September 2010

CORPORATE FINANCE www.bdoindia.co.in

REAL ESTATE
AN UPDATE FROM BDO INDIA CORPORATE FINANCE

With India’s recovery well underway, its

commercial real estate market is beginning
to stabilize.
DID YOU KNOW...?
FACTS STATISTICS
Indeed most cities in India have already
REAL ESTATE SECTOR • Real estate sector is 2nd only to agriculture in terms of employment
witnessed an uptick in the volume of
generation and contributes heavily to Gross Domestic Product
transactions in commercial and residential (GDP) of the country
space.
• Within a short span of time it has evolved from highly fragmented
and unorganised market into a semi-organised market with a large
The real estate industry can be segmented number of listed companies
into the following classes:
GROWTH PROSPECTS • Expected to reach a size of USD 180 bn by 2020 (DIPP)
Housing • Market analysis pegs returns from real estate sector in India at an
Commercial average rate of 14% annually
Retail • The lease rentals have been picking up steadily
Hospitality • Residential space is growing at an average rate of 34%
SEZ/FTZs • Commercial space is growing at an average rate of 10- 15% per year
CONTRIBUTION • Current contribution of real estate sector to India’s GDP is about 5%

FDI INFLOWS • One of the highest FDI attracting sector in India

• FDI Inflows in 2008-09 were USD 2.80 billion as per Department of
Industrial Policy & Promotion (DIPP)
OUTLOOK • Affordable housing expected to be the key factor in driving the real
estate sector growth (Source: Confederation of Real Estate
Developers Associations of India)
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 2

RECENT AMENDMENTS AFFECTING • Honourable Bombay High Court has granted an interim stay in the case of Maharashtra
REAL ESTATE Chamber of Housing Industry (MCHI) vs. Union of India against recovery of service tax on
real estate. The constitutional validity of the levy of service tax is subjudice. Courts in
SPECIAL ECONOMIC ZONES (SEZs) other states have stayed recovery till the matter is decided by Bombay High Court
Income Tax Act Provision (Current CERTAIN REGULATORY ASPECTS
Provision)
Round Tripping
• Units in SEZs get 100% income tax
exemption on export income for the first Round tripping is usually referred to routing of domestic investments through tax haven and
five years and 50% for the next five years. taking advantage of the Double Tax Avoidance Agreement (DTAA) i.e. paying lower taxes
They also get exemption on 50% of the on profits.
ploughed back export profit for the next Example:
five years after the first 10 years. They are
exempted from MAT payment as well • An Indian company can invest up to 400% of its net worth in a JV/ WOS abroad

• Developers – 100% tax exemption for 10 • An investment by JV/WOS in Indian realty stocks listed abroad would lead to round
years in a block of 15 years tripping since the money would come back to India. This is prohibited by regulatory
authorities in India
Direct Tax Code (DTC) (Proposed
Provision) Real Estate Mutual Funds (REMFs):

• Units in SEZs that commence In May 2008, SEBI allowed mutual funds to launch real estate mutual fund schemes to allow
commercial operations by March 31, retail investors to participate in the booming realty market. Fluctuating market prices in real
2014, shall be allowed profit-linked estate sector in last two years have seen very few REMFs being launched.
deductions permitted under the Income Real Estate Investment Trusts (REITs):
Tax Act, 1961. Thereafter exemption
would be linked to investment REITs are investment pools formed to invest in real estate assets. Globally, REIT is a popular
route to invest in realty sector. SEBI has been slow in announcing the REIT guidelines whose
• It is proposed that MAT would also be draft was released in December 2007. Some recent reports suggest that REITs may take some
applicable to such units. However, the more time to take off in India.
MAT credit would be allowed to be
carried forward for 15 years TRENDS IN REAL ESTATE
• Developers would continue to get profit FDI IN HOUSING AND REAL ESTATE:
linked incentives if SEZ is notified prior
to March 2012. Thereafter, investment
linked incentive as contemplated under
DTC 2009 will be allowed
Impact
• It could be interpreted that since the
incentive provided to developers has
been linked to investments, there could
be a spurt in lease rentals to pass on the
tax benefit forgone. This would not have
any impact on valuation
• If the developer does not increase the
rentals, the outgo on account of tax
would be borne by developers. This
would reduce the valuation of the
project considering the projected
profitability
Service Tax
• The highest FDI inflows during the period beginning from April 2000 to May 2010, has
• Finance Bill 2010 introduced service tax been from Mauritius (42%)
on sales of under-construction property
from July 1, 2010. It increased • Total FDI inflow, in housing and real estate, during the period beginning from April 2005
abatement on construction from 67% to to May 2010 is $ 8,492 mn
75% if gross value of commercial or
• FDI in real estate as a percentage of total FDI investments has increased from 0.7% in
residential complex includes cost of
2005-06 to 11% in 2009-10. For 2010-11 (till May 2010) it stands at 7.4%.
land. This reduces the effective tax rate
to approx. 2.575% (10.3% * 25%) of
gross value
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 3

INDICES MULTIPLES SINCE 2008

Book Value Multiple

It could be inferred from the table to the left that the realty index book value
multiple is 73% down from its peak in 2008. Whereas BSE Sensex book value
multiple is down by 13%

PERFORMANCE OF BENCHMARK
INDICES SINCE 2008.

• It can be observed from the graph to the

right that Nifty is 14% lower than its all
time high in 2008. As against this, the
Realty Index is 77% lower from
its peak

INDEX RETURN VIS-À-VIS REALTY INDEX

RETURN FROM JAN. 2007

• It can be observed from the graph to the

right that since inception of Realty Index
on 29 Dec 2006, the Nifty has given a
positive return of 36% while Realty
Index has given a negative return of 57%
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 4

VALUATION MULTIPLES: Average Price

Company Name
THE TABLE ALONG SIDE LISTS THE MULTIPLES OF REALTY COMPANIES: Sales EBITDA P/E
D L F Ltd. 16.56 27.69 68.98
• It can be observed from the table that DLF tops the realty pack in terms of Sales
Unitech Ltd. 9.42 19.63 38.47
Multiple, EBITDA Multiple & PE Multiple.
Housing Dev & Infra Ltd. 6.16 12.02 16.51
• The high valuation of DLF seems to be influenced by the worth of its land bank. Also, Sobha Developers Ltd. 3.04 13.12 24.85
DLF is the one of the few companies to have a pan India footprint in terms of projects
Parsvnath Developers Ltd. 3.28 9.96 20.02
and is more diversified in terms of various segments in real estate development
Orbit Corporation Ltd. 1.49 4.57 7.68
• Peninsula Land is trading at lower multiples. This may be attributed to the lower Ackruti City 7.49 10.55 21.36
visibility of the future projects and also that the company is more focused in Mumbai India Bulls Real Estate 53.13 86.86 315.85
region. Another factor impacting the valuation of Peninsula is that it is more focused
Peninsula Land Ltd. 2.58 5.87 6.81
on commercial projects
Mean 11.46 21.14 57.84

Median 6.16 12.02 21.36

* Based on financials for FY 2009-10 and average share price of July - Aug.

EMERGING OPPORTUNITIES IN REAL ESTATE SECTOR

There is a gradual shift of real estate developers from the traditional development in residential and commercial space to areas like logistics,
warehousing, hospitals, schools and affordable housing. This shift is mainly due to limited players in the segment and also on account of the
rising demand for development in these segments.

Logistics and Warehousing Healthcare Infrastructure Education Infrastructure Low-cost Housing

• Booming trade both international • Health care industry is estimated • Growing interest of leading global • Growing demand for housing
and domestic to grow over a CAGR of 12% over educational institutions in setting up among nuclear families
the next 5 years. institutions in India
• MNCs around the globe are • Easy access to various avenues
establishing operations in India • The industry size was USD 38.8 • Growing working class population of finance
billion in the year 2008 with an increased demand in higher
• Food processing sector, large studies • Shift in attitudes from rented
infrastructure and engineering • Moreover, Health care BPO is a to owned house concept
projects require logistics facilities growing segment • Need for development of world class
educational infrastructure • Housing shortage expected as
• Large warehouses occupy space. • Medical tourism growth is driven a result of migration of
The right kind of logistics is by low cost and high quality • Huge market with untapped potential working population from rural
re q u i re d t o o v e rc o m e t h e services areas to urban areas
shortage of space in towns

DRIVERS IN REAL ESTATE FOR INVESTMENT & VALUATION

• Supply/Demand
Raw Land • Planning & zoning

• Population Growth
Apartments/Residential • Income Growth

Commercial Premises • Local Economic Expansion

/Office Building • Tenant Mix

• Commercial/Industrial Activity
Warehouses • Favourable Status
• Tenant Mix

• Population and Income

• Adequate Parking
Shopping Malls/Retail • Suitable Tenant Mix
• Lease Term

• Demand by Business and tourist

Hotels/Motels • Facility and Service Mix
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 5

VALUATION APPROACH

Valuation of Real Estate companies is unique in comparison to other sectors. In case of most sectors, the EBITDA multiple and revenue
multiple etc. are the key indicators used for deriving the fair value of the company under the Comparable Companies Multiple Method.
There are other approaches like Net Asset Value Method, Discounted Cash Flow Method, and Profit Earning Capacity Method for
deriving the fair value.

However in Real Estate, the valuations have been based on the projected profitability of the projects in development and also on the
land bank value.

DUE DILIGENCE ASPECTS

KEY FOCUS AREA DURING DUE DILIGENCE OF REAL ESTATE DEVELOPER
Areas
Land Bank and Asset • The total land bank of the developer and the valuation thereof
assessment • The Clear title of the land in the name of the developer and supporting documents i.e. lease agreement, purchase agreements,
copy of property card etc.
• Status of the land assets in terms of agricultural/non-agricultural land, ready to developed plots, reserved/unreserved plots etc.
• Any revaluation of assets made in the past and its impact on the financials
• Mortgage or pledge of land creating a right over the land

Work in Process • The number of projects under construction and the estimated date of completion, reasons, if any, for delay in development,
increase in any liability due to delay, status of the project and any contingencies on its completion
• Revenue recognition in case of bookings made and any onus of interest or penalties payable due to delay of possession
• Liability in terms of increased committed costs
• Litigation pending against the property making the project dead

Agreements and • In case of projects which are developed by the entity but the land owned by other party, the agreements for terms and conditions
Important Documents with respect to development rights and revenue sharing or any other elements
• Status of Long-term Lease contracts and any onus on its expiry and the terms of renewal of same
• Long-term construction contracts entered into by the entity with the contractors/contractees and commitments thereof
• Title Certificate/Title card, Power of Attorney
• Alternatively Land Purchase Agreement and Non-Agricultural (NA) land permission
• Change of Land Use Permission, Environment Clearance, Pollution control board Clearance
• Fire, Water, Electricity NOC, Commencement Certificate
• The land is not in the area of high attention line
• Permissions and Certificate from Airport Authorities of India or Railway Authorities
• Land Allotment terms and issues as laid by conditions of the respective statutory body or the government

Loans • Status of Loans availed against specific projects along with its repayment terms If the loans are repayable within short term the
entity may face cash flow crisis due to non-completion of the project or slow moving/non-moving properties
• Rates of interest on the loans
• Any confiscation of pledged property due to non-repayment of loans in the past

Capital Structure • The capital structure of the entity in terms of over dependence on debt for financing the projects leading to high interest costs
• In case of overdependence on equity, whether the entity has failed to raised finance from other sources and the reasons thereof

Financial Impacts • The impact of defaults in the receipt of instalments on the cash flow of the entities
• The piling of non-moving inventories thus affecting recovery price and the cash flow
• Fixed commitments of the municipal taxation payable at a regular interval
• The change in valuations of the property due to litigations or otherwise affecting the net worth of the entity
• Any contingent liabilities against litigations and their probability of materialisation
• Financial impact due to non -adherence of various regulatory provisions
• Debt service coverage ratio/interest coverage ratio/ROCE of the entity

Important points • Financials of the SPV Company

• Revenue recognition policy
• Accounting of costs incurred till date, escalations and cost to complete
• Land Documents Verification and Statutory Compliances
• Verification of payment of Direct and Indirect Taxes
• Verification of the acquisition cost of Land and amount recorded in Books
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 6

RECENT REPORTED TRANSACTIONS IN 2010:

Acquirer Target Deal Value & Stake % Remarks
HDFC Venture Funds Lodha Developers USD 107 million Lodha Developers has sold 10% stake in one of its project to HDFC
Venture Funds for Rs. 500 Crs. The project is undertaken to develop a
117-storey residential tower in Mumbai. The sale value of project is
estimated at Rs. 5,000 Crs.
IL&FS Milestone Fund HCC USD 127.77 million This is the largest investment by a real estate investment trust
74% stake (REIT) fund in India
Xander Real Estate Panchshil Realty USD 110 million The Xander Group has invested Rs 520 Crs in the hospitality division
Partners of Pune-based Panchshil Realty, which is developing seven hotels in
the country under the Marriott brand
DLF DLF Assets USD 696 million One of DLF’s units has bought 245 million CCPS in a group company,
DLF Assets, from private equity firm SC Asia Pte Ltd. After the deal,
the DLF’s unit's stake in DLF Assets has risen to 91.9 per cent,
while SC Asia through its investment arm would continue to hold a
4.59% stake
Puravankara Homex, subsidiary of Joint Venture The Joint Venture proposes to develop 200,000 affordable houses
Homex, Mexico over the next five years in the price range of Rs. 8 – 12 lakhs in
Bangalore, Chennai, Kochi and Pune.
ICICI Bank Lavasa Corporation Ltd., USD 53.19 million Lavasa Corporation, which is developing a hill township near Pune,
subsidiary of Hindustan has raised Rs. 250 Crs from ICICI Bank Ltd. through quasi-equity
Construction Company instruments

OUR RECENT ENGAGEMENTS

CORPORATE ADVISORY SERVICES

REAL ESTATE POWER MUTUAL FUNDS
• Undertaken Merger of the group • Undertaken Merger of Real Ispat • Formation of Mutual Fund for IDBI
companies of Hiranandani Limited and its group company

MERGER VALUATION
BANKING MEDIA & ENTERTAINMENT FMCG OTHERS
• Merger of Bank of Rajasthan with • Merger of AIMs listed company • Merger of Fem Care Ltd. with • Merger of Quippo Infrastructure
ICICI Bank with its parent company UTV Dabur India Limited Equipment Limited with SREI
• Merger of State Bank of Indore Software Communications Infrastructure Limited
with State Bank of India Limited
• Merger of US Subsidiary with the
listed Parent in India Crest
Animation Studios Limited

BRAND VALUATION
PHARMA IT SOFTWARE MANUFACTURING MEDIA & ENTERTAINMENT
• Brand Valuation of I-Pill brand • Valuation of intellectual property • Valuation of brands and related • Brand Valuation of Star Vijay
acquired by Piramal Healthcare rights of Tally transferred to Tally intangibles of Malibu Plastica Pvt. brand for the purpose of transfer
from Cipla Solutions Pvt. Ltd. Ltd. transferred to a Joint Venture of brand
between Bayer Material Science
and Malibu Plastica & Malibu-Tech

DUE DILIGENCE
REAL ESTATE HOSPITALITY ENGINEERING
• D u e D i l i g e n c e o f V i k h ro l i • DD of Asian Hotels Ltd. (West) • DD of Bharat Wire Ropes Limited
Corporate Park of HCC for and Aria Hotels & Consultancy for acquisition by Gaja Mercantile
investment by Milestone Capital Services Ltd. for investment by (Deal Value Rs 200 Cr)
Advisors (Deal value Rs. 775 Crs) IL &FS (Deal Value Rs 80 Cr)

M & A / PRIVATE EQUITY

METALS ENGINEERING
• Sole advisors to Delta Magnets • Sole advisors to the Directors of
Ltd in its acquisition of MMG Dynatech Furnaces (Bombay) Pvt.
Magdev Ltd. (UK). and MMG India Ltd. for sale of shares to a German
Pvt. Ltd. Company
 REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER 7

BDO CORPORATE FINANCE PRACTICE

CONTACT:
BDO’s Corporate Finance team offers the hands-on experience and skills to address your
business needs. In addition to the valuation of Real Estate, we have the ability to support any LATA MORE
valuation requiring expertise in machinery and equipment for a variety of applications Director – Valuations & Corporate
including: Restructuring
lata.more@bdoindia.co.in
• Mergers and Acquisitions
• Purchase Price Allocations
• IFRS Valuation RAJENDRA CHITALE
• Intangibles Valuation Director – Due Diligence
• Arbitration Valuation rajendra.chitale@bdoindia.co.in
• Portfolio Reviews and Valuation
• Impairment testing
• Restructuring Advisory KIRTI SHAH
• Due Diligence Services National Head – Corporate Finance
Advisory
• Private Equity Placement
kirti.shah@bdoindia.co.in

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