Prestige Estates Projects is aiming to be net cash positive by September 2021 and is on track for its next phase of growth with a target of Rs 3,800 crore of rental income over the next five years through office and retail developments, and it is constantly expanding out of South India with planned residential projects in Mumbai and Noida. President and CEO Irfan Razack told FE’s Shubhra Tandon that despite the brutal second wave of Covid-19, demand for real estate remains strong and fiscal year 22 will be better than fiscal year 21 for the sector. . Edited excerpts:
How has the pandemic changed the real estate sector in India?
From September to March, the residential real estate sector across the country, especially in cities like Mumbai, Bengaluru and Hyderabad, posted record sales, with people choosing to buy houses rather than staying in rented accommodation and people with smaller venues being they upgraded to bigger houses. The pandemic has also led to changes in products. New projects being planned at Prestige, for example, are creating more open spaces and introducing safety measures like non-contact elevators and a host of other solutions appropriate to a pandemic. As we move forward, the designs will evolve further to make the spaces much safer. I think that now, developers have to start thinking differently, everyone has to innovate and make their products relevant over time.
Given that the second wave of Covid was much more brutal and appears to have affected consumer sentiments much more severely, what awaits real estate in fiscal year 22?
Consumer confidence has been affected by the second wave. Yes, people have delayed their purchasing decisions out of fear and panic. However, the situation has stabilized and we are getting back to normal. Yes, there is short-term stress for developers in terms of cash flows, payments, and loan servicing, but it should go away in a quarter or so. Demand will not return strongly, but I think business should return to normal by September. From now on, I think that fiscal year 22 will be better than fiscal year 21. However, the third wave disclaimer is always there, and if it is worse than the second, there would be problems.
At a time when companies are considering adopting hybrid or more work-from-home models, how do you think office real estate will evolve?
We do not believe that offices will go out of style, although demand may be soft for 3-4 quarters. While there is no doubt that large multinationals will adopt a hybrid model, many more business and work will also come to the country, leading to increased demand for office space. We believe that the planning of the office space will now be more elaborate. If the seat per square foot per person were 40 or 50, it will now double with the need for distancing. Many of the companies have already renovated their offices during the closing periods. In addition, some developers had stopped construction or abandoned their plans to build offices, reducing supply. Therefore, since supply contracts and demand is also slow to return, things will balance out in the coming quarters.
What is Prestige’s experience in new leases and renovations?
Both are happening. Between January and April, Bengaluru leased around 3 million square feet, of which our company’s share is 750,000 square feet, even rent collection is 98-99%, so we are quite stable.
Prestige has significantly reduced its debt levels after the completion of phase 1 of the deal with Blackstone, and aims to have positive net cash by September 2021. What is the next phase of growth for the company?
Our goal is to achieve Rs 3.8 billion rental income in the next five years, which will be through a combination of office and retail. We will have more square footage of rent than we have given Blackstone thus far. We are also doing some office assets with Blackstone that are under construction. Once they are completed and rented, perhaps they will also be listed in your REIT or we will participate together with them. In addition, the company can also create a REIT in the next 5-6 years. On the residential front, our focus will be on middle-income, premium and luxury homes and we are looking for Ebitda margins of around 20% from this segment.
Prestige intends to invest Rs 3,000 crore over the next three years to grow the rental portfolio. Please share the details of what it entails.
There are 18.72 million square feet of ongoing commercial projects and 2.56 million square feet of retail assets. There are another 22.88 million square feet of upcoming projects in the commercial segment and 1.97 million square feet of retail assets.
What will be your strategy for expansions outside of South India and what are the plans there?
We have immobilized some properties in Mumbai, Hyderabad and Noida, where we are focusing on the mid and premium segment. In fact, Hyderabad is developing as a good market, so we are expanding our presence there. We are also developing projects in Chennai. We had also previously decided to go to Tier II cities, but as a strategy we are now moving away from smaller cities because we think it takes too much effort for less volumes. So we are focused on Tier I cities, which is where the volumes are. We are treading carefully on luxury as demand is slow in that segment.