DLF returns to its roots in property downturn

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India's biggest property developer DLF, burdened by debt and sluggish demand, is reining in its once-aggressive pan-India plans to focus on the familiar territory of its home market in northern India.

DLF Ltd, founded in 1946 - a year before India's independence - as Delhi Land and Finance, will concentrate on building high-margin luxury homes in north India while new projects in other parts of the country take a back seat.

"For new launches the larger focus is on north India whereas the overall focus in the south is to complete the large projects we have already initiated," Mohit Gujral, vice-chairman and managing director of DLF India, said in an interview.

Indian developers are beset by a faltering economy, weak home sales in key cities, and high interest rates, prompting them to scale back or put on hold projects planned during the boom years of 2005-2007 in Asia's third-largest economy.

DLF, which builds homes, offices and malls, said it plans to break ground on about 10-12 million square feet this year, compared with 12 million square feet in the year that ended in March and half the 24 million square feet it launched in the year ended March 2008, according to brokerage Ambit Capital.

Most of its new projects will be in north India, which makes up 70 per cent of its business, in cities such as Gurgaon, Lucknow, and the Chandigarh area.

With loans of about $4 billion to service at an average cost of 12.75 per cent, DLF is left with little free cash so it is prioritising projects that will maximise profits, which fell to a six-year low in the year that ended in March.

That means a focus on lucrative luxury homes and away from affordable and mid-range housing that is more sensitive to rising prices of steel, cement and labour, said Gujral.

"In the north we have high value projects that have a better contribution to the bottom line," he said, while the south had more mid-scale and lower-scale projects.

"Unless we replenish our land banks in the south with higher yielding projects, even though we may have large volumes there, it will have a skewed contribution to the bottom line," he said.

DLF will follow through on some of its lower-end projects outside north India, such as Maiden Heights in Bengaluru, an affordable housing joint venture with Bank of America-Merrill Lynch where homes cost as little as $45 a square foot.

By comparison, apartments in DLF's Magnolias project in Gurgaon, the Delhi satellite city developed by DLF that is its most profitable market, can cost more than $360 per square foot.

Rakshit Ranjan, an analyst with Ambit, said DLF's northern focus makes sense.

"As long as the stress on the balance sheet is managed and macro factors don't hurt housing demand, given the strength of its brand in the NCR (National Capital Region) markets and enough land bank to launch and execute projects in the near future, this can prove to be a good strategy," he said.

The National Capital Region encompasses an urban region around Delhi and is home to more than 37 million people.

THINK LOCALLY

From a peak in early 2008, DLF shares are down 82 per cent, valuing it at $6.5 billion. It has projects in 28 cities, more than any of its rivals.

Property tends to be a local business in India and most developers stick to home markets, where they own land and know the bureaucracy. DLF and a few others like Unitech and Indiabulls Real Estate had more sprawling ambitions.

During the boom, many developers dreamed of transforming the urban landscape with millions of square feet of homes, offices and malls and set off on an aggressive expansion financed with debt that at 6 percent interest was cheap by Indian standards.

But in 2011, home sales in the financial hub of Mumbai fell 45 per cent from a year earlier while sales in the New Delhi region were down 20 per cent, according to consultant Jones Lang LaSalle India's Real Estate Intelligence Services.

Sales in Bengaluru and Hyderabad were also lower, with Chennai recording the lowest fall at about 5 per cent.

DLF still plans to expand in Chennai, but in some cities planned projects remain plots of land on which the company is in no hurry to build. Some it plans to sell.

For instance, in 2007 DLF paid about Rs 7 billion for a plot in Mumbai to build 5 million square feet of luxury homes in a city where its only other presence is a minority stake in a project with Hubtown.

DLF has been trying to sell the Mumbai land for about 30 billion rupees to help pay down debt.

"If you mature into a market where you build relationships across the board you can take on any pressure. But if you come in new with the biggest game in town and somebody puts a spoke in it, you are dead," said Gujral.