Godrej’s master plan

In early 2000, Nandan Damani, chairman of what was then Simplex Mills, a textile and paper maker, decided to enter a new business. His plan: Develop a strip of land he owned in South Mumbai’s Cuffe Parade. Unsure of how to go about it, he asked Deepak Parekh, chairman of HDFC, for advice, and was told to approach Adi Godrej’s real estate company, Godrej Properties. Damani met Godrej, and came away impressed with the “manner in which Godrej examined all the facts himself”. This, plus the group’s untarnished reputation in an industry where corruption is the norm, gave Damani the confidence to sign on for a single project—a seven-storey residential tower called Godrej Glenelg, the value of which remains undisclosed.

Two years later, Damani signed a significantly larger deal with Godrej Properties: 650,000 sq. ft. of mill land allocated for redevelopment opposite the Mahalaxmi Race Course. Planet Godrej, comprising five 48-storey towers, was launched in 2006. The coveted location (between Haji Ali, near the heart of Mumbai, and Worli, the city’s business district) was being chased by a number of developers, but Damani felt most comfortable with Godrej. Having dealt with Godrej and his son Pirojsha on the project, Damani said they were approachable and decisive. Planet Godrej marked a turning point for Damani, who changed the company’s name to Simplex Realty soon afterwards.

Equally, Planet Godrej was a landmark in Godrej Properties’ evolution. Set up in 1990, the company had thus far functioned in a desultory fashion, managing a few projects in Mumbai and nearby cities, with an annual turnover of around Rs 50 crore. So convinced was Godrej of the Simplex project that it actually paid more than Rs 20 crore to Damani’s 700-plus mill workers to settle their dues, so the mill land was available without any hassles. To hear Anuj Puri, chairman of Jones Lang LaSalle, a real estate consultancy, describe it: “Godrej does a deal based on 50% diligence and 50% instinct, while other developers do it based on 90% instinct.” The price per square foot at Planet Godrej was about Rs 4,500 when bookings began in 2004; it has rocketed to about Rs 35,000 today. Similarly, BeauMonde in Prabhadevi, built by Sheth Builders, started at Rs 6,000 around the same time and is over Rs 50,000 today. The difference is that Prabhadevi was already an upmarket area whereas Planet Godrej gentrified the neighbourhood.

Over the last century or so, the Godrej Group’s industrial sprawl has made it a household name. It sells, among other things, furniture, locks, soaps, hair dye, air fresheners, and household insecticides. Now, it is bringing its expertise and reputation into real estate. It uses an asset-light model where the company builds on the strength of the landowner, and uses its brand, marketing muscle, and established relationships to get permissions, raise funds, and hire quality construction companies such as Shapoorji Pallonjee Group, BE Billimoria & Co, and Gammon India. This reduces working capital, and hinges on “collaborative partnerships”, says Milind Korde, former managing director of Godrej Properties. He ran the company for 20 years, oversaw its Rs 500 crore primary issue in December 2009 that was oversubscribed almost four times, before stepping down in 2011 for personal reasons. Planet Godrej was built on his watch.

Pirojsha, who began as a management trainee with Godrej Properties in 2004, has succeeded him. He worked for a couple years before leaving to get an MBA from Columbia Business School in 2008, after which he rejoined the company as executive director. A senior Godrej group executive, who did not want to be named, says Pirojsha’s independent charge of Godrej Properties could be Adi Godrej’s way of testing a potential successor; one daughter, Nisaba, is associated with the consumer products business, while another, Tanya, oversees marketing for the group. Pirojsha says, “We don’t talk about succession planning.”

But, at any rate, his ascension indicates that the family is serious about scaling up this business. Else why bloody a scion? In 2011, when Godrej Properties had a turnover of around Rs 500 crore, Adi Godrej announced that real estate could become a Rs 20,000 crore business by 2020. Though Pirojsha says the figure was “largely a visionary exercise and an aspiration”, he admits that the group has a host of businesses (construction, securities, cement mixing) that naturally wrap around real estate.

In FY12, the rest of the group pulled in sales worth Rs 18,514 crore, while Godrej Properties’ turnover was Rs 820 crore. But after adjusting for the value of unsold inventory, a practice by which the markets evaluate real estate firms, Godrej Properties ended the year with sales of Rs 2,542 crore, which put it on the Fortune India 500, ranked 341.

The push into properties comes at a time when the real estate market is weak. DLF, India’s largest developer, has reported slowing profits for almost two years in a row, while Unitech, the other biggie, saw a 47% fall in profits in the second quarter of FY13. Across the board, the sector has underperformed expectations for the past year, and reports say that 50% of all new projects are likely to see delays. “No developer ever wants to delay a project, as it will eventually cost him,” says Harshavardhan Neotia, chairman of Kolkata-based Ambuja Realty Group.

During an analyst call after the recent quarterly results, addressing concerns about the Rs 1,610 crore debt on the company’s books and larger projects that were stuck, Pirojsha was candid about Godrej Properties’ performance. “Clearly, sales in Chandigarh and Kolkata have been weak, and underperformed our expectations,” he said. “In Kolkata, we locked ourselves in at lower prices.”

The company’s net debt-to-equity ratio is at 1:1, one of the highest in its peer group. Its operating cash flows are weighed down by multiple slow-starting projects: a Rs 1,000 crore deal signed with Jet Airways to develop a two-acre plot the airline owns in the Bandra Kurla Complex; a 1 million sq. ft. IT park in Kolkata called Godrej Waterside, developed in partnership with Infinity Infotech Park; and Godrej Eternia, a 480,000 sq. ft. office and retail complex in Chandigarh, built in partnership with Zara Infrastructure and constructed by Larsen & Toubro. On the Jet Airways deal, Pirojsha explained the project was expected to be launched soon and the company would work with L&T to make it a high-end commercial development of about 1 million sq. ft. He was clear about not converting it from a commercial into a residential one. “We won’t deploy capital on farm land … there’s a lot of risk and complexity, and we aren’t suited to handle that,” he added.

Some analysts came away impressed. Vineet Chandak, associate vice president, real estate, IDFC, says when everybody else was snapping up land, Godrej Properties refused to do so. Pirojsha’s candour with analysts is in line with the core strategy he’s applying: In a murky industry, think of it as transparency arbitrage. Hussain Manji, who runs Mumbai real estate brokerage firm Makaan Aur Dukaan, says transparency is Godrej Properties’ big differentiator: “When a Godrej Properties tells you that [the carpet] area is 38%, then it will be 38% and not 30%.”

Hem Tejuja, MD of Groupco Developers, a construction company, says inflating the actual carpet area, the process by which price per square foot is calculated for a flat, is the biggest issue in real estate. “Most developers do it,” he says. The industry’s other big problem is the vast amount of cash demanded off the books. The guideline value, or the state’s declared value of land in a specific locality, is generally ignored. Developers take the ‘circle rate’ amount from banks (since most customers take home loans), and then demand an almost equal amount in cash from the buyer.

Companies get away with it because most buyers rarely have the funds or the time to chase crooked developers in court. There have been sporadic cases of buyers grouping against developers, but since the law makes no provision for class action suits, these are rare.

Godrej, Tata, and Mahindra are trusted names in other industries, and bring that sheen to real estate. Even large real estate companies often fail to match that appeal. Anita Arjundas, MD of rival Mahindra Lifespace Developers, says, “The advantage of our parent company’s manufacturing approach is that we are used to financial discipline, and access to capital.” That attracts customers, despite the fact, as a Knight Frank study shows, that branded residences cost up to 31% more than equivalent non-branded projects.

“We just don’t accept cash,” says Pirojsha, “regardless of how small or large the sum is.” His view is that while the average Godrej property may come at a premium, he hopes customers see the value of transparency. All-cheque transactions mean the full value of a property is registered with regulatory authorities and when a customer wants to sell his property, he doesn’t fall into the vicious cycle of having to do a part-cash transaction to make good on the value of the property. “So some customers come to us because they don’t want to pay cash, and others come because they see a brand that stands for value and quality,” he adds.

On Sept. 13, Godrej Properties sold 695 apartments it had developed in Gurgaon. All in one day. The deal—phase one of a project called Godrej Summit—not only upended the existing model of broker-led marketing, it reached out directly to consumers in a fiercely competitive market outside the company’s home turf. Typically, companies sell flats in lots of 10, or multiples thereof, to brokers who sell them to home-buyers at higher prices. However, almost 90% of Godrej Properties’ flats were sold directly to consumers. Independent brokers, who declined to be named, point out that the Summit property was priced around Rs 1,000 more than competitors. The street responded; the share price climbed from Rs 512 in early September to Rs 560 later that month. Then, officials with developer Indiabulls Real Estate say that a project in Vikhroli (Godrej Platinum) commands the same per square foot price as a tony suburb such as Bandra: Rs 30,000.

Asshiesh Agarwal, an Edelweiss analyst who tracks the company, says its outlook for commercial projects is weak but its joint development model is one that has given it more prominence than projects by Tata Housing or Mahindra & Mahindra. “You don’t see those names as much as you see Godrej across major cities in India.” He adds that the margins for a strategy that includes a mix of joint ventures (JVs), joint development (JD), and land acquisitions, which Tata and Mahindra primarily follow, are higher than for a JD agreement where multiple partners share the spoils.

Industry estimates put the margins from a JD at approximately half or less than from a JV or land acquisition model. “Godrej’s margins are no more than about Rs 500 per sq. ft. on average, sometimes Rs 200 per sq. ft.,” says one real estate developer who declined to be identified. Another, who also wished to stay anonymous, says it’s one thing to deal with five or six partners—the pressure starts when the numbers are in double digits. Today Godrej is working with 18 to 20 venture partners.

In a way, these have been training years for Pirojsha. If he succeeds in turning around the Jet Airways deal and other projects, it’s likely that the company will shift strategies and adopt a mixed model similar to Tata Housing and others. Pirojsha says he’s not averse to acquiring land and building on it, as long as the “shared-risk” approach can be followed. An early step in that direction is the joint investment deal signed last July with Dutch pension fund APG for a Rs 770 crore co-investment vehicle.

That capital will be used to purchase land and enter JV deals to develop residential projects.