Towering ambition

When other 16-year-old boys were busy chasing girls or playing cricket, Vikas Oberoi would be at the dining table, drawing plans for buildings. In the evening, the same table would become a boardroom, with Oberoi and his father Ranvir Oberoi discussing the family construction business for hours on end. Oberoi Constructions was then a small builder, with just two residential buildings to its name. More than a decade later, when Vikas Oberoi took over as managing director in 1998, he dusted off those drawings, renamed the company Oberoi Realty and set off to transform both, Mumbai’s landscape and the company’s fortunes. His first project was in Kandivili, a Mumbai suburb. “It was exactly the kind of project I had dreamed of building — there was a swimming pool, gym… everything that I wanted in a residential development,” says Oberoi, now 43 years old. 

He may well have reason to be pleased with himself. The ₹1,148-crore Oberoi Realty is now the second-most valuable listed real estate developer in India, after DLF. And it’s done this through a combination of right timing, right location, and a prudent and conservative approach in a trade characterised by bold, dramatic bets. How did it get there? And more significantly, can it continue to grow using the same tactics?

Focused approach

The cornerstone of Oberoi’s strategy has been its riveted focus on the premium end of the housing and commercial real estate market, from day one. The Kandivili project, Oberoi Gardens, for instance, had three towers of 27 floors each and all 324 apartments were 3-bedroom ones. “We wanted to tell people they can get luxury even in the suburbs,” says Oberoi. It isn’t just add-ons like tennis courts and air-conditioned lobbies that made the difference, though — in Mumbai’s tough real estate market, Oberoi Realty has managed to build a reputation of delivering apartments on time.

“Except for a six month delay here and there, all our projects have been delivered on time,” claims Oberoi, pointing that outsourcing construction to firms like L&T and Samsung C&T has helped ensure quality and timely delivery in its high-profile projects. “Oberoi’s quality has met the expectation of buyers, because of which they make slightly higher realisation than their peers,” avers Arun Agarwal, an analyst with Religare Securities. Moreover, the company commands a premium of 20-25% in every project it builds. “An Oberoi property is the costliest in the area it is in,” says Oberoi. 

Analysts agree that Oberoi is way ahead of builders such as Sunteck Realty, which sells a third of what Oberoi does, despite offering lower rates. While other developers spread their projects across segments, Oberoi Realty has been strictly focused on high-income housing. Its ticket size is also much higher, since it doesn’t sell anything less that a 3-BHK, with prices starting at ₹2.5 crore.

While residential projects have been its mainstay, bringing in about 80% of revenues, so far, the company has executed 35 projects — apartments, malls, hotels and commercial properties — totalling 6 million sq ft of developed space. It has sold about 7.12 million sq ft (this includes part of its under-construction properties already sold) and leased an area of 1.14 million sq ft. It currently has five projects totalling around 8.5 million sq ft, under construction, with an order book of ₹1,600 crore. Granted, this is a small fraction of market leader DLF’s 62 million sq ft under construction, but it’s not bad, considering that Oberoi Realty is a Mumbai-centric player unlike DLF, which has been a pan-India developer.

Advantage Oberoi

Oberoi Realty’s successful run as a first-generation builder began with its first purchase in 2002, of Novartis’s 60-acre campus in Goregaon, Mumbai for ₹ 107 crore. A delay in possession proved fortuitous. “Novartis could give possession of the land only in 2007,” explains Oberoi. “We started selling properties in Goregaon at ₹2,800 per sq ft but today the product sells at ₹25,000 a sq ft, so it is a 10x increase in price.” 

It also helped that the transaction took place before the Reserve Bank of India tightened lending norms for the real estate sector. The Goregaon tract was bought through internal accruals and bank guarantees. Around half of it has been developed and the rest will be completed in the next three years. The land, effectively Oberoi Realty’s calling card in Mumbai’s crowded property market, now has Oberoi Garden City (OGC), an integrated development with a mall, a five star hotel, an international school, and commercial and residential projects. 

Oberoi followed this up with purchases of large tracts in Andheri East (24.47 acres for ₹106 crore in 2005), Mulund (23 acres for ₹221 crore in 2005) and Worli (3.01 acres for ₹300 crore in 2009) in Mumbai. By 2007, the company’s debt had mounted to ₹200 crore, but it repaid this through sales realisations from its Goregaon and Andheri projects. Now, it’s the only listed zero-debt real estate company in India. That’s an impressive tag, considering that market leader DLF has amassed a debt burden of ₹21,731 crore. Vikas Oberoi attributes this to prudence and timely purchase of land. “We buy when everyone is selling and sell when everyone is buying,” explains Oberoi. 

Now, Oberoi says he wants to move to a just-in-time inventory model for land acquisition, as is the case in other markets globally. He explains that there’s little point in holding on to a land bank, because one cannot be sure that prices will go up. But how well will this play out in a business where developers have built their businesses largely on the back of well-timed land purchase and holdings? “In India, a just in time model may not work,” says Arvind Nandan, executive director, consulting services, at Cushman & Wakefield (India). “It can work in specific situations where land is procured from a government agency, where you can take land and not spend money on preparing it.

But, in a majority of cases land prices change so much that if you wait for the land, it may become expensive.” Nandan adds that the concept of a land bank has worked in India for a reason. “One reason is developers want to secure land at cheap rates in locations that show potential. Developers also want to keep land in hand in the hope that they can trade it off in the future,” he says. Oberoi Realty currently has about 20 million sq ft of land under development in Goregaon, Andheri, Worli, Mulund and Pune. 

Another factor that worked for Oberoi has been its conservative approach to buying property. While bidding for land, it has shown a restraint that’s been missing in its competitors. For example, in August last year, Lodha Developers bought DLF’s 17-acre Mumbai Textile Mill plot in Worli for ₹2,700 crore, nearly four times higher than the price at which DLF bought the parcel back in 2005. Lodha also paid ₹4,050 crore for 6.17-acres in Wadala in 2010. Will Oberoi Realty ever consider such aggressive bids? Oberoi says even though it may make sense for other builders, his company would rather buy land during a downturn. “We will never buy land that doesn’t make economical sense.” People who know him say he’s a tough negotiator who wouldn’t settle for a return below 30%  even as others settle for anything between 25% and 30% return.

The hard-nosed approach has mostly worked. Oberoi Realty earns a margin of 50% for two reasons — its land buying strategy and zero interest costs. Construction expenses are taken care of through payments from home buyers. “It works beautifully for us,” says Oberoi. Ideally, in residential projects, the construction cost is linked to buyer payment, but if sales are down, some developers resort to debt to finance construction cost. This could be either debt from banks or proxy debt of the type that one sees builders offering: EMI schemes, for instance, where they take a deposit from buyers and pay them an interest, like a loan. 

Analysts say while things have worked out well so far, Oberoi Realty will now have to start buying and holding land, sooner than later. “The question is whether they have a replenishment strategy. They have 20 million sq ft of land now, which will last them for the next five or six years. But, still, in the next one or two years, if they don’t buy land, it will be worrisome,” says Param Desai, senior research analyst at Nirmal Bang Institutional Equities.

“We treat land as a raw material and hence do not bank land and increase idle inventory. As and when the existing land is used up, we shall acquire further land for development either by outright purchase or joint venture mode, whatever makes business sense to the company,” maintains Oberoi. His line of reasoning has few takers, though. “This whole idea of buying land during a downturn is easier said than done because you don’t know when there is a peak and there is a trough,” cautions Religare’s Agarwal.

“It is very tough to take a call on the cycle. The 50% margins that Oberoi has made till now came from a significant appreciation in land prices, which does not happen in a just-in time-model.” Agarwal cites other developers such as Godrej and Prestige, who carry out joint development with land owners and make just about 30-35% in margins. The fact that Oberoi Realty’s projects have been concentrated in one location — Mumbai — is also a cause for concern, analysts point out. For volumes to grow on a consistent basis, a developer needs to have different projects in different locations as there is a limit to how much it can build and sell in one location. 

Venturing out

As it happens, Oberoi Realty does have plans to move outside Mumbai. First up is the National Capital Region, perhaps later this year or next year. Nirmal Bang’s Desai says one of the reasons Oberoi is looking at geographical expansion is because it has not been able to close any land deal in Mumbai. He feels that it will be difficult for the company to expand outside Mumbai. “They can make some amount of money but it will not be easy to go to NCR or Bengaluru.”

Whether that is indeed the reason or it’s a natural progression for any real estate company, Oberoi is certainly looking outward. But with a difference. The model the company follow in NCR is a joint development model, where it will partner with a land owner and enter into a revenue or profit sharing agreement. Oberoi hopes to replicate the experience it had with mixed use development at Worli, an ongoing joint venture with the Sahana Group. While the model sounds good on paper, Oberoi could face problems in getting a partner on ground, since there are not many land owners in the NCR region who want to partner with a developer, according to Agarwal, “Even developers such as Sobha and Godrej who have entered the NCR market have found it difficult to get joint development partners, so it may not be an easy ride.”  

Proving naysayers wrong will be crucial if the company is to build on its initial successes, and deliver returns for its investors. Oberoi Realty caught investors’ fancy in January, 2007, when in one of the biggest foreign direct investments in the India property sector, Morgan Stanley’s real estate arm bought a 10.75% stake in the company for ₹675 crore. Oberoi then went in for an IPO in October 2010, raising ₹1,000 crore. The stock now trades at ₹233, below its issue price of ₹260, and investors are waiting for a trigger. “The stock has been stagnant for quite some time now because there really hasn’t been any new development for the stock to move up,” says Agarwal.

The company has around ₹1,072 crore of cash on its books, which it had planned to use to buy land. Currently, it is invested in bank deposits and mutual funds, earning returns of 8-10% — and Oberoi appears to be in no hurry. He wants to stick to his philosophy of buying land during a downturn. Analysts agree that right now there aren’t many options available for land buyers to pick up tracts at attractive prices. Nirmal Bang’s Desai says there has been a slowdown in the Mumbai market in terms of demand for homes but it has not resulted in a price correction in the end product or land prices. “In fact, land prices have gone up because of which Oberoi Realty has not been able to close any land deal. They are still looking out for land acquisitions. They don’t want to be aggressive and will wait it out for one or two years.”  

Certainly, Oberoi has a few issues to take care of before he replicates the company’s early wins. The company has an unsold inventory of 1 million sq ft. “Oberoi has failed in winning land bids but that is also because they are conservative. They were bidding for HUL land in Andheri and DLF land in Lower Parel but they did not want to buy DLF land at more than ₹2,000 crore. Considering the kind of oversupply Lower Parel is seeing, it makes sense for Oberoi to be conservative,” says Desai. Vikas Oberoi likes to play the waiting game. It has paid off in the past and his investors might as well get used to it. Trees don’t grow to the sky and the same could be true for land prices in Mumbai.