The Hindu Business Line : Realty stocks turn a new leaf in 2007

A sharp increase in the number of realty companies tapping the markets, increased FII participation in realty IPOs, stringent disclosure norms from SEBI for IPO candidates and improved understanding of factors that drive valuations for these companies are some of the key changes that has turned this sector into a more investor friendly destination.

For the first time, the markets witnessed large-sized realty companies opting for the initial public offering route for funding their projects.

About nine real estate developers raised a whopping Rs 14,200 crore in 2007 through IPOs.

DLF’s mega offer alone cornered 65 per cent of the above sum. This does not include money raised by infrastructure players who had a presence in realty as well.

All the realty IPOs saw considerable interest from qualified institutional buyers (QIB), which ensured reasonable over-subscription levels in 2007.

Regulatory changes helped this trend - the Government, during the later part of 2006, opened up the gates for foreign institutional investors to invest in real estate through the primary market (IPOs).

Sobha Developers and Parsvnath Developers reaped the benefit of this change as they witnessed QIB subscription levels of 168 times and 74 times their offer size (towards the end of 2006).

However, 2007 saw mixed trends in institutional interest. While companies with new business models such as Akruti Nirman invited huge institutional interest during the IPO, there were not as many takers for the colossal IPO of DLF.

Further, retail investors appear to have relied on institutional interest to make their investment decisions. High retail over subscription often came about in IPOs with a higher level of QIB subscriptions (see table).

With a deluge of realty IPOs in the queue for 2007, SEBI decided to tighten disclosure norms early in the year.

The break-up of land bank into various categories such as owned land, land with development rights, land agreements and so on provided investors with a better understanding of the potential for each company’s projects.

Disclosure of the market value of the land bank in the offer document also came to an end and was replaced with detailed disclosures of current and future projects to be undertaken.

Similar disclosures adopted by the already listed companies also enabled better understanding of the realty business.

This moderated stock valuations, which had sky rocketed the previous year. Companies such as Ansal Properties & Infrastructure, Sobha Developers and Mahindra Lifespace Developers saw a moderation in price earnings multiple to more realistic levels, although this was partly backed by improved earnings.

However, others such as Marg Constructions, Lok Housing commanded a sharp re-rating after improved information disclosure on their projects was made available.

Attractive pricing

The initial stream of IPOs reaped a good harvest despite stiff pricing, as there were very few listed stocks in the space then.

However, with an expanding basket of listed realty stocks by mid-2007, attractive IPO pricing turned out to be the key driver for subscriptions.

The high demand for the Omaxe IPO while Purvankara’s offer struggled (which had to reset its price band) is an example. More recently, Kolte-Patil Developers, a regional player with attractive pricing was over-subscribed 44 times; as against this, Brigade Enterprises, another regional player with more ambitious pricing received a subscription of just 13 times its offer size.

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