Why IBREL chose to hive off its commercial real estate business…

Real estate companies in India are in the midst of a major rethink. Firstly, they are desperately trying to reduce the debt in their books to make their models more flexible. Secondly, these companies are also looking at ways and means to leverage the power of real estate investment trusts (REITs) to monetize their existing asset portfolios and become asset-light. Thirdly, real estate companies are also looking to restructure their business models and product structure to be in tune with the changing market demands. Lastly, real estate companies are also looking at means of getting large institutional investors to participate in projects either by taking a company-level stake or by involving themselves on a project basis. It is on these lines that the Indiabulls Real Estate Company Ltd. (IBREL) has sought to restructure itself. Here is how it will be restructured and what the larger implications could be.

How IBREL will be restructured…

IBREL has announced plans to hive off its commercial real estate business into a separate venture altogether. This includes its business of commercial property development and its commercial property leasing business. In fact, the entire commercial and leasing business of IBREL will be housed under a separate company, Indiabulls Commercial Assets Ltd. (ICAL). Once this restructuring is completed only the retail real estate portfolio will stay with the original IBREL

What is the rationale behind this restructuring?

In India commercial and residential real estate businesses have been two different ball games altogether. The commercial real estate business has seen a lot of institutional interest in the last few years. Large investors like GIC of Singapore and Blackstone have shown interest in the commercial leasing business in India. In fact, GIC of Singapore has taken a stake in the commercial leasing business of DLF while Blackstone has taken a stake in the commercial and leasing business of K Raheja Group. Large PE Funds have been quite bullish on the Indian real estate sector since sustained GDP growth at above7.5% will translate into a tremendous boom in demand for real estate. Most institutional investors look at the commercial side as the higher yield and lower risk side of the business. Obviously, for IBREL, hiving off ICAL will be the first step towards getting foreign institutional investment. It will be much easier to get investment into a purely commercial real estate venture compared to a venture where residential is also part of the portfolio.

What does IBREL do going ahead?

While IBREL will continue to be a key stakeholder in ICAL, the core IBREL will consist of the residential portfolio. IBREL bets that the residential sector will pick up substantially as growth and incomes pick up. The big focus for the residential space will be the low cost housing space, which is the area where the government has provided a massive thrust. With the definition of low-cost housing being liberalized by the government in the last budget, these projects will actually become viable from a real estate developers point of view. That is where the massive growth could lie. As the ICAL is able to monetize its assets in the commercial space either through a REIT or through an equity placement, these funds can be ploughed back into the residential business of IBREL, where the exponential growth and the alpha are going to be.

Sum of parts more than the whole…

The IBREL decision to hive off the commercial side of the business is a classic case of the sum of parts being more than the whole. The commercial side of the real estate business is what will offer steady and regular growth as well as annuity incomes in the form of lease rentals. That is also the segment of the business where institutional investors have evinced interest in the past. On the other hand, the residential side of the business is where the real growth and alpha is likely to come from. Effectively, the company will be leveraging the stability of its commercial real estate business and monetize it to fund its expansion of the residential business. That appears to be a right move at the right time for Indiabulls.

If the market reaction to the decision on the day of the announcement was any indication, the reception definitely seems to be enthusiastic!

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