the other products attract a continually incremental maintenance.

Reason # 05 if we analyze the supply Vs demand for real estate products in our country, land as a commodity would remain in demand for the next couple of decades. There is an acute demand for finished products, which would have to be constructed on LAND. Hence, investments in LAND are bound to grow, provided the buying strategy is right. For e.g: Delhi as a city state is forecasted to grow from 136 lakhs to 240 lakhs of population in the next decade. That necessitates almost another few thousands of hectares to be brought under development. Hence, invest in land today, rather than wait for appreciation at a much later date; at much lower returns.

Reason # 06 With the economy projected to grow at a fast rate, and with disposable incomes being higher, aspiration of green living, bigger houses, better amenities, affordable luxuries etc. would take over. Those can be achieved on bigger land chunks being brought under development. Hence, invest in land today.

Reason # 07 Land affords the “right balance in your real estate portfolio”. While investing in real estate, one needs to have a right product mix to hedge the risk, with one or two products which are low on risk and high on returns. That is what land promises to be.

Having said the above, we also advise our clients to exercise the right amount of caution and source expertise while buying land. Seek out experts rather than take the ‘gut-feel-approach’. Analyze-understand-replicate success stories in land as a portfolio rather than try to re-write a success story. Remember, all leading developers in our country grew at this scorching pace on valuations, using land as the growth engine.

HAPPY LAND-ing!!!!!!!!!!

The author is the Director for strategic consulting for a Gurgaon based Real estate consulting organization and can be contacted on ramesh.menon@hotmail.com