Indiabulls-Embassy merger a strategic decision for both: Embassy's Virwani

The merger between Indiabulls Real Estate and Embassy is a strategic decision for both companies, said Jitendra 'Jitu' Virwani, Chairman and Founder of the Embassy Group.

In an interview, billionaire Virwani said that Embassy is predominantly Bengaluru-based while Indiabulls has a 95 per cent residential asset base.

"I feel the merger benefits both companies – by allowing Indiabulls to participate in the fast-growing commercial market of Bengaluru and for Embassy, as it allows us to build a pan-India presence," he said.

Virwani said the combined entity will have access to the major Tier-I markets of NCR, MMR and Bengaluru as well as strategically important Tier-II cities and will have a very balanced mix of both commercial and residential assets.

"The combination also provides us scale and creates one of the leading real estate platforms in the country with Rs 10,700 crore of surplus from launched projects, 80.8 million sq ft of saleable/leasable area and an additional monetisable land bank of 3,300 acres in NCR, MMR, Nashik and Chennai," he said.

Virwani said that on receipt of all approvals and once the merger is complete, certain Embassy Group entities shall become the new promoter entities and the existing Indiabulls promoters will seek to declassify themselves as promoters.

On the consolidation trends in the real estate industry, Virwani said: "We believe that there will be increasing consolidation amongst players in the real estate industry. The consolidation was limited to acquisition of distressed projects/assets by a larger well-
capitalised developer. However, we believe that in the future, consolidation will get broad-based and may happen at entity levels and even between Tier-I developers as well."

"We believe the current market dislocation will make the residential sector more organised and eliminate unwanted excessive competition. We foresee a change in the way real estate companies upgrade and conduct themselves," he added.

On the priorities as the new promoter group, Virwani said that their "immediate focus would be to generate liquidity of Rs 10,700 crore by selling near completion/ under construction inventory, which requires very little additional capital of Rs 200 crore".

"The liquidity generated will be redeployed for planned projects and other new market opportunities."

On the revival in the sector, he said investor and homebuyer confidence needs to come back. "It is very difficult to exactly say how much time that will take but I am pretty sure that it will happen sooner than later," Virwani said.

Excerpts of the interview:

Q: Indiabulls Real Estate Ltd and Embassy Group have entered into a merger. What is the rationale and trigger for this move?

A: The merger is a strategic decision for both companies. Embassy is predominantly Bengaluru-based whilst Indiabulls has a 95 per cent residential asset base. I feel the merger benefits both companies – by allowing Indiabulls to participate in the fast-growing commercial market of Bengaluru and for Embassy, as it allows us to build a pan India presence.

The combined entity will have access to the major Tier-I markets of NCR, MMR and Bengaluru as well as strategically important Tier-II cities and will have a very balanced mix of both commercial and residential assets.

The combination also provides us scale and creates one of the leading real estate platforms in the country with Rs 10,700 crore of surplus from launched projects, 80.8 million sq.ft. of saleable/leasable area and an additional monetizable land bank of 3,300 acres in NCR, MMR, Nasik and Chennai.

Whilst we have a listed REIT platform for yield investors, we believe there is an interesting play in residential and commercial development. We believe a listed platform allows us to access more avenues for capital to grow the business. There will be a lot of opportunities due to recent market dislocations and having a listed platform of scale, backed by institutional investors, provides us with a strong base to make good use of these opportunities and accelerate growth.

Q: What will be the change in the structure of promoters?

A: On receipt of all approvals and once the merger is complete, certain Embassy Group entities shall become the new promoter entities and the existing IBREL promoters will seek to declassify themselves as promoters. The resultant combined entity post merger shall be owned 44.9 per cent by Embassy promoter entities, 26.2 per cent by the existing public shareholders (excluding old and new promoter groups), 9.8 per cent by IBREL promoter entities and 19.1 per cent by existing Embassy private equity and institutional investors, including Blackstone Real Estate Partners.

Q: The combined IBREL entity will become one of India's leading real estate development companies. What will be the reach and expansion of the new entity?

A: The merger will create a market leader in terms of net surplus from launched projects (Rs 10,700 crore) and land bank ownership (3,353 acres). The combined entity will become 2nd largest real estate company in terms of inventory for sale + planned residential projects area (around 38 million sq ft).

The combined entity shall have 30 projects spread across Mumbai, Bengaluru and NCR/ strategically important Tier-II cities with a development potential of 80.8 million sq ft. The merged entity will be one of the leading market players among listed companies in the real estate sector.

Q: What are the opportunities created due to market consolidation and dislocation? Is this the beginning of consolidation in real estate sector and how do you see panning out?

A: We believe that there will be increasing consolidation amongst players in the real estate industry. The consolidation was limited to acquisition of distressed projects/ assets by a larger well-capitalised developer. However, we believe that in the future,
consolidation will get broad-based and may happen at entity levels and even between Tier-I developers as well.

We believe the current market dislocation will make the residential sector more organised and eliminate unwanted excessive competition. We foresee a change in the way real estate companies upgrade and conduct themselves.

Q: What are the opportunities in commercial and residential real estate for the new entity?

A: As I have stated before, the merged entity shall benefit from a complementary pan-India presence across key Tier-I and Tier-II markets. Merger shall provide us diversification and a balance mix of asset classes, 53 per cent commercial and 47 per cent residential. The planned commercial assets have a development potential of 43.2 million sq ft and the ongoing plus planned residential projects have a development
potential of 37.6 million sq ft.

Additionally, there exists a land bank of 3,353 acres in NCR, MMR, Nasik and Chennai, which will provide us with further developmental opportunities over the long term.

Q: As the new promoters, what would be the future strategy?

A: Our immediate focus would be to generate liquidity of Rs 10,700 crore by selling near completion/under construction inventory, which requires very little additional capital of Rs 200 crore. The liquidity generated will be redeployed for planned projects and other new market opportunities.

There are multiple institutional investors who would like to generate development returns and are willing to invest their capital in a professionally-run, well-governed, well-capitalised platform, which we aim to provide. This will allow us to capitalise on the multitude of other opportunities available in the real estate segment due to market
dislocations.

Q: When is the real estate sector expected to revive? Is there confidence to buy big ticket items like homes?

A: As I have stated, I believe that the recent market dislocations will bring about increased consolidation in the sector which will make it more organised. Investor and homebuyer confidence needs to come back. It is very difficult to exactly say how much time that will take but I am pretty sure that it will happen sooner than later. We,
however, expect large Tier-1 developers who are well capitalised to benefit disproportionately from this revival. We have seen in the last 30-40 days that gradually that confidence is coming back, reflected in our sales numbers.

Q: What are the plans for the SEZ and manufacturing capacities?

A: As of now, we do not have any specific plans for the SEZ land and will evaluate the appropriate strategy for these land banks in due course..