Distress sale: Why corporates are selling prime property in a slump ...

A pressing need to deleverage is prompting Indian companies to sell or lease their real estate assets disregarding a crippling slump in?the sector.

The pall of gloom that has pervaded the economy over the last few years have increased the debt levels of companies. They are finding it difficult to service the debt due to the prevailing high interest rates. This is forcing them to take to other routes to raise money to repay the debt and consolidate financially.

And what best way other than cashing in on the real estate assets to raise a quick buck?

And, moreover, for companies selling real estate (be it commercial or residential) located?in the much sought-after PIN codes?is easier than divesting their non-core business in a slump.

?The reason is simple.? There is no point in blocking assets worth crores of rupees in maintaining a property rather than using the cash to expand business operations or better one?s finances,? says Pankaj Kapoor, MD at property consulting firm Liasas Foras.

Little wonder that Vijay Mallya has not managed to get any investor so far for bailing out his debt-laden airline Kingfisher,?but did find private equity investors to buy into his real estate assets.

Firstpost had earlier reported that PE major Blackstone has offered to buy out the prime office and retail realty blocks in UB City, the biggest commercial property project of around 3.7 lakh square feet? in the heart of Bangalore for Rs 550 crore.

The demand and sharp appreciation in real estate prices have brought most corporates to the negotiation table, in the last one-and-a-half year. AFP

State-run Air India has already appointed a global real estate consultant to monetise its real estate assets to raise over Rs 5,000 crore as part of its financial restructuring plan.

While the national carrier?s properties in India are scattered all over the country, most of the value would come from its assets in Delhi, Mumbai and Bangalore.

State-run BSNL and MTNL are not far behind and have invited bids from consultants to help them monetise their real estate assets to? recouping falling profits and revenues from their core business.

While BSNL holds properties worth thousands of crores in 3,500 towns, MTNL wants to monetise about 50 land parcels totalling 6.10 million sq in Delhi and Mumbai alone.

However, it is not just state-run companies that are betting on real estate to shore up financials. Even private companies, reeling under high borrowing costs and lack of private equity investments, are now turning towards real estate as their saviour.

Gammon India, which plans to cut debt by around 22 percent to Rs 2,500 crore by next year, is looking at liquidating its real estate portfolio.

?The demand and sharp appreciation in real estate prices have brought most corporates to the negotiation table, in the last one-and-a-half years,? said Ambar Maheshwari, managing director, corporate finance at Jones Land LaSalle India.

This is perhaps the reason why recently Citibank sold off a 2,550 square feet flat in Malabar Hill?s Palazzo building for a record Rs 28 crore.

According to an Economic Times report, Citibank has sold more than a dozen flats in Mumbai?s prime areas like Altamount Road, Mount Mary in Bandra, NCPA, Colaba etc. Last year, Citibank? put up for sale a 3,000 sq ft flat in Usha Kiran building on Altamount Road for an estimated price of Rs 18-20 crore.

But is this a one of case or are these companies in dire needs of funds?

Explains, Maheshwari, ?When the going is great, most corporates invest surplus cash in real estate, but when funding dries up from lenders as well as private equity funds it is only real estate that can give maximum return on investment.?

But he cautions that in a slump not all real estate sells but only those that command high values due to their prime location and limited supply.

No wonder, some of Mumbai?s residential buildings continue to command the astronomical Rs 1 lakh per sq ft price, while newer projects experience sluggish rates due to their high rates.

A recent report in the Times of India said, one of Standard Chartered Bank?s duplexes measuring 3,638 sq ft flat on the seventh and eight floors of the 28-storey sea-facing Samudra Mahal, a prime residential skyscraper at Worli, was sold for Rs 40 crore.

?This is an end-user driven, well-established residential market full of many large business families and communities who will not sell their home property here, but are always looking to buy one for future generations and expanding family needs. Think of it as a market where many rich individuals and families compete for a very scarce supply of such apartments,? says Aniruddh Wahal, director, at property consulting firm DTZ.

On the other hand, the new buildings are essentially investor play, where even the end-users from South Mumbai are buying only for the next generation with little intent to move into them upon completion, he adds.

Hence despite these record transactions, new project developments in India?s super-luxury market? will continue to be sluggish in 2013 since these record transactions only happen rarely because? such supply at any point in time is very limited and the buyers are end-users.

Another reason for such sell-offs is the change in Mumbai? office dynamics. Over the past couple of years, most offices have shifted base from Nariman Point in South Bombay to Bandra Kurla Complex and Lower Parel in central Mumbai due to the space crunch in the island city.

?Major banks have relocated HQ offices over the last couple of years to BKC in particular and North Mumbai in general. Next, they are going to move their executive residences and the Citibank deal is? one such example,? said Wahal.

Other multinational companies too put their residential apartments on the block to make their asset light.

In April 2012, FMCG major HUL, which has shifted its corporate office to Andheri East in Mumbai?s suburbs, sold its prime commercial property Gulita in Worli to Piramal Realty for Rs 452 crore to free up cash in idle assets.

The American Consulate too put its prime property on the market after it shifted to suburbs.

While real estate assets are proving to be a knight in the shining armour for debt-ridden companies, such high-value transactions does not imply optimism for the real estate sector as a whole.

Source: http://www.firstpost.com/business/distress-sale-why-corporates-are-selling-prime-property-in-a-slump-557347.html

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