From turning around coffee cafe chain Barista to building affordable housing townships and luxury residences, Brotin Banerjee has come a long way. It was sometime in 2005-06 when Banerjee was asked to handle the loss-making Tata Housing business.

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Unfortunately, the real estate business had gone through tough times — and the company was even up for sale during the 2003-2005 period. Its equity was completely wiped out. In fact, the company didn’t even have the right to use the Tata brand (logo) and was operated under the THDC (Tata Housing Development Corporation) banner.

The company had no new projects, no land parcels and the last project it acquired was sometime in 2001-02. There were just about 40-50 employees left in the company and they used to work out of a residential building called Emerald Court at Mahim. It had to be converted into a commercial office space because there were not many buyers for the said residential project being on the wrong side of Mahim. There has been a big change from those days.

Tata Housing has done extremely well as a company and over the last three to four years it has grown at a CAGR of over 100%, Banerjee tells DNA in an interview. Excerpts:

Tell us a bit about Tata Housing.From being a loss-making entity back in 2005, we have doubled profit year on year since then. And from having no new projects then, we now have approximately 46 msf (million square feet) of projects — some of which are under operation and monetisation and some that we tied-up last year and are yet to be monetised. We today have presence in 9 to 10 cities and projects from Rs5 lakh a unit to about Rs8 crore. All these are sustainable green building projects and the best part of it all is that all of it has been done with just Rs100 core of equity, which came in 2007.

Last fiscal we sold close to ¤2,000 crore of stock in terms of order booking. We can’t book the entire sales because of the percentage completion method being followed by us in this regard.

What went wrong with THDC earlier and what were the corrective steps taken?Probably the understanding of real estate and the way it worked was not there. Besides, it wasn’t a focused business vertical for the group then. However, all of that changed with the coming in of a new chairman in the form of Krishnakumar. He brought in a lot of focus and gave necessary support, thereby motivating the company to excel in the business.

Was it recapitalised as well?The company had only Rs10 crore which was hardly anything back in 2005-06. Interestingly, this company was earlier operating as Tata Aircrafts Ltd and when Air India got nationalised it continued to operate as a shell company. Sometime in 1984, late JRD Tata thought the group should enter the real estate sector and make a difference by bringing in transparency. He felt if the corporates don’t show the light then how will it really happen.

Unfortunately between 1984 and 2005, the company did some really brilliant projects including developments at Aurangzeb Road (Delhi), Goa and Mumbai. These were one-off developments and were probably mis-timed, got caught in recession and as a result the projects did not start and even if they did the completion didn’t happen on time. The group at that time was expanding in other areas of business and having got into real estate they realised the sector was still very opaque; it had regulatory problems and suffered significantly from bureaucracy etc and hence de-focused from that business.

Rebirth of THDC then happened in 2006-07 and the company got recapitalised by Rs100 crore sometime in mid-2007 and that’s when the Tata Housing story really started.

What was the mandate given to you then?There was no specific mandate as such given the history/track record of the company over a period of 20 years. I don’t think they really hoped that this business would do as much as it has managed in the last four years.

Tata Sons, the main holding company, must have been surprised by the dramatic turnaround?They certainly are and have said so too. In fact both Tata and Krishnakumar would reasonably be very happy with the way this business has shaped up. In fact, there is a lot of optimism in the company’s workforce and I feel that itself is a big satisfaction for all of us.

With just about 45-50 employees in 2005-06 we are now an over 400 people strong company as of March 2011. By the end of this fiscal (March 2012), the total employee strength would be over 750 which in itself shows the kind of growth being envisaged.

On the business side, we should be adding another 15 msf to 16 msf of projects between the two companies — Smart Value Homes and Tata Housing. In a short period of time we have re-established the firm and the market knows us as an innovative company. Incidentally, we have also gone through a recessionary phase and still managed to register over 100% growth (yoy).

During the recessionary phase, was there any worry in the company or management?Not at all, and I’ll tell you why. Firstly, we did not have money to burn which was the case with many other players. Secondly, because all the equity had already been wiped out earlier, we very well knew the importance of cash, preserve capital and how to optimise it when recapitalisation happened in mid-2007. We did a large number of projects on a joint development agreement (JDA) and joint venture (JV) basis which helped us in a big way during the recession. Had we invested the entire ¤100 crore and taken a huge debt we would have definitely got into trouble.

According to statistics doled out by the Deepak Parekh committee earlier (a couple of years ago) about 6% of the Indian GDP comes from real estate and construction of real estate assets — ie $36 billion. Out of this, nearly 70% to 75% is contributed by residential and the balance is shared between retail, commercial offices, SEZs, hotels etc.

Tata Housing is uniquely placed because we are present in multiple cities,which is a major de-risking factor. We were doing low-cost and affordable housing projects which got a lot of traction at the time of recession and there was a genuine pent-up demand which helped the company continue with its business in a very normal fashion. Some sarcastic people told us we will never be able to do it and that it was just a market gimmick, but today, we are doing over 12,000 to 15,000 flats under the Smart Value Homes’ entity. There is no realtor in the country with that kind of a development pipeline.

How much did the parent company help you considering they also have a huge land bank?None, actually. This entire thing about parent company helping us has no weight. There has been no help from the parent other than the management and recapitalisation of ¤100 crore that happened in mid-2007. And we have got no land parcels from the parent company’s land bank.

One of the very good things about the Tata’s is that unlike many other firms (both professionally and family-run entities) in India, the Tata’s doesn’t force you to buy products from the parent company. I am free to buy from anyone and similarly they are free to buy residential apartments from any other developer. That’s the kind of freedom every operating unit enjoys and each one of them is at a hand’s distance away. That’s a very big strength wherein no attempt is made to hide the inefficiencies by cross-buying and cross-selling.

Where do you see the next big opportunity coming from, now that Tata Housing has attained notable size and scale?There is a very big opportunity in the affordable housing segment which I’d feared earlier that we will not be able to tap it. In 2008 when we started, there were a few things that we wanted — ie commodity prices have to be lower; the government will have to come out with a housing policy.

However, the last two years have clearly shown us that either of the things is happening. Land and commodity prices have gone up. There is no government incentive for people to get into affordable housing, thereby putting an end to the fashion of affordable housing which was being talked about by every other player.

So, only serious players are left in the market now and there aren’t too many of them either. Among the handful, I am certain we are the biggest in this space so far. There are a lot of challenges in affordable housing and if it’s not addressed by the stake holders the government’s dream of giving housing for all will always remain a dream.

We see huge potential and we think we know the formula to monetise it. But to implement it, I will have to do many more things than what I am doing today. I will probably have to change the paradigm at the earliest possible, move away from labour-intensive processes by bringing in technology. I have already tried tying up long-term supply contracts for steel, cement, tiles and other materials used in the business, which itself is a difficult task. But I think it’s the use of new construction technology that will be a complete game changer in this low-cost affordable housing business.

Typically in the last few years, the cost of construction has gone up by 20-22% in the top metro cities across India. At best, every company would have taken an escalation factor of 5% to 7% and no one projected the costs to increase so significantly. This is largely driven by labour shortage, construction material (sand) shortage, delay in getting project approvals and so on. All of this has had a detrimental impact on the Indian real estate sector.

What is the kind of return that you are normally comfortable to work at in this business?It depends from project to project. For any real estate developer I would think a band between 25 and 40%.

And the 40% margin will accrue from premium projects?40% would normally be for a project where you have got the land at a cheap price. Land has become a major issue. If we get land at a cheaper price then we are able to get a higher margin.

So when you talk about Rs2,000 crore order bookings how much of it would be booked in terms of revenues?A significant part of it would be booked. But to answer your question, even last year (2010-11) we did 100% more over the previous year.

For your luxury homes, Prive, you set out a three-year time frame to sell but you managed to exhaust in less than a year?In Boisar we had a four-year timeframe. We sold most of our Boisar homes. In Vasind, we have sold out our Phase 1. In case of Prive, which is very high-end, we set out to sell within three years. Except for 8-10 units we reserved, the rest we sold out in less than a year. 

What would you attribute the success to?Three factors. It was aesthetically and efficiently built products. Much better than most efficient competitors. Second, we ensure that the customer is not short-changed. Third, most projects have some innovative tilt. Whether it is the tallest tower, or whether it is a theme or art and culture or whether it is sheer affordability. We have some strong value proposition for each of our product to differentiate it from competition. It has really helped in selling out faster.

Even the model you followed to sell exclusive homes was different. We understand you went to wealth managers?To sell Prive, yes. But for low-cost housing I didn’t do anything. We only did a lottery system.

Was it similar to the MHADA lottery system?It is very similar. In Boisar, I got 7,000 applicants. For Vasind, I got close to 5,000 applications. I had to return most of the money.

Why did you go to wealth managers? Their thinking is different.It’s a new channel. Wealth managers manage people who are wealthy. Typically, a wealth manager becomes a very close confidante of people whose wealth he or she is managing, because their clients share a lot of details with them.

If we are able to convince the wealth manager that the project is sound, that is enough as the clients go by their word. We didn’t advertise for this project, except that we profiled it in some of the international magazines, but other than that we sold it by word of mouth.

Recently, we launched a project in Delhi, (we’ll do a formal launch soon) where we sold close to 380 apartments though we haven’t done any significant marketing even in this market. It is very premium end project in Gurgaon.

Tell us about some of your future projects? This year we have a target of about 60 to 65 million square feet. We’ll grow by about 15-20 million square feet hopefully. Maybe, we’ll do a 50:50 spilt with Tata Housing and Smart Value Homes. And we we’ll concentrate on 8 to 10 cities in India. We’ll bring in multiple projects in these cities.

Will you participate in setting up new townships which are coming up in the Delhi-Mumbai corridor?We are doing a quite a few townships. Most of our projects are of an average size of 3 to 5 million square feet. Most of our projects have a school, a primary heathcare centre, offices and other things. But, there are a lot of policy actions that the government has to introduce. The government is in many ways holding back genuine developers who want to change the infrastructure and create better looking cities in India.

Are you looking at re-development of old buildings in Mumbai and Delhi?We are open to re-development of old society buildings, but not slum re-development. I believe that one of growth engines for Tata Housing in Mumbai will be re-development. I’m sure that given the Tata brand name, which stands for trust, a large number of societies have approached us. We have turned down a few societies because their requirement did not meet our values. The project has to stand the test of time. So we’ll be very selective.

How many such redevelopment projects do you have in Mumbai?We have two or three projects in Mumbai. I can’t name them but they are in the suburbs.

Real estate is often considered as the riskiest among all asset classes?Over time, if you look at any asset classes, you’ll find that it has delivered a better return than any other investment. You have to be dumb if you have not made money. In a short period of time most people may feel they have lost money but if a long-term investor holds for a three to five year time frame there is no way they would have lost money in real estate. So it depends on the horizon you are looking at; if you go with good brands and a good track record and good locations investors will never lose money.

But Reserve Bank of India often makes public their worries on asset bubbles in the real estate sector.

RBI has done well in putting stringent curbs which ensures that asset bubbles are not created. They (RBI) don’t allow you to borrow from banks to fund land acquisitions for about four years now. That has cooled down rates. Asset bubbles are created when certain schemes such as pay and park schemes make some go completely mad. Some 23 bidders quoted exorbitant amounts for this project. It doesn’t make sense when people do due diligence in those projects.

In five years time where do you see Tata Housing?I hope that in five years we will be among the top three real estate companies in India as we are certainly growing faster than most companies. If you look at real estate companies with a Rs1,000 crore-plus turnover, you would not find more than five or six companies.

Any listing plans?Not yet. Firstly, we need to be prepared to list and secondly we don’t have an urgent need for capital. We have taken non-convertible debentures and we follow a business model where we are not dependent on buying land but acquiring projects through joint ventures.

So, I don’t know whether we will go for an IPO in a hurry. If we do at all, it will be at a time when it is more conducive to do an IPO. Most real estate companies that are listed are currently trading below their asset values.

But if you are growing at 100% CAGR, don’t you need a lot of capital?In seven out of 10 projects which are done on joint development, we pay not more than 20% of the land value upfront. The rest is monetised over time. Plus, we look at internal accruals where we hope to generate Rs2,000 crore every year. Internal accruals and debt will help us meet our growth requirement. If we need equity funding, our parent — Tata Sons — will be more than willing to provide us those funds.

Have you started rewarding your shareholders (Tata Sons owns about 99% of the company)?Yes, we began paying dividends two years back. It is a good amount of money.