SOAR FOR MORE: CASE STUDY COMPETITION

MR. MEHTA’S DILEMMA

“Residential Real estate emerging as a preferred asset class” read the news article title on Mr Mehta’s
phone as he scrolled through the morning news on his phone. Mr Mehta was on his way to his office
in heavy rains of Mumbai which was under week-long orange-alert. However, a peek outside his car
made him feel like any other rainy day in the city. The news article stroked the right chord to the
question lingering on Mr Mehta’s mind for past week – Which asset class should his firm Mehta
Realty Limited (MRL) focus on in their next project.
Mr. Mehta’s continuing dominance in the Indian real estate industry was possible only through a
combination of shrewd decision-making, tough negotiations, and an unending desire to build the
largest and most successful real estate company in the country. He had built Mehta Realty Ltd. over
decades, spanning developments at every price point from affordable (below 50L for a 2-bedroom) to
luxury (in MRL’s most premium projects, flats are sold at more than 1L per square foot, or 20Cr plus
for a flat). In order to build such a diversified real estate empire, Mr. Mehta has built a very strong
marketing and sales team, able to target homebuyers across all segments in the Mumbai
Metropolitan Region (MMR).
Indian Realty’s K-shaped recovery in post pandemic era was a widely discussed topic by leading
journalists across media. The large players in the industry were gaining market share at the cost of
smaller players. While there was merit in the discussions, MRL found itself on the better side of the
fence. There was spike in post-COVID demand and quite few land plot options available for purchase.
While in previous years Mr. Mehta would have pounced on any plot with a clean title and line of sight
into sales, he was now facing a unique challenge. The cash on hand is limited owing to high upfront
investment on acquiring plots and the recent sales slump from pandemic. On top of that funding from
investors for Real Estate was limited because of the volatility in technology start-up ecosystem.
“Sir, we have arrived” said Mr Mehta’s driver as they reach MRL’s head office. “Thank you!” greeted
Mr. Mehta just in time as he finished reading the news article. While walking towards his office, his
mind shifted focused on the proposal kept on his desk by the Head of Strategy Team for his next
project. Mr. Mehta and MRL were faced with an important decision: of four appealing land parcels,
which one should MRL pick?
The company has around INR 250 Cr in capital to invest with the sole purpose of maximizing future
returns. Since a typical realty project gets developed over three years and sold over four years, it is
vital that the team gets their projections right.
The first available option is a small plot in the prime Worli area of South Mumbai. Historically, the
most desirable area in the city and the core of MRL rapid expansion since the early 2000s, the plot is
sure to make money. Worli sees steady demand from ultra-high net worth families that have
historically lived in premium locations, and those wanting to make a statement that they have arrived.
After exponential growth in prices during the 1990s and up to around 2010, price growth has more
recently been steady, generally around the same as inflation. However, South Bombay is governed by
very strict regulations and the available plot was not only small but also very expensive. With the
given equity, MRL can buy 2 acres of land (including all licensing costs). Because of the stringent
regulations and requirements, construction would not begin until a year after the property was
purchased. For this plot of land, the total FSI would be 1.5 and the building would consist of luxury 4-
bedroom apartments that have a built up area of 3,000 sqft each. Should Mr. Mehta continue the
ever-rewarding premium housing model in South Mumbai?
The second plot was in Andheri West, an area where MRL historically had only a very small footprint.
But Andheri was among the fastest growing micro markets within Mumbai, and Mr Mehta had long
since hoped to establish a flagship development in the area. Inhabited by salaried classes and a
growing commercial hub, Andheri was also desirable for its improving infrastructure. It included a
station on Mumbai’s only operating metro line, a train station on the Western Line of the Mumbai
Suburban Railway system, and easy access to the airport. With the Metro expected to expand
operations in coming years and the development of Mumbai’s Coastal Road, many believe that
Andheri would become an even more desirable location. In recent years, a number of retail and
entertainment establishments, including restaurants, shopping malls, movie theatres, etc., had
launched in the area. There is a palpable sense of excitement about the area, and prices have been
rising twice as fast as inflation. But had Andheri already reached saturation? Or will this rapid growth
continue? This question was on Mr Mehta’s mind as he considered whether to purchase the 5 acre
plot for 250Cr (inclusive of all licensing), with total FSI of 2. He wanted to develop multiple towers
that would consist of 1, 2, and 3 bedroom apartments for the rising middle class of the city.
The third plot of land being considered was in Bangalore. Mr Mehta was keen to expand his footprint
beyond Mumbai, and he saw Bangalore, as the centre of India’s rapidly expanding IT/ITeS industry, as
the ideal first port of call. Bangalore had seen huge growth in real estate as thousands of IT workers,
investors, start-up founders and employees, and others have moved into the city. The 250 Cr available
would buy a large plot in Bangalore – about 10 acres. With an FSI of 1.25, this would give MRL a
significant presence in the city. And yet there were now concerns about the IT sector itself. Will anti-
globalization policies in the West and increasing automation mean that Bangalore’s IT sector has
already peaked? Or will a slew of venture-backed start-ups kick-start a new phase of expansion?
As he was wrestling with this decision, Mr Mehta’s daughter told him about her plans to launch an AI-
based start-up to make hotel and airline bookings faster, cheaper, and easier. When Mr Mehta
offered her office space in one of his commercial buildings, she politely declined. She wanted to be
based in a co-working space, where bright minds bring together their ideas for change. The Bangalore
land parcel that Mr Mehta was considering could also house a commercial development. Was a co-
working space a better use of land in Bangalore than building a residential property? Mr Mehta
deployed his Strategy team to do some quick analysis. A co-working space would function like a
commercial office development, with rental income collected every month. In general, 10% of rental
income would go toward upkeep and maintenance of the property. Co-working spaces were
increasingly popular, but would they survive the test of time?
The fourth plot is at Dombivali, location touted as the next datacentre hub in Navi Mumbai region.
The sum of 250 Cr will fetch a plot of 5 acres with FSI of 1. The post-pandemic era has pushed every
industry and sector towards rapid digitization such that there is burgeoning need by many companies
for leasing datacentres. This segment promises high return but is still in nascent stage and requires
significantly higher development cost. Would MSL be willing to take the bet on this promising plot?
These were some of the questions Mr Mehta struggled with as he tried to decide which of the four
land parcels he should purchase.
 PROBLEM STATEMENT

How should Mr Mehta deploy the INR 250 Cr in available capital so as to maximise the future returns
on his selected project? Please evaluate all options quantitatively backed by qualitative reasoning and
provide your recommendation on the most suited option for MSL. Do provide your reasoning and
comparison across all options along with risks associated with each option.
Alternatively, is there any better use of the capital other than four options given above? Provide a
brief summary of your alternate option along with qualitative reasoning.

Note on Evaluation:
Entries will be evaluated on soundness of logic & assumptions, quality of analysis and creativity of
business ideas. All assumptions and associated risks for each option given above made for calculation
purpose must be clearly mentioned in the submission entries. Candidates may use any publicly
available material (e.g. industry reports, new articles, etc.) to strengthen their evaluation and findings.

Factors for consideration while evaluating options:

 Use industry standard values for all parameters where values are not provided such as -
o Debt-to-equity ratio
o Expected price (or revenue) change % in each market
o Cost of Capital
 Revenue from co-working model can be calculated basis current hot-desk rates on average sized
hot-seat. You may want to assume higher
 Appropriate lifecycle period for each project and its impact on financials
 For leased assets, MSL may also evaluate selling-off entire asset to 3rd party investor at cap rate
of 9%
 Annexure-1: Inputs for evaluating investment options

1. Inputs for Land Options

Description of Parameter Worli Andheri Dombivali Bangalore

Plot Size 2 5 5 10
(in acres)
Total FSI 1.5 2 1 1.25
(all inclusive)
Carpet Area 75% 75% 75% 75%
(% of Built-up area)
Construction Cost* 15000 7000 40000 7000
(per sqft)
Sales & Marketing Cost 2% 2% 2% 5%
(% of revenue)
Project Contingency Cost 10% 10% 10% 10%
(% of construction cost)
Current Market Price 60000 22500 20000
(per sqft of Carpet Area)
* In case of commercial property, the property is typically sold/leased on bare-shell basis. So, overall construction cost per
sqft is lower than residential unit. Appropriate discounting factor may be assumed basis current market data.
All prices in INR

2. Typical schedule of costs & sales

Schedule Structure Year-1 Year-2 Year-3 Year-4

Construction Cost
25% 50% 25% 0%
(tower phasing)
Sales Volume
70% 15% 10% 5%
(% of units sold)
% of collections
50% 25% 15% 10%
(from year of sale)

3. Data on co-working space in Bangalore

Monthly Upkeep costs 10%

Pricing Model Price per month per hot desk

4. Data specific for Data Centre asset in Dombivali

Size of each DC building (sqft) 25,000
No. of IT racks in each DC building 800
No. of servers in each DC building 4,000
Max design of IT load (kW) per DC building 2,500
Annual rent charged by DC operator to client for 1 server 40,000
 Annexure-2: Description of Real-Estate specific terms

Area of flat. As a result of RERA, this will increasingly be the standard unit for measuring
prices. Previously, psf was given by built-up area or super-built up area, which could
Carpet Area include area of outer and inner walls, dry balcony area, and sometimes even common
areas.
Floor Space Index is the ratio of a building's total floor area (gross floor area) to the size
of the piece of land upon which it is built. The terms can also refer to limits imposed on
FSI such a ratio. Floor area ratio = (total covered area on all floors of all buildings on a
certain plot, gross floor area) / (area of the plot)
Fungible FSI Purchasable FSI from state government

PSF Per square foot. A standard industry measure for pricing, costing, etc.
Real Estate Regulation Act, a recently enforced set of regulations that govern how
RERA developers and builders must function.