Air India Monetisation

The MoU has provided for three models of development of properties. In Model 1, the land value
will be the Air
India interest in the partnership. Money on development of the project shall be the interest of the
NBCC. The
sale proceeds will be shared by NBCC and Air India in the ratio of partnership interest. In Model
2, NBCC shall
pay Air India a portion of the value of the land as upfront money. NBCC interest in the project
would be the
project cost and upfront money paid to Air India. The sale proceeds are shared by NBCC and Air
India in the
ratio of partnership interest. In Model 3, NBCC shall construct the project on behalf of Air India
and
development cost will be invested by NBCC and will charge fixed internal rate of return (IRR) on
the project on
its investment on mutually acceptable terms. This will help Air India in realizing full potential of
its surplus land
assets in partnership with NBCC.

Development Management (DM) is a business model which is attractive from a corporate land
owner
perspective since the land owner steps into the developer shoes and undertakes the
development for
the project which would give higher returns compared to the other options. In this case, the
developer
undertakes the marketing of the project for which they would receive a certain percentage of
the revenues as marketing fees.

7.2. Evaluating the options

7.2.1. Outright sale

This monetisation option still holds its charm for the land
owner since the cash flows are realised upfront and
can be deployed in any other business venture. Some
of the key negatives are that the valuation would be
heavily negotiated and one has to factor in the impact of

upfront capital gains tax. From a developer perspective,

this option is very capital intensive and can be explored
only on a very selective basis.

7.2.2. Joint Venture

As per our analysis, in case of a Joint Venture (JV),

the land owner registers the land parcel in a Special
Purpose Vehicle (SPV) or converts the partnership
holding the land parcel into a Limited Liability
Partnership (LLP) . The land owner then divests partial
stake in the SPV (upward of 50 per cent) in favour of the
developer. In a JV, the construction and financing risk
would be undertaken by the developer and the profits
are normally shared in the ratio of the JV partners
shareholding. In a JV, the land owner would get upfront
cash flows by divesting 50 to 70 per cent stake in
the JV. The returns to the land owner would typically
be higher in a JV when compared to an outright sale
option since the land owner is an equity partner in the
JV company. Both the parties can divest/dilute stake
in favour of a private equity player in case additional
funding is required or if they are looking at a cash out.
Key aspects to be considered are:
Since the JV would be for a longer period in time, it
would be crucial for both the parties to strike a good
business relationship.
Upfront payment to the land owner is typically
upward of 50 per cent of land value, hence
negotiating the valuation would be a challenge in
a JV.
Any cost overrun would require additional capital
contribution which can be a financial stress for the
land owner.
Tax implications - Capital gains tax would be
applicable to the land owner at the time of
divestment of stake; also, the profits from the JV
would be taxed at the applicable corporate tax rates.
In case of repatriation of profits from the JV, a tax
efficient structure combining Dividend Distribution
Tax (DDT) and buy back of shares would have to be
worked out.
Key points to consider in a JV from a land owners
perspective include:
Responsibilities of both parties should be clearly
defined The land owner is typically responsible
for providing the land in a marketable state to the
developer. The developer would be responsible for
all construction related approvals, overseeing the
day to day operations of the project, appointment of
contractors, consultants as well as marketing of the
project.
Development mix, product mix, amenities, FSI
utilisation, methodology for sharing additional FSI
cost, marketing plan for the project, project cost,
sales price, timelines for development is required to
be finalised by both parties.
A mechanism to monitor the costs should be pre
agreed and incorporated into the JVA. Third party
consultants maybe appointed to monitor the same.
In case, additional capital is required by the project
and land owner does not bring in further capital,
then hybrid instruments could be issued where
in the shareholding and control would not be
diluted but only the sharing of return would be

disproportionate (i.e. not in proportion to the ratio of

the shareholding in the JV).
The land owner has affirmative rights in matters
like changes in capital structure, additional capital
outlay, increase in project cost, change in project
consultant, architects, etc.
A penalty clause could be incorporated if the project
is delayed beyond agreed timelines (after factoring
in grace period and delay on account of points
mentioned under force majeure in the JVA).

7.2.3. Joint development

Post 2008, many of the developers have been preferring

the Joint Development (JD) route. From a land owner
perspective, only the economic interest/development
rights is transferred to the developer and the land
owner retains possession of the land parcel. As per our
analysis, typically 10-15 per cent of the land value would
be payable as an upfront deposit, and the land owner
also gets either a revenue share or an area share from
the project.

36

2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved.

37
Selection of the right developer for the location and
proposed product mix is key to a successful project and
its timely completion.
In a JD, some of the key highlights are that the land
owner does not need to bring in any additional capital
for development, and also they can partake in any
future upsides in the project. The land owner can raise
structured funding against their share of receivables
from the project. Though the number of JDs are very
high in the market place, from a land owner perspective
they typically have limited control over the project
development, and in a period of sluggish sales their
Net Present Value (NPV) of receivables from the project
would be impacted.
Another aspect that the land owner needs to prepared
for in a JD is the timing of capital gains. Since only
the economic interest in the land is transferred
to the developer at the time of execution of Joint
Development Agreement (JDA), the normal treatment
is to consider the land as a stock in trade such that
the capital gains is taxable in the year in which such
stock is sold. Efficient drafting of the JDA is the key
to computing the capital gains implication to the land
owner.
Key points to ponder in a JD from a land owners
perspective are as follows:
Land owner responsibilities All land related
approvals are to the land owners account and
timelines for the same need to be agreed upfront.
Product Mix and units allocated to the land owner
should be clearly defined in the supplementary
sharing agreement.
The land owner has the right to monitor the cost
and project quality on a quarterly basis. Third party
consultants may be appointed for monitoring the
cost and quality of project.
A refundable security deposit at 10-15 per cent of
the land value could be paid as an upfront security
deposit on the date of signing the JDA. In case

there are land related approvals to be completed

before the signing of the JDA, the developer could
try to negotiate a partial payout of the security
deposit at the time of signing the JDA and the
balance payable upon receiving the land related
approvals.
A penalty clause could be incorporated if the project
is delayed beyond the agreed timelines (after
factoring in grace period and delay on account of
points mentioned under force majeure in the JVA).

7.2.4. Development Management (DM) Emerging Business Model

Development management is an emerging business

model in the real estate space. Overall construction risk
of the project tends to vest with the land owner, and
the developer gets paid a marketing fee for marketing
and branding the project. From a developer perspective,
DM provides them the opportunity to market multiple
projects across various cities and locations, thus
building a scalable business model.
In this case, the land owner and developer enter
into Development Management Agreement (DMA)
wherein:
The developer would be responsible for the
management of the entire project.
The land owner gets access to the developers
brand and development expertise.
Construction risk rests with the land owner who
provides for the development cost.
Fixed percentage of revenues of the project are
shared with the developer, which may include an
upfront fee payment also.
DM is emerging as a preferred business model with
corporates that have surplus land parcels since they
would typically like to have greater project control and
not be a passive partner in the project. In all the other
options, the land owner typically sells the land, transfers
the land into a JV or transfers the economic interest in
the land to the developer, whereas in this case the land
owner would retain full possession and control of the
land. The land owner steps into the developers shoes
from a execution perspective, and on account of that
also gets maximum share in the project cash flows and
future upsides from the project.
Challenging the tides: Indian Real Estate

`
When to sell ?

Making the best choice

The answer isnt black and white, and there is no right decision for every hospital. There are many factors to
consider. It requires a systematic approach to evaluate real estate strategies on a property-by-property basis. For
instance, some in the industry may be thinking they will take advantage of current competitive lending rates and

then monetize at some point in future. But they should be careful not to count their chickens before theyre
hatched since the same factors that drive easy lending such as interest rates and investors looking for
stable yields also drive asset value. In other words, when one opportunity goes away, the other may as well.

Bombay Dyeing
Bombay Dyeing has big plans in the real estate space. It has formed a real estate arm, Bombay Realty, which
will not only develop and/or undertake the real estate projects of the company, but also develop the land bank of
the Nusli Wadia group (its promoter). The management has said the group has 10,000 acres of land across
India, including 64 acres owned by the company.
Bombay Dyeing has already sold about six acres of land and is planning to monetise the remaining in phases.
On the flip side, its core businesses of textiles and polyester (which account for 87 per cent of its revenues) are
not in great shape. It is only the real estate business that is growing and contributing to the companys
profitability. In terms of valuations, the companys enterprise value works out to be Rs 3,687 crore (market
capitalisation of Rs 2,300 crore and debt of Rs 1,387 crore). If the value of land bank, estimated to be worth Rs
2,500 crore, is adjusted, the value of its core business comes to Rs 1,187 crore, reflecting that gains of the
reality business are more or less in the stock price.

Industry Review
Indian Economy:
India continues to feature as one of global economys
future growth engines along with several other developing
economies such as China, Brazil, Russia, Indonesia and South
Africa. However, on the whole, 2012 was another challenging
year with the global economy yet to completely recover from
the post-Lehman crisis of 2008. Significant headwinds in the
form of a delay in the recovery of US economy despite multiple
fiscal stimuli by the Federal Reserve, European sovereign
debt crisis, moderating growth in China and other emerging

economies slowed down global growth rates. As per a World

Bank report Global Economic Prospects (GEP) released in
January 2013, global economic growth was relatively weak in
2012 at 2.3%. Growth is expected to remain subdued at 2.4% in
2013 before it is expected to gradually strengthen to 3.1% and
3.3% in 2014 and 2015, respectively.
As per the India Development Update of the World Bank, Indias
GDP growth stood at 5% in FY2013. The economy continued
to face various macro-economic challenges such as high

World Bank forecasts the

Indian economy to grow by
6.1% in FY2014 and further
strengthen to 6.7% in FY2015,
led by robust domestic
demand, strong savings and
investment rate.
fiscal deficit, large current account deficit, significant rupee
depreciation, high inflation, high interest rates and consequent
slowdown in core sectors such as agriculture, power,
infrastructure, mining and manufacturing. However, the Report
highlighted that India is regaining economic momentum
and growth is seen recovering gradually to its high long-term
potential. World Bank forecasts the Indian economy to grow by
6.1% in FY2014 and further strengthen to 6.7% in FY2015, led by
robust domestic demand, strong savings and investment rate.
The Road Ahead
Union Budget 2013-2014 set the path for fiscal consolidation
targeting to reduce Indias fiscal deficit to 4.8% of GDP during
FY2014. It announced several measures to strengthen the
economy using fiscal and monetary tools to improve the
overall business scenario. The Government aims to stimulate
the economy through key policy initiatives such as easing of
Foreign Direct Investment (FDI) in vital sectors of the economy.
The Government allowed 51% FDI in multi-brand retail, 100%
FDI in single-brand retail and 49% in the aviation sector. The
FDI cap was also raised from 49% to 74% in broadcasting and
Asset Reconstruction Companies. Foreign investment has also
been allowed in power exchanges, while Foreign Institutional
Investors (FII) have been given the go-ahead to invest up to
23% in commodity exchanges without seeking Government
approval. These measures are likely to provide substantial
boost to the capital intensive sectors by opening up easy
access to foreign capital.
Amidst concerns of rising inflation and slowing growth, the
Reserve Bank of India (RBI) maintained its cautious stance on
the monetary policy during most of FY2013. However, during
the year, RBI cut the Repo Rate thrice by 25 basis points (bps)
each to bring it down to 7.25% in Apr-13, compared to 8.00%
in Mar-12. Over the last one year, Cash Reserve Ratio (CRR)
and Statutory Liquidity Ratio (SLR) were also brought down
from 4.75% and 24% in Mar-12 to 4.00% and 23.00% currently,
providing increased liquidity to banks for lending. This enabled
banks to increase their lending during a difficult business
environment and meet RBIs target of 16% credit
growth during FY2013.
Thus, focused fiscal and monetary measures, increase in
Government expenditure towards core sectors and
lowering of interest rates by RBI are expected to help
revive the consumer discretionary spending, further
reinforcing Indias consumption growth story.

Management Discussion & Analysis

Residential Realty:

The Real Estate sector plays a significant role in the Indian

economy. As per industry reports, the total size of Indias real
estate sector was US $67 Bn in FY2011, contributing around 5%
to Indias GDP and providing the second-largest employment
after agriculture. The industry is expected to touch US $180 Bn
by 2020. Indias real estate industry is largely represented by the
residential segment which accounts for around 90-95% of the
total market, rest being the commercial and retail segments.
The residential segment has seen a significant growth over the
past few years and has attracted not only domestic developers,
but even foreign investors who find strong potential for growth
driven by Indias large population base, rising income levels, and
rapid urbanization. According to the Department of Industrial
Policy and Promotion (DIPP), the real estate sector received 2%
of total FDI inflows in India during FY2012.
Housing shortage of approximately 20.5 Mn units in 2010 in
urban areas is expected to increase to 21.7 Mn units by 2014.
The shortage in rural areas is expected to reduce from
26 Mn units to 19.7 Mn units by 2014. The huge quantum
of this shortfall offers tremendous scope for the
residential sector in India.

45

According to Jones Lang LaSalle, a total of 160,622 residential units

were launched pan-India in 2012, compared with 154,701 units
during 2011. The larger cities of Mumbai and NCR-Delhi recorded
healthy absorption during 2012, with a 60% contribution to the
overall absorption. Chennai and Pune were among the other cities
that increased their share of absorption during 2012 to 26%, up
from 23% during 2011. From the pricing perspective, the average
residential capital values in 2012 appreciated in the range of 3-5%, as
per Crisil Research.
Recent policy initiatives and measures announced during Union
Budget 2013-2014 are seen setting positive triggers for Indias real
estate sector. The RBI has allowed foreign citizens of Indian origin
to invest in the real estate sector. It has also allowed real estate
developers to raise upto US $1bn through European Commercial
Borrowings (ECB). Furthermore, the government has allowed 100% FDI

Chennai and Pune were

among the other cities that
increased their share of
absorption during 2012
to 26%, up from 23%
during 2011.
Share of absorption by City - 2012
2%3%
9%
15%
45%
15%
11%
Source: JLL Real Estate Intelligence Service, 2012

Mumbai
NCR
Chennai
Pune
Kolkata
Hyderabad
Bengaluru
NEW residential launches in 8 major cities in 2012
Q1 2012 Q2 2012 Q3 2012 Q4 2012
Source : Cushman & Wakefield Research
32,000
Bengaluru
Hyderabad
Kolkata

Pune
Ahmedabad
Chennai
NCR
Mumbai

Newly launched units

45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
18,000
37,000
39,700

anagement

Discussion & Analysis

The Phoenix Mills Limited Annual Report 2013

46