Valuation models for diversified, listed real estate developers are evolving because of their revenue model comprising annuity and outright cash flows, according to Murtuza Arsiwalla.
For companies operating in the residential, commercial and hospitality space and even owning land banks, each of these segments could be viewed as a different business, Arsiwalla, director at Kotak Institutional Securities, told BloombergQuint’s Niraj Shah in an interview. Accordingly, he said, varied multiples would be applied to each of these.
“The multiples that we assign for the development business are lower than the trading multiples of the rental business because a commercial business would yield cash flows in perpetuity, whereas there is no clarity when looking at development business in terms of projects in hand,” Arsiwalla said.
The commercial space underwent a rerating after real estate investment trusts. The disclosures required under REITs, he said, helped appreciate the growth trajectory for annuity assets and this enabled the companies to move closer to assuming double-digit growth figures for rentals.
Arsiwalla also expects to see re-rating in the residential or development space. They, he said, could emerge as multi-baggers if pipeline projects start being valued dearly. Residential space has the potential to grow two to four times the size but also faces a higher risk of not actually capitalising versus the commercial space, which has a lower risk-reward ratio due to the annuity nature of cash flows, he said.
Introduction of RERA and a stamp duty cut (by Maharashtra) aided project delivery within timelines and higher sales for developers, while helping buyers save on additional costs. All these factors contributed to a higher stamp duty collection for the government, Arsiwalla said.
Shift Of Preference
According to Arsiwalla, there is a visible shift in consumer preference towards organised developers. That’s because of lower execution risk and the sector becoming more capital intensive over the last four-five few years. Besides, the tightening of the regulatory framework has made it difficult for marginal players to survive.
He said it may not be surprising that by 2030, some of the businesses in the organised listed space may have market caps that are four to five times their current size.
Over the last few years, the number of developers reduced to half, Arsiwalla said. Still, market shares of large developers are in the low single digits. There’s no single pan-India player with more than 1% or 1.5% market share compared to their Chinese counterparts where two to three companies dominate the market, indicating great potential for growth, he said. The future, he said, will belong to companies that have size, good customer recall, low execution risk and access to low-cost capital.