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» Realty majors diversify into other areas as slowdown begins to hurt

Date: Aug 29, 2008

Author: Economic Times

Grappling with a slump in the property market, Indian realty players are trying to diversify into new areas like power, telecom, entertainment, aluminium, cement and steel. Firms like DLF, Omaxe, Parsvnath, HDIL, Unitech, Akruti City and Mantri Realty have either initiated or announced plans for new ventures.

Diversification into related areas such as retail mall development, tie-up with hoteliers, or bidding for airport or road development projects are logical extensions to their current capabilities. Unitech’s latest announcement to tap the 3G-telecom business is an example of this diversification route.

With the residential and office segments witnessing a slower offtake, real estate companies are forced to foray into other activities. But the question is, are these initiatives taken to overcome the slowdown or just avenues for tax benefits? Realty firms enjoy tax exemptions under Sec 80-IA across various sectors.

“One cannot ignore the tax exemption benefits to all these new projects. However, the greater benefit is in the valuation,” said Deloitte Haskins & Sells partner Jayesh Kariya. According to him, these new ventures are structured in the form of special purpose vehicles (SPVs) that can be hived off as separate business later or merged to derive higher value for the parent company.

“The parent (company) in such cases will earn a tax-free dividend from its subsidiaries operating in these tax exempted businesses during its initial years,” said Mr Kariya. Such diversifications into capitalintensive projects carry the risk of execution and could become a strain for the holding company.