Gaurav Dalmia is no stranger to the Indian investment community. Dalmia can probably claim to be the first and only member of a traditional business family (he is part of the Delhi’s Dalmia family) to launch a venture capital fund (Infinity Technology Investments), sponsor a private equity fund (India Value Fund) and launch a real estate fund (Landmark Holdings).
Known to be a shrewd and adept investor, Dalmia has backed companies like Indiabulls in its early days and has been sewing up real estate deals across India in partnership with prominent builders like Shipra Group in Ghaziabad and Kumar Builders in Pune. He is unfazed by the current flux in real estate markets nor is he worried about the high interest rate regime that is likely to sustain for sometime. He says real estate investors can still make money if they follow a bottom-up investment approach.
Dalmia, the founder and chairman of Landmark Holdings, the Delhi-based real estate fund that has $225 million in aggregate funds under management (with additional $100 million commitment), believes the real estate market is only beginning to correct. He says the irrational exuberance in the real estate market is passe now since there is a real demand for housing while speculators will be pushed out of the market. VC Circle’s Shrija Agrawal catches up with Dalmia in his 11th floor office in Narayan Manzil in Delhi’s Connaught Place, where one cannot miss the picture of Nobel peace prize winner and Grameen Bank founder Mohammed Yunus sharing space with the portraits of Microsoft founder Bill Gates, billionaire investor Warren Buffet, steel magnate Laxmi Narayan Mittal, and spiritual guru Dalai Lama. Edited excerpts:
I am a bottom up investor, and not a top down investor. A bottom up investor will say, “Look, show me a proposal. Here are the strengths and the weaknesses of this proposal. And we may do it or not do it (on the merits of the project)”. A top down investor will say, “Well, the Indian economy is growing, and I will make a bet on that”. We don’t start from the top. We start from the bottom of the deal.
That said, if the macro environment is a little slower, the projects will be slower. For instance, if the rupee appreciates, there will be a slowdown in IT and there will be a slowdown in IT related employment and therefore housing catering to that sector. That’s a macro view.
So, now we need to have a bet on the rupee (because it affects housing demand indirectly). So, we try to blend the top down view with the bottom up view, but an 80 per cent of our thinking is based on a bottom up view.
To make money you don’t need a phenomenal macro environment. To make money, you need only a reasonably decent macro environment. Between 1990 and 2008, has the micro environment been phenomenal all through out? Look at the wealth that has been created in these 18 years. Let’s assume 1990 was the liberalisation kick-off, since then the economy has not gone one way, it has gone up and down. But wealth has been created. So I don’t believe macro environment is the primary
determinant in investment returns.
Reserve Bank of India raised borrowing rates last fortnight to the highest in more than six years. How do you see high interest rates affecting housing demand?
Interest rates will affect demand. It will also affect our margins because our interest costs will go up. I think that is a reasonably big variable, which means we look at higher margin projects and if we don’t get higher margin ones, we simply don’t do it.
What are your other concerns in the current macro environment? Isn’t inflation a threat?
Inflation, buying power of the consumer, interest rate, change of government, upcoming elections, and therefore, the macro management of the economy, all remain concerns. Even though the demand is real, there is too much of supply. A lot of them have gone into the hands of speculators. So the problem lies on the supply side. The demand is growing reasonably. The projects which have been conceived well are doing well and will continue to do so.
Much of the boom in real estate was linked to the prices of land banks, with the prices of land falling especially in tier-II and tier- III cities. What remains your future outlook on the real estate scene in India?
I was never a believer in the so called “land banks”. Land banks are an equivalent of eyeballs during the dotcom boom. In the internet boom, you had the silly concept of eyeballs - because you had people visiting your site, it would somehow translate into revenue and so on.
It never happened. Similarly for land banks, you have got to get licenses, you have got to construct, you got to sell it, you got to collect money. There are a lot of complex and risky steps before you translate landbanks into profit. The stock market believed, “landbank = profit = therefore fantastic”. The equation was not that obvious to me.
Do you think the real estate market has corrected?
The stock valuations of the real estate companies have corrected by 40-50 per cent. I think real estate market is seeing a correction now. The key word is quality. There are 200 developers, and a 70 per cent of them will disappear. Players who are not serious will disappear. In 1985, believe it or not, there were 200 petrochemical players in India, only some 20 petro chemical players have survived since then. A similar shakeout will happen (in real estate). Stronger companies like DLF will be affected by, say, a 10 per cent. But a weak company will see its life changing completely.
What is your firm’s investment strategy?
As a real estate investment company, we partner with best of breed developers. We can come in to a project at a start up stage or at a fully conceived stage. We would define best of breed by geographic
specialty and product specialty. I don’t believe if one is a great developer in Delhi, he can necessarily conquer the Bombay market too. The reason is we believe that there are good developers in Bombay and they are not asleep.
I think geographical specialisation makes sense. Same with asset specialisation. Developing middle- market housing is very different from developing a shopping mall. Just because a developer has a township it doesn’t mean that he can pull off a shopping mall, especially as the competitive environment unfolds. In easy days, you can do everything. But you need to specialise. I don’t believe there is anything called the real estate business. There’s a hotel business which is very different from a shopping mall business which is very different from housing business, which is very different from a warehousing business.
So you got to know what you are doing. So, we would look for best of breed partners with geographic focus and product focus, and partner with them, that’s our strategy.
You said you can also come at a start up stage. What is the kind of value you bring to the table at that stage?
For instance, we bring in value in terms of configuring the project. Should we do middle market housing at a particular place or high-end housing, deciding the product mix etc.
Do you have a research team backing you?
We have instincts. Besides, we do research when identifying a project and evaluating a proposal.
What all do you look for before investing in a project?
We look at the local economy, what is the demand-supply situation, the particular location, the developer – and whether he can pull it off and so on. We would be the financial partner, we will bring in our own equity, and will also arrange debt.
How many projects do you have currently and what are the returns you are expecting from them?
We have 21 projects currently (see the table). We expect a 30-40 per cent returns, although it varies from project to project.
How do you hedge against the rising project financing costs?
You factor that into the cost, there is no other way to hedge against that. We still don’t have a fixed price norm in India.
Does that mean it is passed down to the end consumer?
May be not. It just goes out of your profit.
Has raising capital become difficult in this scenario?
Absolutely. Anyone who has an access to capital today has a competitive advantage.
How long do you expect the slump?
The slump hasn’t started. It is just starting. You have to watch the fun in the next two years. People will be out there with begging bowls. There are developers who are paying 30 per cent interest to
private lenders that is equivalent of a begging bowl.
What is your outlook for the real estate market?
I think the market is doing alright. There was too much euphoria in the market. You should segregate between the euphoria and the real market. I think returns will be far more selective. If you look at the
demographics in India, the real estate boom is linked to the demographic boom. It is quite happening in India.
Why is the shopping mall boom happening now and why did’nt it happen 15 years ago? It’s happening now because of the buying patterns of young consumers, this demographic shift will mean that the housing demand will go through the roof. It will mean more organised retail, it would mean more domestic tourism therefore the need for hotels so on and forth. This demographic will drive real estate more in India than in the US which is a mature economy. Forget the short term and the medium term, real estate is the best play out here.
How are you doing things differently in the current market scenario?
We are little more choosy. Also, we are doing projects with a shorter time horizon now than we were doing earlier. Earlier, we would do some element of landbanking, as in buy land and develop after two years. Today, we don’t do that. We will buy land and will start developing in six months (maximum) if not earlier.
Will you look at listing Landmark Holdings?
Listed companies have the pressure of announcing quarterly earnings and other things. A real estate business does not have month to month earnings. Our earnings are too erratic by the very nature, so I am not sure whether a real estate company should necessarily be listed.
Income generating assets can be listed. Our product mix is such that we don’t have too much of income generating assets.
Dalmia family has significant presence in sectors like cements, metals, agro-chemicals etc. Any other sector which the Dalmia family is evaluating as a significant business opportunity?
We have been looking at the infrastructure space for quite some time.
What is your advice for all those new entrants eyeing the real estate space?
Don’t do real estate because its sexy, do it because you know the domain or you want to learn the domain. If you are looking for easy money, forget it.