Business Today
An industry waiting to create many billionaires

Big real estate names are still reaping the rewards of bets made in the '80s. Lesson: Be long-term greedy.

Real estate is a hot industry: For right and wrong reasons. Housing is the world's largest industry. Good! In countries with demographics like India, it sees high growth. Great! It has created extraordinary wealth in emerging markets. Cool! But it operates in India's great opaque environment of local permit regulation. Problem! Money siphoning and accounting jugglery are commonplace. Awful! There is a frenzy, with people chasing easy money. Counter-productive! This industry will create some captains of business, yet it will leave behind many losers.

History shows that all bubbles, such as the real estate one we just came out of, have some economic logic: high margins, superior growth, easy financing. However, these positives are short-lived. People who see the ocean and are excited from afar, very often, find that they cannot deal with the tides and the undercurrents.

My sense is that property development will remain largely fragmented and regional, in most asset classes, as it has been the case in the more developed markets. Consolidation will happen in rent-yielding assets, as specialised investors buy developed revenue-generating assets. History predicts this. Many developers, especially north Indian ones, came up with pan-India strategies. I think this was a strategic mistake. Empirical evidence—DLF became a $12-billion behemoth largely on the back of one suburb of Delhi—was largely ignored. Developers sub-optimised the management of one project, just so that they could sign up another one. Many will find that they can shrink and grow rich.

Real estate development is very different from normal investing. Every project is a start-up requiring an extraordinary presence of mind and intensity. If you invest in a regular business, you expect earnings to grow, as well as the price-to-earning (PE) ratio to grow. If you invest in a housing project, there are only earnings from operations. As a result, in order to get the same return in real estate compared to private equity, one has to be far more operationsoriented, as many pure financially-minded investors have now sadly acknowledged.

I have to comment that land banks are like eyeballs from the dotcom boom of a decade ago. It is marginally useful but oversimplified information on which serious investment bets are being made. And people betting on sustained upward movement of prices should note that in the short term price run-ups may happen, but in the medium to long term, prices will be determined by the wallet of the middle class Indian. As a result, the level of overvaluation is such that you should not be surprised to find that your favourite real estate stock has halved while its sales have zoomed.

As far as project-level investing goes, real estate can offer a wide range of returns even in deals of the same vintage. Also, real estate just does not fit into a five-year cycle, which is a long-term investment horizon for many. Big real estate names are still reaping the rewards of bets made in the '80s. Lesson: Be long-term greedy.

Someone asked me what it took to succeed in Indian real estate. My first thought: Don't be an absentee owner (and try to learn the local language). Decide which segments you will play in (and which you will avoid). Make few concentrated bets (indeed, diversification is a hedge against our own ignorance). Be driven by conviction (not market sentiment). Think bottoms-up (details!). Use standard good management (it's all in the implementation). Folks who have the temperament to play in this game will do exceedingly well. This industry is waiting to create many billionaires!

The writer is the Founder-Chairman, Landmark Holdings

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