Three large realty firms have placed bids to build and operate stretches of national highways that have come up for auction this year as part of expanding their portfolio to offset a slump in their core business. Unitech Ltd, DLF Ltd and Omaxe Ltd are among several infrastructure companies bidding for the right to build and operate national highway stretches that are currently being offered by the National Highways Authority of India, or NHAI, the regulator for inter-state highways.
The projects they are bidding for are part of the national highway development programme, or NHDP, which aims to upgrade more than 33,000km of highways, according to an NHAI official, who didn’t wish to be named.
The real estate sector in India has seen a slowdown in recent times as it has become expensive for developers to borrow money, with Reserve Bank of India raising the repurchase rate overnight lending rates to banks to a seven-year high of 9% last month.
In the past three years, property prices in some markets such as Gurgaon in Haryana and Noida in Uttar Pradesh adjoining the national capital have jumped by 100-200%, deterring home-buyers from investing in properties. As a result, realty firms are finding it tough to sell residential properties that typically contribute 50-70% to their revenues. DLF, Unitech and Omaxe have a large chunk of their residential and commercial projects in these places.
The Union government estimates that India needs at least Rs20 trillion in infrastructure investments in five years, at least a third of which it expects to come from private firms.
While DLF, the country’s biggest realty firm by market capitalization, announced an infrastructure development partnership with Gayatri Projects Ltd earlier this year, Omaxe partners with Hyderabad-based GVK Industries Ltd and Nagarjuna Construction Co. Ltd on a project-to-project basis.
Unitech, which has built highways on a turnkey basis (building roads for a fee), is now bidding for projects that allow the concessionaire who wins the bid to operate and derive revenues from the highways for a specified period. Its revenue from the construction business was Rs213.01 crore for the year to March.
A concession agreement, which governs national highways, doesn’t allow developers to commercially exploit land along the highways they operate, although such land is considered prime property.
Some analysts say, for real estate companies, bidding for national highway projects could be a way of building their portfolio so they would be able to bid for state highways or the so-called ring roads around cities, many of which have land development components.
“You don’t need a land development component. If you know how to execute your project well, then you can make money upfront, rather than wait for toll revenues,” said Amrit Pandurangi, who heads the infrastructure practice for consulting firm PricewaterhouseCoopers.
Calling investing in infrastructure the latest fad, Subhash Bedi, director at Red Fort Capital Advisors Pvt. Ltd, an India-focused real estate fund, said infrastructure investments made sense for real estate companies because of a “synergy of skill sets, construction skills and project management skills.”
“What real estate companies are beginning to understand is that land is not a store of value. In the case of a lot of real estate companies, they are asset-rich and not cash flow-rich… In infrastructure projects, you get a steady cash flow,” said Ashish Kalra, managing director of Trikona Capital Plc., which manages over Rs4,300 crore in infrastructure and real estate assets in the country.
“We have project management expertise and have done highway construction contracts in the past,” said Unitech’s executive vice-president M.K. Aggarwal. “When totally unrelated industrial groups are bidding, why can’t we?”