January 28, 2010
Indian property IPOs expected to do poorly
Observers cite competition from large public sector offerings
(MUMBAI) Investors are more likely to choke on a glut of India property IPOs set to hit the market this year than gobble them up.
Even though Godrej made a strong debut this month in the first Indian property listing in two years, the initial public offers of other developers could meet more restrained investor buying as they compete with a slew of large public sector offerings.
At least 16 real estate firms have lined up plans for initial public offers to raise about US$6 billion, buoyed by an 81 per cent rise in the Mumbai stock index last year and as property buyers return.
'If all the IPOs get bunched up, we have a problem. Everybody may not see the light of day,' said Jayesh Shroff, fund manager at SBI MF, which manages about US$8 billion worth of funds.
What awaits India's property IPO rush may be exactly what happened to China's offerings in recent years. The Chinese property sector saw early success from some offerings several years ago, but a dozen or so that followed suffered as investors grew tired of the same old IPO story.
And it could also play out as it did in India in 2007, when DLF and others floated, but are now among the worst market performers, trading way below their IPO prices, with market valuations sliding between 70-90 per cent.
Godrej has already dropped 17 per cent from its Jan 5 debut high after its around US$100 million IPO.
India's real estate industry, like the sector globally, was hard hit by the 2008 credit crisis after years of booming demand.
Property prices doubled in the two years to 2007, fuelled by interest from foreign investors.
But the sharp rise was followed by interest rate rises to calm inflation and the global financial turmoil, pulling down property sales by more than half. Left with unsold and incomplete projects, developers were forced to restructure spiralling debt obligations.
The equity market rally since March threw a lifeline, and several real estate firms are again dusting off plans to raise public money.
'Although many developers were able to defer repayments, high interest costs and requirement of funds for project execution are still a concern,' said Sushanto Roy, chief executive at Sahara Prime City, which plans a US$650 million IPO this year.
A recovery in the property market has also been encouraging.
A series of interest rate cuts and pent-up demand from a large urban middle class have helped push up prices by about 30 per cent from last year's lows in the first quarter.
Indian companies sold shares worth US$17.5 billion last year, mostly by property and power sector firms. IPOs made a comeback in July after an 18-month drought, with 21 companies raising a total of US$4.1 billion since then.
These numbers should be dwarfed this year, mainly by a government roadmap to raise funds through stake sales in state-run firms, as it strives to speed up reforms and cover a widening fiscal deficit in Asia's third-largest economy.
So all eyes will be on the next property IPO, which could be DB Realty, which set a price for its US$325 million IPO, sources said this week.
Others in the likely line-up include a US$650 million IPO by Lodha Developers, an US$830 million offering by Emaar MGF, an Indian joint venture of Dubai's Emaar Properties, and a US$650 million IPO by Sahara Prime City.
Investors, still scarred by the sub-prime crisis, remain cautious of investing in a property market that is beset with red-tape, land disputes and difficulty in valuations due to the huge quality difference among India's developers.
'If greed overtakes you and you price it very high, the IPO might fail,' Pranay Vakil, chairman of property services firm Knight Frank India, told Reuters Insider.
Mr Vakil is adviser to several of the upcoming offers.
Martin Koh/ Sherry Tang