Q&A: Indian Real Estate Guru Upbeat On Local Market

Jul 11 2008 | 10:59am ET

Source: VC Circle -- Gaurav Dalmia is no stranger to the Indian investment community. Known to be a shrewd investor, Dalmia, founder and chairman of $225 million Delhi-based real estate fund Landmark Holdings, is not fazed by the current flux in real estate markets, nor is he worried about the high interest rate regime that is likely to continue for some time. He says real estate investors in India can still make money if they follow a bottom-up investment approach.

VC Circle’s Shrija Agrawal caught up with Dalmia in his office in Narayan Manzil to get his take on the current Indian real estate scene.

VC Circle: How are you reading the macro situation right now? Are you nervous as a real estate investor?

Dalmia: I am a bottom up investor, and not a top down investor. 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% of our thinking is based on a bottom up view.

VC Circle: The Reserve Bank of India recently raised borrowing rates to the highest in more than six years. How do you see high interest rates affecting housing demand?

Dalmia: 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.

VC Circle: What are your other concerns in the current macro environment? Isn’t inflation a threat?

Dalmia: Inflation, buying power of the consumer, interest rates, 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 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.

VC Circle: Do you think the Indian real estate market has corrected?

Dalmia: The stock valuations of the real estate companies have corrected by 40-50%. I think real estate market is seeing a correction now. The key word is quality. There are 200 developers, and 70% of them will disappear. Players who are not serious will disappear. In 1985, believe it or not, there were 200 petrochemical players in India and only some 20 petro chemical players have survived since then. A similar shakeout will happen (in real estate).

VC Circle: What is your firm’s investment strategy?

Dalmia: As a real estate investment company, we partner with best of breed developers. We can come into 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 specialization makes sense and the same with asset specialization.

VC Circle: What do you look for before investing in a project?

Dalmia: 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.

VC Circle: How many projects do you have currently and what are the returns you are expecting from them?

Dalmia: We have 21 projects currently and we expect 30% to 40% returns although it varies from project to project.

VC Circle: How long do you expect the slump to continue?

Dalmia: 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% interest to private lenders, that is equivalent of a begging bowl.

VC Circle: What is your outlook for the real estate market?

Dalmia: 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 didn’t 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 organized 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 U.S. which is a mature economy. Forget the short term and the medium term, real estate is the best play out here.

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