Realty Developers Afflicted With Low Returns, Says Rakesh Jhunjunwala

Ace investor Rakesh Jhunjunwala on Thursday said real estate developers are afflicted with very low return on capital as compared to bluechip stocks.

Jhunjunwala, who runs RARE Enterprises and is set to be a major shareholder in an upcoming airliner, said only the affordable housing developers can look at listing because of the volumes which they can deliver.

It can be noted that very few developers like Macrotech Developers formerly Lodha, and DLF are listed on the bourses.

Jhunjunwala cited the case of DLF, saying the stock price plummeted to Rs 80 from Rs 1,300 per piece to illustrate the risks associated.

"If I were a developer, I won't list because it is not a business which is susceptible to list," he said, speaking at an event on real estate organized by lobby grouping CII. He also questioned the rationale for listing, wondering if it is done to raise capital or from a succession planning perspective. Bluechip stocks give an 18 to 25 per cent return on capital as against the 6 to 7 per cent observed in the real estate segment, he said.

Investors were bullish about Real Estate Investment Trusts (REIT) as an asset class and also about commercial realty, which he feels will be powered by the growth in the knowledge economy like IT services and pharma.

Jhunjunwala said in the past, he has invested in up to five realty projects and made money but said the possibility of investing in those is very slim and activity if any will be limited to rental housing.

Buying a house is deeply entrenched in the psyche, Jhunjunwala said while expressing optimism about the real estate sector going ahead.

However, the need to buy a house had led him to sell a holding in leading rating agency Crisil in 2006 to raise over Rs 20 crore, and rued that he would have been richer by Rs 1,000 crore today if he had not sold the stake.

Meanwhile, Jhunjunwala said he is amazed at the surprise shown by people for his decision to invest in a new airliner which has been named Akasa. The equity investor said he has committed Rs 275 crore for the stake in the airline, which can potentially have a market cap of Rs 10,000 crore.

Half of the top management is from the largest airliner Indigo, which has an Rs 80,000 crore market cap and it is not so that the entire life has been bet on the project, Jhunjunwala said, reminding that Ryan Air was profitable from day one of the operations at a time when many European airlines were going down.

Jhunjunwala also mentioned a conversation between him and Tata Sons chairman N Chandrasekaran, wherein he wondered how the conglomerate paid Rs 18,000 crore to buy the struggling national carrier Air India, while Akasa is getting started on an investment of $50 million or Rs 376 crore itself.

He reminisced that his conservative Marwari family, which was doubtful about his entry into the stock markets, was proven wrong by him and similarly, he hoped to prove people wrong with the airline business entry as well, making it clear that the “ego” is at play now.