February 3, 2022
In recent times, after DLF and Lodha, Godrej Properties (GP) seems to be the next one with aggressive ambitions in the Indian Real Estate Sector.
The Company has been on a spree of land acquisitions and product launches.
Now it has announced a strategic partnership with D B Realty (DBR) to target redevelopment projects in Mumbai – both slum rehabilitation and MHADA redevelopment.
Contours of the partnership are very interesting. Here is an effort to highlight the key notables (do especially note the mentioned timelines) –
- By March 31, 2022
- GP and DBR will set-up a 50:50 SPV to undertake redevelopment projects. Both will contribute equal capital into this SPV. Targeted fund infusion is Rs 300 crore each. However, please note that this fund infusion might happen over period and not in a lumpsum at the time of setting up the JV.
- DBR’s responsibility will be business development and preparing project sites for approvals (means managing all the dirty work), whereas GP’s role will be development, sales and marketing (basically using it’s brand name). Something similar was done by Omkar and L&T in the past.
- SPV will pay 10% to GP and 5% to DBR for their respective roles. (Though may be an inconsequent observation, but GP’s press release doesn’t talk about 5% to DBR and DBR’s press release about 10% to GP. Respective press releases only mention payouts to themselves)
- Not every redevelopment project identified by DBR has to be compulsorily executed by SPV. Option remains with GP to allow it or not (in the form of Right of First Refusal).
So in the redevelopment SPV, GP is committing Rs 300 crore. However, parallely there is another transaction. GP investing Rs 400 crore into DBR. This is part of a larger equity fund infusion into DBR.
Key notables in that regard –
- Immediately in Stage 1
- DBR is allotting 13.05 crore equity warrants – 9.75 crore to the promoters and 3.3 crore to an investor (Pinnacle Investments, an entity largely owned by the promoters of Prestige Estates).
- Equity warrants are being issued at a price of Rs 43.15/ warrant i.e., fund infusion totalling Rs 563 crore
- 25% of this i.e., Rs 141 crore is payable immediately and balance 75% (Rs 422 crore) within next 18 months.
- Stage 2 – this is where GP might be investing
- DBR has approved to further allott 12.70 crore warrants in future in the following manner – 5 crore to GP, 5.7 crore to Pinnacle and 2 crore to the promoters.
- Pricing of these warrants would depend upon the prevailing share price of DBR and market regulations at the time of exercise.
- This round is a possibility and not a compulsion.
- GP has time till September 2023 to subscribe 5 crore warrants and would be liable to pay Rs 400 crore for this – 25% at the time of issuance and balance 75% within 18 months thereafter. Implied valuations for this works out to Rs 80/ warrant.
- If everything goes well, this will be the final shareholding of DBR assuming all the approved warrants are subscribed to –
- Existing promoters – 54.08%
- Pinnacle Investments – 17.97%
- Godrej Properties – 9.98%
- Public – 17.97%
As you can notice, a seemingly simple transaction has lot of ifs and buts.
Godrej in it’s typical style, continues to expand aggressively in the Real Estate Sector. Through this transaction it has allowed itself to look inside the redevelopment space more closely.
Although optically it seems that GP is investing Rs 700 crore in this endeavour, the funds (as noticed above) will come through in various stages and over period. Very unlikely, GP will compulsorily put them all in, if it’s not comfortable with the proceedings.
Therefore, as such I am not overly concerned about GP’s commitments in this area. However, what bothers me is how fast it wants to go and grab everything in the Indian Real Estate sector.
For me, a focused approach works better in real estate sector than going all in. Examples of Unitech, HDIL, DLF etc have taught me good lessons in the past.
May be I am biased and Godrej group has a better corporate governance track record, but let it be.
Though I continue to be very bullish on the Indian real estate over the medium term, I will still continue to avoid very aggressive direct plays and am happy to continue looking for derivative/ linked opportunities.
February 4, 2022
Markets didn’t like GP getting into redevelopment projects. The stock witnessed heavy selling and tanked by almost 10%.
Company in the evening announced that it’s withdrawing from the transaction due to the feedback it received from various stakeholders.