Although media reports, vis-a-vis real estate IPOs have not been positive, yet, offerings have been subscribed and new ones are in the pipeline,” says realtor Bharat Malik. The Indian investment market will not blindly put money in real estate IPOs anymore and this is because there are issues that go beyond market sentiment, says Pankaj Kapoor, CEO of real estate research and analysis firm, Liases Foras. “Valuations have been a problem for real estate IPOs in the past and we have seen some companies whose IPOs have been delayed, offering valuation discount to pre-money. Investing in a real estate IPO requires as much due diligence, as when it comes to buying real estate. This applies equally, to the investor and also the company which makes the IPO offering,” he explains.
Nayan Bheda, MD of the Neptune Group, says that things have improved, over the past few months. “Investors have returned and the market sentiment has improved. I feel that IPOs will do well in the coming days,” he says. Taking the example of Godrej Properties Ltd, the first developer to sell shares in an IPO in India after a gap of almost two years, he says, “It raised Rs 4.69 billion last December and the stock has gained about 3%, since its trading debut.” Raheja Universal has also announced plans for an IPO and Bheda says that this trend is an encouraging one.
An IPO becomes successful when a company provides sustainable returns to the investor and ample liquidity in the stock, says Abhinandan Lodha, deputy MD, Lodha Group. “The success of upcoming IPOs will depend on their timing and the prevalent market scenario,” he says. On the issue of some companies coming up with IPOs that have been delayed, offering valuation discount to pre-money, Lodha points out that for each company, the value drivers could be different. “The financial markets have changed and valuations of real estate are still at a nascent stage. This may be one of the factors leading to shifting valuations,” he suggests.
Companies have realised that with falling retail interest and the flight of foreign investors, it will be difficult to gain closure, unless valuations are really attractive, adds Amit Goenka, national director – capital transactions, Knight Frank India. “The onus lies on companies, to infuse confidence in retail clients, through their merchant bankers. Unless companies offer pre-money value discounts, there would be little interest, compared to the risk weightage of real estate stocks,” he maintains.
CA Sumeet Mehta, MD and CEO of Paradigm Advisors, says that investors would prefer to invest in realty firms’ IPOs that offer a mix of justifiable valuations and a strong cash-flow, instead of merely relying on land bank valuations. “In the present scenario, the focus appears to be shifting from land banks and valuation reports, to the execution skills of the developer and demand and price sustainability in the micro markets where the developers are executing their projects,” points out Mehta.
According to Goenka, market experts have been talking about IPO aspirants ‘trying to avoid their predecessors’ pitfalls and keep their valuations attractive’ and this will be a positive move, he says. “The market’s reaction to IPOs in the past, has underlined one simple fact: that an IPO is a way to raise growth capital and enhance capital base,” he says.
While cutting down on valuations and raising capital may augur well for developers, whether it would augur well for investors will depend upon four factors, says Mehta. “Firstly, it will depend on whether the issue’s proceeds are utilised to build land banks, or complete projects, or start new projects. The second factor will be the execution capability and commitment of the developer. The next factor will be the sustainability of property prices at current levels, in the wake of what appears to be an overheated property market. Lastly, it will depend on demand and absorption, in the wake of slowing down of demand due to rise in prices,” Mehta elaborates.
IPOs are a good option for retail investors, aiming to benefit from India’s economic growth, says Vishal Ratanghayra, director, asset management company, Signature India. “Companies going in for listing should go by current valuations and future appreciation, to allow share holders to benefit in the mid-long term. The stock markets largely react to sentiments and over the next few years, fundamentals as well as sentiments are expected to be positive. Nevertheless, there needs to be prudence at at the investor’s level, before investing,” he maintains.
Real estate IPOs have had a chequered history, admits Kapoor. The future of real estate IPOs will depend upon their respective issue price band and whether investors perceive it as being fair, he concludes.
Source: Economic Times, Chennai Edition