A makeover on the cards for DLF?


Bengaluru: DLF Ltd, India’s largest real estate developer, has adopted a multi-pronged approach to its financial and operational issues, having recently concluded a game-changing deal with Singapore’s sovereign wealth fund GIC Pte. Ltd.

Besides looking to reduce its debt and fixing its balance sheet, DLF has reviewed its residential business, which has been a problem area for the developer at a time when the real estate sector is in its worst downturn ever.

On the cards is the ramping up of its new office platform with partner GIC through acquisitions and embedded development potential, building the portfolio for 3-4 years and then looking at a possible listing.

For starters, DLF will reduce its net debt, currently at Rs27,000 crore, by Rs9,000 crore immediately. This year, DLF will also go for a qualified institutional placement (QIP) followed by a sale of compulsorily convertible preference shares (CCPs) by its promoters by December.

“The reduction of Rs9,000 crore is the first milestone following which there are two more milestones to achieve, through the QIP and buyback of CCPS. The target is that by March 2019, DLF’s net debt will be zero,” group chief financial officer Saurabh Chawla said in a phone interview.

In December, DLF said its promoters had concluded the sale of a 33.34% stake in its rental arm to GIC for around Rs8,900 crore. In August, the promoters sold the entire 40% stake in DLF Cyber City Developers Ltd (DCCDL) for Rs11,900 crore, the proceeds of which were to be infused into DLF, primarily for debt reduction. The transaction involved the stake sale to GIC and buyback of remaining shares worth Rs3,000 crore by DCCDL. The Rs9,000 crore of debt reduction now is post the allotment of compulsorily convertible debentures and warrants to promoters, against their investment of proceeds from the GIC deal into DLF.

Of the current net debt of Rs27,000 crore, around Rs16,000 crore is debt from its rental portfolio. The joint venture (JV) with GIC will operate as an independent entity and the Rs16,000 crore debt will be carved out from DLF and moved to the rental platform. The debt in this JV will not appear on DLF’s balance sheet, making it a zero-debt entity.

“For our yielding assets, we needed a long-term investor. GIC is a sovereign fund, very different from a private equity fund. It brings in patient capital and can look at a 15-20 year play. Even in 2007, we had wanted to set up a business trust in Singapore for our commercial assets,” Chawla said.

The opportunities are many for DLF-GIC.

“Today the JV can participate in many opportunities to buy office assets, which have so far been picked up by pension funds but no Indian corporate has participated. There is also tremendous embedded potential in the portfolio to expand,” he said. The JV can acquire or rent land from DLF or even ask DLF to develop and sell it to the platform. But first, the focus is to grow and build the portfolio a few years before listing.

However, unlike its well-performing office portfolio, it is the residential business that DLF needed to re-evaluate given that its core market, the National Capital Region (NCR) centred on Delhi, has been the worst hit by the slowdown.

The plan now is to sell completed inventory on one hand and then get into construction of new projects.

“We have a lot of land parcels and these have to be held through equity. We anticipated demand but that demand didn’t emerge. It is then that we decided to redesign our balance sheet. Our immediate preference in residential is to first sell down the 15 million sq. ft that we have and convert to cash,” Chawla said.

For instance, DLF will soon begin work on The Capital Greens project in central Delhi where GIC is an investor. It is a high-value project, but DLF will first construct the project for the next few years and only then sell.

“In the current real estate scenario, DLF has adopted the right strategy. Reducing debt and focusing on their core markets and asset class is the appropriate thing to do,” said Ramesh Nair, CEO and country head, JLL India.livemint