Godrej Properties (GPL), the real estate arm of the Godrej Group, has been buying land parcels over the last six months, which it had largely refrained from in favour of asset light development models so far. Pirojsha Godrej, chairman, GPL tells Shubhra Tandon that Indian real estate is in early stages of a multi-year recovery cycle and the company is looking to cash on it to enhance margins and improve risk reward returns. Excerpts:
GPL was among the first developers in India to adopt the joint development/joint venture model. However, you have got into buying land parcels for projects with 5-6 deals recently. Why this shift in strategy?
There is no shift in strategy. That said, there has been a concerted effort to improve the overall quality of project locations with more city centric, as the demand is better, there is more pricing power, and margins, therefore, can be enhanced. Also, we are not focusing on the development management fee model because we want a higher economic interest in our new projects. While it offers a high return on capital, it offers relatively lower absolute return, and sometime risk reward isn’t that attractive. So, we are looking at either joint ventures where we have a significant economic stake in the project or looking at outright purchases. Also, for a business like real estate it does not make sense to have one-size fits all answer. So, while there will be some more outright purchases in the second half, there will also be a large number of joint ventures coming through.
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What has changed in the market that you are getting into outright purchase of land?
The market is in very early stages of what we think will be a multi-year recovery. Our job is to generate the best risk-adjusted returns that we can, and how we source land to fulfil that might actually be very different at different times of the market cycle. Any land purchases now, are likely to be developed through a very strong real estate cycle, and we are quite likely to have margin expansion. We are all the more interested in using these next 12 months to secure a strong portfolio, because we do think that the timing is quite attractive.
Other developers are also back to buying land parcels, isn’t there a risk of heated competition for prime parcels like 8-9 years ago?
Being able to decide on what leg of the cycle we are in, and adjust our business development strategy accordingly is also important. In two to three years from now, if we see the market heating up, which is often the case in an up cycle, and you have 10-15 developers chasing after every land parcel, willing to make pretty aggressive assumptions etc, that time we might say that we do not see much logic in being aggressive in land purchases and switch to do development in more asset light structures, because there can be a risk of cycle turning and the project being developed in a weaker leg of the cycle.
How are the land prices looking like at present compared to two years ago?
There is no deep distress in the sector, and land prices have firmed up over the last two years. But yes, we do think that we are getting lands at an attractive valuation. And particularly given where in the development cycle we are in. Our expectation is that the sector will continue to strengthen in the next two to three years, which means an improvement in volumes, in real estate prices, so we feel these are attractive times to be investing on the land side.
Does this rise in land buying trend in any way indicate a come back for the luxury residential market, and could we see a return of marquee projects again soon?
Our focus very much remains on the mid-income to premium. There will be one-off luxury projects like we have in Connaught Place in Delhi and maybe launch one soon on Carmichael Road in Mumbai. The vast majority of volumes and scale of the business will come from mid-income to premium category projects. I don’t see one coming at the expense of the other. I do not think that even in the down cycle high quality land parcels were not picked up. Yes, end user demand for luxury had come down a lot, which has picked up since Covid. However, I do not see any dramatic shift, or that will take away developers’ focus from mid-income space.
North is gaining importance in GPL’s portfolio and NCR was the strongest market this quarter too. Does this change mean you are more focused on northern region going forward versus your home ground MMR?
We have defined four markets—MMR, NCR, Bengaluru and Pune as our priority markets, and each providing huge opportunity. Market scale is not a constraint to growth. There is no reason to think that NCR would necessarily continue to be largest region for us, while it will definitely continue to grow. But, we have an equally exciting pipeline in the other three cities, so there will be some good healthy internal competition to see which of the zones can emerge as the largest, and that might be different one in different years.
Where do we see GPL over the next two to three years?
We had guided 2-3 years ago that in FY23 we hope to cross Rs 10,000 crore in booking value, so I think we are well on track to do that. The Rs 10,000 crore will require 27% growth this year, and certainly we hope to have these kind of healthy growth rates for the next three years as well.