Hiranandani Constructions chairman and managing director Niranjan Hiranandani is, unlike his peers, insulated from heavy debt and weak cash flow, and has no large land bank. His rental income is enough to pay off his debt in three years, even without doing any business. But he is caught in a family dispute between his only son and daughter over his wealth. In an interview with FE?s Shubhra Tandon and Baiju Kalesh, Hiranandani shares his view on the current business environment and the way ahead. Excerpts:

Real estate developers are yet to earn the respect of customers unlike, say, a consumer durables company. Is it because customers think you don’t have discipline in pricing properties? Will this perception change in the near future?

In sectors like automobile or telecom, government interference has been minimal in the post-liberalisation era, enabling these industries to get off the ground. However, real estate has not changed. Urban Land Ceiling got scrapped five years ago, but the benefits of that have not yet accrued to the common man. Taxes have shot up. In an affordable housing scheme, the total cost of taxes was anywhere between 7-8% 20 years ago; today, it is 32%, which includes service tax, stamp duty, VAT and other components. Everybody finds it easy to tax real estate because they see it as a space where builders are making money.

Building affordable houses would have cleared the air of doubt…

The Reserve Bank of India also looks at it negatively. They call low-cost housing as commercial lending. The risk weightage has been increased and whatever benefits were there earlier have also been withdrawn. Obviously, from all perspectives, the government has not been an enabler for affordable housing, or housing in general.

Real estate developers are also to blame for land-grabs and lack of on-time delivery…

Land has always been a coloured subject, partly because there was a lot of black money involved. So, it was associated with Haji Mastan, Yusuf Patel and others in the earlier days. Good people shunned real estate because it was considered a coloured business. People like me were really in difficulty and we worked hard towards creating respectability in the industry.

And, today, we have succeeded. With the Tata Group, Mahindra & Mahindra and Great Eastern Shipping getting into housing, I think, by and large, that respectability has come. It is certainly far better than what it used to be, though not entirely clean.

Bollywood, which was once considered a coloured business, is now earning respect and global investors’ interest…

Transparency is critical. But you just can’t have only sales, you need to have rental housing, too. Historically, the Rent Act in India has been against developers. So, there was no security of getting back the property or getting rents. It is changing, but slowly. However, in an international real estate company, a large amount of its portfolio will be rental stock, with saleable component only 50% of the total portfolio.

And, then, they have REIT to which they sell off the stock. International companies are able to encash their rental portfolio any time to tackle the volatility. In India, unless rental housing becomes at least 50% of the business, it is not insured from volatility.

How is the rental trend in India?

It was there earlier because, at one time, the valuations of properties had shot up and, at those values, it became exciting for builders to get such units and some companies went public. DLF, Unitech, Ansal Housing and Construction, Hubtown and Orbit Corporation got listed on the stock exchanges. But unfortunately, investors lost out as valuations that were shown based on the land procurement theory got demolished. Execution was a major issue in some of these companies.

Real estate developers are in a tight spot. Home-buyers have deferred purchases, lenders are averse to fund. How can one overcome this?

They all need to rationalise. Be it real estate or any other business, when you are in a bad shape, you do what DLF is doing ? selling off assets, cutting down loans, or negotiating some of them at lower rates. Hopefully, as the market picks up, the prices will also do so and they will get out of the crunch.

But will that be long term?

Real estate is not a short-term business. Nowhere in

the world does it happen that way. Real estate cycles are long and they should be looked at that way.

What is the expectation in the short term for companies? Will some of them fall apart?

In the short term, it will be very tough. The first six months of 2012 are going to be very tough for any company. Falling apart, well, will depend on the strength of the individual company.

Developers are aggressive about building in Tier-II and Tier-III cities…

That depends. Pune is going to do very well, so are Bangalore and Chennai. New cities like Ahmedabad are bound to do well. But, then, not every other city is going to. People said Coimbatore will do well, it is not. Mysore is not doing well either.

Your business model is different from others. You never chased land banks. How did you resist it?

I am not greedy (laughs). That is because we have always been conservative. We are growth oriented, but conservative in our objectives. We are very clear in our business models. We have incremental growth, while many of the companies are looking at exponential growth.

We have not over-leveraged our borrowings. We have

never over-leveraged our growth story. But we are consistently growing every year between 15% and 20-25% compounded growth, barring four or five bad years in the last 35 years.

At least 30% of my residential business comes from customers who have bought from me earlier or connections through them. They are my brand ambassadors. Also, having succeeded in a model, we will continue that in the future. Not that the models do not change, but from a holistic perspective, they are townships.

How is your debt position?

We have not failed any of our banks in the last 35 years. And I think that is why we enjoy credibility with customers, suppliers and contractors.

How do you approach a project in the board room?

Basically, it is my younger brother (Surendra Hiranandani) and I who are principle decision-makers. Then, we have a team of key decision makers. Most people are working here for 25-28 years. Two of us on top and, then, three below that and another four or five below that.

And this team is the core of our company and they decide on a project. It is never an individual decision, but, sometimes, I may just decide individually because I am so convinced that we don’t really need any concurrence.

You financial numbers are good…

That is what we got the highest grade rating from Crisil for. We can pay all our debts within three years only from our rental incomes. So, basically, even if I don’t do any business, my loans will get paid.

You have cash in hand, a conservative business strategy and there is a slowdown happening. Is it the right time to grow?

We have enough growth strategy and land bank in place. All land is fully paid and written off, and there is no debt against any land. We always buy the land and, as of today, it is there for the next 10-12 years of development.

Do you have land banks across India?

We have very limited land banks. We take five or six plots, work on it for the next 5-10 years and, then, we keep on buying smaller plots here and there to get the excitement going, else it gets boring. But we don’t go for very high-priced bidding or auctions. We don’t want to be the biggest in the market.

Are you looking to buy land now?

Land prices will come down, six months from now. We will not buy before another 6-8 months.

Will you be looking at only residential development?

Residential should be our base, but some commercial, retail will be there. The mix will be 80% residential and 20% commercial.