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

additional capital is required by the project and land owner does not bring in further capital. •• A mechanism to monitor the costs should be pre agreed and incorporated into the JVA. it would be crucial for both the parties to strike a good business relationship. Key points to consider in a JV from a land owner’s 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. this option is very capital intensive and can be explored only on a very selective basis. 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) .Capital gains tax would be applicable to the land owner at the time of divestment of stake. the land owner would get upfront cash flows by divesting 50 to 70 per cent stake in the JV.upfront capital gains tax. product mix.2. a tax efficient structure combining Dividend Distribution Tax (DDT) and buy back of shares would have to be worked out. •• Any cost overrun would require additional capital contribution which can be a financial stress for the land owner. appointment of contractors.2. Joint Venture As per our analysis. From a developer perspective. In a JV. timelines for development is required to be finalised by both parties. amenities. •• In case. project cost. 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. The developer would be responsible for all construction related approvals. •• Upfront payment to the land owner is typically upward of 50 per cent of land value. 7. the profits from the JV would be taxed at the applicable corporate tax rates. •• Development mix. FSI utilisation. Key aspects to be considered are: •• Since the JV would be for a longer period in time. marketing plan for the project. The land owner then divests partial stake in the SPV (upward of 50 per cent) in favour of the developer. in case of a Joint Venture (JV). In case of repatriation of profits from the 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. •• Tax implications . overseeing the day to day operations of the project. In a JV. Third party consultants maybe appointed to monitor the same. then hybrid instruments could be issued where in the shareholding and control would not be diluted but only the sharing of return would be . consultants as well as marketing of the project. also. methodology for sharing additional FSI cost. hence negotiating the valuation would be a challenge in a JV. 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. sales price.

and the land owner also gets either a revenue share or an area share from the project. 7. 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. and in a period of sluggish sales their Net Present Value (NPV) of receivables from the project would be impacted.e. a Swiss entity. Key points to ponder in a JD from a land owner’s perspective are as follows: •• Land owner responsibilities – All land related approvals are to the land owner’s account and timelines for the same need to be agreed upfront. increase in project cost. architects. 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. many of the developers have been preferring the Joint Development (JD) route. Though the number of JD’s are very high in the market place. •• The land owner has the right to monitor the cost and project quality on a quarterly basis. •• The land owner has affirmative rights in matters like changes in capital structure. In a JD. Joint development Post 2008. additional capital outlay. In case . •• 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. not in proportion to the ratio of the shareholding in the JV). Third party consultants may be appointed for monitoring the cost and quality of project. •• 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). All rights reserved.2. Efficient drafting of the JDA is the key to computing the capital gains implication to the land owner.disproportionate (i. an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 36 © 2015 KPMG. 37 Selection of the right developer for the location and proposed product mix is key to a successful project and its timely completion. Since only the economic interest in the land is transferred to the developer at the time of execution of Joint Development Agreement (JDA). 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. Another aspect that the land owner needs to prepared for in a JD is the timing of capital gains. from a land owner perspective they typically have limited control over the project development. change in project consultant. some of the key highlights are that the land owner does not need to bring in any additional capital for development. As per our analysis.3. •• Product Mix and units allocated to the land owner should be clearly defined in the supplementary sharing agreement. etc. typically 10-15 per cent of the land value would be payable as an upfront deposit.

•• The land owner gets access to the developer’s brand and development expertise.4. and on account of that also gets maximum share in the project cash flows and future upsides from the project. the land owner and developer enter into Development Management Agreement (DMA) wherein: •• The developer would be responsible for the management of the entire project. For instance. some in the industry may be thinking they will take advantage of current competitive lending rates and . From a developer perspective. The land owner steps into the developer’s ‘shoes’ from a execution perspective. DM provides them the opportunity to market multiple projects across various cities and locations. and there is no “right decision” for every hospital. •• Construction risk rests with the land owner who provides for the development cost. and the developer gets paid a marketing fee for marketing and branding the project.there are land related approvals to be completed before the signing of the JDA. In all the other options. 7. •• Fixed percentage of revenues of the project are shared with the developer. In this case. thus building a scalable business model. 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. the land owner typically sells the land. •• 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). 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. Development Management (DM) Emerging Business Model Development management is an emerging business model in the real estate space. transfers the land into a JV or transfers the economic interest in the land to the developer. Overall construction risk of the project tends to vest with the land owner. There are many factors to consider. It requires a systematic approach to evaluate real estate strategies on a property-by-property basis.2. whereas in this case the land owner would retain full possession and control of the land. which may include an upfront fee payment also. Challenging the tides: Indian Real Estate ` When to sell ? Making the best choice The answer isn’t black and white.

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

000 acres of land across India. On the flip side. In terms of valuations.300 crore and debt of Rs 1. estimated to be worth Rs 2. If the value of land bank. Bombay Realty. reflecting that gains of the reality business are more or less in the stock price. the value of its core business comes to Rs 1. It is only the real estate business that is growing and contributing to the company’s profitability. The management has said the group has 10.387 crore).Bombay Dyeing Bombay Dyeing has big plans in the real estate space. Bombay Dyeing has already sold about six acres of land and is planning to monetise the remaining in phases.500 crore. including 64 acres owned by the company.187 crore.687 crore (market capitalisation of Rs 2. . is adjusted. but also develop the land bank of the Nusli Wadia group (its promoter). It has formed a real estate arm. its core businesses of textiles and polyester (which account for 87 per cent of its revenues) are not in great shape. the company’s enterprise value works out to be Rs 3. which will not only develop and/or undertake the real estate projects of the company.

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

led by robust domestic demand. global economic growth was relatively weak in 2012 at 2.4% in 2013 before it is expected to gradually strengthen to 3. led by robust domestic demand. significant rupee depreciation. respectively.25% in Apr-13.7% in FY2015. However. India’s GDP growth stood at 5% in FY2013. As per a World Bank report ‘Global Economic Prospects’ (GEP) released in January 2013. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were also brought down from 4. The FDI cap was also raised from 49% to 74% in broadcasting and Asset Reconstruction Companies.7% in FY2015. during the year. Growth is expected to remain subdued at 2. World Bank forecasts the Indian economy to grow by 6. However. compared to 8.3%.economies slowed down global growth rates. focused fiscal and monetary measures. while Foreign Institutional Investors (FII) have been given the go-ahead to invest up to 23% in commodity exchanges without seeking Government approval.00% and 23.00% currently. Amidst concerns of rising inflation and slowing growth. providing increased liquidity to banks for lending. power. Foreign investment has also been allowed in power exchanges. the Reserve Bank of India (RBI) maintained its cautious stance on the monetary policy during most of FY2013. strong savings and investment rate.1% in FY2014 and further strengthen to 6.3% in 2014 and 2015. strong savings and investment rate. the Report highlighted that India is regaining economic momentum and growth is seen recovering gradually to its high long-term potential.8% of GDP during FY2014. The Road Ahead Union Budget 2013-2014 set the path for fiscal consolidation targeting to reduce India’s fiscal deficit to 4. Over the last one year. infrastructure. Management Discussion & Analysis Residential Realty: . fiscal deficit. 100% FDI in single-brand retail and 49% in the aviation sector.00% in Mar-12.75% and 24% in Mar-12 to 4. As per the India Development Update of the World Bank. The economy continued to face various macro-economic challenges such as high World Bank forecasts the Indian economy to grow by 6.1% and 3. high interest rates and consequent slowdown in core sectors such as agriculture. large current account deficit. further reinforcing India’s consumption growth story. Thus. high inflation. These measures are likely to provide substantial boost to the capital intensive sectors by opening up easy access to foreign capital. RBI cut the Repo Rate thrice by 25 basis points (bps) each to bring it down to 7. 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.1% in FY2014 and further strengthen to 6. It announced several measures to strengthen the economy using fiscal and monetary tools to improve the overall business scenario. This enabled banks to increase their lending during a difficult business environment and meet RBI’s target of 16% credit growth during FY2013. The Government allowed 51% FDI in multi-brand retail. increase in Government expenditure towards core sectors and lowering of interest rates by RBI are expected to help revive the consumer discretionary spending. mining and manufacturing.

According to the Department of Industrial Policy and Promotion (DIPP).7 Mn units by 2014.2012 2%3% 9% 15% 45% 15% 11% Source: JLL Real Estate Intelligence Service. The huge quantum of this shortfall offers tremendous scope for the residential sector in India. up from 23% during 2011. Furthermore.5 Mn units in 2010 in urban areas is expected to increase to 21. compared with 154. the total size of India’s real estate sector was US $67 Bn in FY2011. the real estate sector received 2% of total FDI inflows in India during FY2012. 45 According to Jones Lang LaSalle. From the pricing perspective.701 units during 2011. the government has allowed 100% FDI Chennai and Pune were among the other cities that increased their share of absorption during 2012 to 26%. Share of absorption by City .000 Bengaluru Hyderabad Kolkata . as per Crisil Research. but even foreign investors who find strong potential for growth driven by India’s large population base. a total of 160. As per industry reports. The RBI has allowed foreign citizens of Indian origin to invest in the real estate sector. The shortage in rural areas is expected to reduce from 26 Mn units to 19. with a 60% contribution to the overall absorption. the average residential capital values in 2012 appreciated in the range of 3-5%. Chennai and Pune were among the other cities that increased their share of absorption during 2012 to 26%. rising income levels. up from 23% during 2011. The larger cities of Mumbai and NCR-Delhi recorded healthy absorption during 2012.The Real Estate sector plays a significant role in the Indian economy. Recent policy initiatives and measures announced during Union Budget 2013-2014 are seen setting positive triggers for India’s real estate sector. contributing around 5% to India’s GDP and providing the second-largest employment after agriculture. rest being the commercial and retail segments. 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 32.7 Mn units by 2014. India’s real estate industry is largely represented by the residential segment which accounts for around 90-95% of the total market. and rapid urbanization. Housing shortage of approximately 20. It has also allowed real estate developers to raise upto US $1bn through European Commercial Borrowings (ECB). The residential segment has seen a significant growth over the past few years and has attracted not only domestic developers.622 residential units were launched pan-India in 2012. The industry is expected to touch US $180 Bn by 2020.

000 25.000 40.000 39.000 20.000 0 18.000 35.000 15.000 37.Pune Ahmedabad Chennai NCR Mumbai Newly launched units 45.000 5.000 30.000 10.700 M anagement Discussion & Analysis The Phoenix Mills Limited Annual Report 2013 46 .