Oberoi Realty – quality real estate business

Following up from the first two articles about real estate (you can find them here and here). Since the articles were quite long, I’m going to summarise them here for convenience. So, the first article talks about the real estate cycle in India starting from the liberalization in 1991. We are currently in the second real estate cycle. The first cycle peaked in 1995 and the second cycle peaked in 2012-14 period. Currently, we are in the final stage of the second real estate cycle. While it is not clear when the third real estate cycle will start, it feels like we are close to the bottom because there is a lot of pessimism when it comes to real estate in general at present.

The second article looked at select real estate companies and their performance. One company was the standout out-performer amongst those – Oberoi Realty, on almost every parameter. Now, let us put one and two together and what do we get. Here we have a company that is the best real estate company in India and its standing at the cusp of a real estate cycle which is about to turn. That should provide it a solid tailwind for the foreseeable future.

Oberoi is present across the real estate market, including residential, office space, retail, hospitality and social infrastructure. Their specialty is that they create integrated mixed-use developments such as Oberoi Garden City, which includes a shopping mall, a hotel, office spaces and an international school. They have built a reputation of delivering such high-quality developments over a period of time. These large integrated developments enhance customer satisfaction, are highly sought after and hence command a premium.

They outsource construction and design of the developments and hence this cannot be unique to them. Their competitive advantage lies in conceptualizing these developments – from planning, capital allocation, strategic land purchase to delivering the projects on time. These qualities over time reinforce each other and sum of the parts is greater than the whole.

The business has a lot of momentum as we draw to close of FY2019. The commercial portfolio is 1.2m sq ft comprising of Oberoi Mall, Commerz I and Commerz II. This generated revenues of INR 235cr in FY2018. This portfolio is expected to increase to 4.8m sq ft with the addition of Commerz III, Borliwali Mall and Boriwali and Worli Commercial Developments. On the residential front, they have four major revenue generating projects going forward – two in Mulund and one each in Boriwali and Worli. In the past, they have never had more than two major revenue generating projects at any point in time. On the hospitality front, they have had a single hotel (Westin) since 2011. This is also expected to increase to four hotels – two additional hotels in Worli and one in Boriwali.

However, there is a flip side to all this momentum. The slowdown in the real estate sector continues and it is difficult to predict when the recovery will take hold. Hence, the offtake from the projects of Oberoi may be slower than expected and they may have to hold this inventory for a longer time. In the short term, this may be a source of pain since they have four revenue generating projects.

But if we look at this from a longer-term perspective of 5-10 years, I’m much more sanguine about their prospects due to several reasons. One, as already alluded real estate sector will do much better over a longer term. In particular Oberoi will do even better due to regulations such as GST and RERA, which will over time lead to consolidation in the real estate sector. Two, Oberoi’s management is passionate about the business and manage the business with integrity and for the long-term interest of all stakeholders. We will look at these aspects in more detail in a follow up article.

Value investor

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