News: 'Land bank' is the new driver of real estate stocks
(TNN 16/05/2006) Mumbai - The current bull rally has been remarkably clean so far, but, maybe, not any more. It looks like the rally may have finally created a bubble. And this time round, it’s the turn of real estate stocks to be the show stoppers.
Valuations of real estate developers and companies with supposed ‘land banks’ have been shooting up in recent weeks. Developers like Unitech, Peninsula Land, Mahindra Gesco and Ansal Properties and old companies with valuable land like Bombay Dyeing or Bata are now getting astronomical valuations. Many of these have triple-digit P/Es. The manner of the price rise is also disconcerting (see story ‘Real Easy’).
The market last witnessed such frenzy in early ’00, just before the burst of the Internet bubble. At that time, ‘eye balls’ was the buzzword that made IT companies quote at 100- plus P/E multiples. As the reality surfaced, market underwent a sharp correction and investors suffered a lot of heartburn. Today, the buzzword is ‘land bank’.
Let’s take a look at the builders. Unitech is currently the largest listed builder. Its market cap has risen 24 times in the last one year. It is now over Rs 11,000 crore. Ansal Properties’ market cap rose 13 times in the last one year from Rs 229 crore to Rs 2,988 crore.
Peninsula Land, DS Kulkarni, and Arihant Foundations are among the other developers whose market cap has risen more than 10 times in the last one year. Even BF Utilities, which has merely intentions of turning into a developer, has seen its market capital cross Rs 10,000 crore.
Then, there are old manufacturing companies which have defunct factories in city limits like Bombay Dyeing and Bata. Announcements that these companies will develop their real estate holdings sent their stock prices soaring. NOIDA Toll Bridge, a company which owns a bridge across the Yamuna in Delhi and has barely broken even, has seen its market cap go up five times on real-estate buzz.
ET Big Bucks tried to investigate what has exactly led to such rise in valuations. There is very little equity research on any builder. Analysts don’t cover most of these stocks. Apart from a reputed company like Mahindra Gesco there is hardly any institutional holding is most other builders.
Some reports came out last week on DLF, whose IPO is just around the corner. Traditional companies like Bata or Bombay Dyeing are a different proposition; there is some institutional holding there. So, it does appear that there is an information gap in the market on these companies.
The P/E of these stocks cannot be calculated because past earnings are minuscule. The common trigger behind the extraordinary performance of these stocks is the surge in property prices across metros in the last two years.
Prices in metros of Delhi and NCR region, Mumbai, Bangalore, Chennai, Hyderabad and Pune have seen an around 30-50% rise. In many areas, prices have more than doubled. This has focused attention on companies – real estate developers or otherwise- which have considerable ‘land banks’ to cash in on the boom. Land bank basically refers to the land that the companies own (directly or indirectly).
As per ET Big Buck sources, Ansal Properties has a land bank of 1,200 acres, Bata India 262 acres, Indiabulls 167 acres and Arihant Foundations 126 acres. Delhi- based DLF, which will soon come with an IPO, is the largest player.
It is currently developing 1,372 acres with additional 2,893 crore acres of land for future development. Data for Unitech is not available, but it is believed to be the second largest builder in the country after DLF.
The problem arises when analysts start putting numbers to land banks that a company owns. The current high property prices makes the value of the land bank look rosy, but such values may not even sustain beyond three years. Some of the land banks that companies own are expected to be developed over the next 5-10 years.
In other words, the value of the land can be ephemeral. Take for instance, DLF’s case. Its land bank value, according to a real estate consultant, is worth Rs 77,200-84,969 crore. However, the project development on this land could continue well into ’15.
The valuations also build in astronomical growth in operations. A research report on DLF says it has developed 28.5m sq ft since 1949. It will develop another 88m sq ft in the next three years.
For traditional companies, like Bata and Bombay Dyeing, the valuations look a little saner. Bata is fetching higher valuations, thanks to its Bata Nagar project in Kolkata. It has a land bank of 262 acres, which could be roughly valued at Rs 1,140 crore.
As per reports, the company doesn’t have plans to sell the land, but will lease it out. It is developing 9m sq ft of space of which 7m sq ft will be residential and 1.5m sq ft will be for an IT park. This could be potentially upwards of Rs 2,500 crore. The company’s market cap is around Rs 2,000 crore, not too out of sync with the underlying value.
In a nutshell, the issue of valuing real estate is a not an easy one. Since at this point, many of these companies have only assets and no income, traditional methods like discounting earnings are hard to apply. So, if you think you can’t decipher the fundamentals of such stocks, then the safest option is to simply stay away from them.
Valuations of real estate developers and companies with supposed ‘land banks’ have been shooting up in recent weeks. Developers like Unitech, Peninsula Land, Mahindra Gesco and Ansal Properties and old companies with valuable land like Bombay Dyeing or Bata are now getting astronomical valuations. Many of these have triple-digit P/Es. The manner of the price rise is also disconcerting (see story ‘Real Easy’).
The market last witnessed such frenzy in early ’00, just before the burst of the Internet bubble. At that time, ‘eye balls’ was the buzzword that made IT companies quote at 100- plus P/E multiples. As the reality surfaced, market underwent a sharp correction and investors suffered a lot of heartburn. Today, the buzzword is ‘land bank’.
Let’s take a look at the builders. Unitech is currently the largest listed builder. Its market cap has risen 24 times in the last one year. It is now over Rs 11,000 crore. Ansal Properties’ market cap rose 13 times in the last one year from Rs 229 crore to Rs 2,988 crore.
Peninsula Land, DS Kulkarni, and Arihant Foundations are among the other developers whose market cap has risen more than 10 times in the last one year. Even BF Utilities, which has merely intentions of turning into a developer, has seen its market capital cross Rs 10,000 crore.
Then, there are old manufacturing companies which have defunct factories in city limits like Bombay Dyeing and Bata. Announcements that these companies will develop their real estate holdings sent their stock prices soaring. NOIDA Toll Bridge, a company which owns a bridge across the Yamuna in Delhi and has barely broken even, has seen its market cap go up five times on real-estate buzz.
ET Big Bucks tried to investigate what has exactly led to such rise in valuations. There is very little equity research on any builder. Analysts don’t cover most of these stocks. Apart from a reputed company like Mahindra Gesco there is hardly any institutional holding is most other builders.
Some reports came out last week on DLF, whose IPO is just around the corner. Traditional companies like Bata or Bombay Dyeing are a different proposition; there is some institutional holding there. So, it does appear that there is an information gap in the market on these companies.
The P/E of these stocks cannot be calculated because past earnings are minuscule. The common trigger behind the extraordinary performance of these stocks is the surge in property prices across metros in the last two years.
Prices in metros of Delhi and NCR region, Mumbai, Bangalore, Chennai, Hyderabad and Pune have seen an around 30-50% rise. In many areas, prices have more than doubled. This has focused attention on companies – real estate developers or otherwise- which have considerable ‘land banks’ to cash in on the boom. Land bank basically refers to the land that the companies own (directly or indirectly).
As per ET Big Buck sources, Ansal Properties has a land bank of 1,200 acres, Bata India 262 acres, Indiabulls 167 acres and Arihant Foundations 126 acres. Delhi- based DLF, which will soon come with an IPO, is the largest player.
It is currently developing 1,372 acres with additional 2,893 crore acres of land for future development. Data for Unitech is not available, but it is believed to be the second largest builder in the country after DLF.
The problem arises when analysts start putting numbers to land banks that a company owns. The current high property prices makes the value of the land bank look rosy, but such values may not even sustain beyond three years. Some of the land banks that companies own are expected to be developed over the next 5-10 years.
In other words, the value of the land can be ephemeral. Take for instance, DLF’s case. Its land bank value, according to a real estate consultant, is worth Rs 77,200-84,969 crore. However, the project development on this land could continue well into ’15.
The valuations also build in astronomical growth in operations. A research report on DLF says it has developed 28.5m sq ft since 1949. It will develop another 88m sq ft in the next three years.
For traditional companies, like Bata and Bombay Dyeing, the valuations look a little saner. Bata is fetching higher valuations, thanks to its Bata Nagar project in Kolkata. It has a land bank of 262 acres, which could be roughly valued at Rs 1,140 crore.
As per reports, the company doesn’t have plans to sell the land, but will lease it out. It is developing 9m sq ft of space of which 7m sq ft will be residential and 1.5m sq ft will be for an IT park. This could be potentially upwards of Rs 2,500 crore. The company’s market cap is around Rs 2,000 crore, not too out of sync with the underlying value.
In a nutshell, the issue of valuing real estate is a not an easy one. Since at this point, many of these companies have only assets and no income, traditional methods like discounting earnings are hard to apply. So, if you think you can’t decipher the fundamentals of such stocks, then the safest option is to simply stay away from them.
posted by InCar Group Press Room at 14:06
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