In a recent episode of Comedy Central Roasts, a series of celebrity specials aired on theComedy Central cable network in the US, maverick real estate mogul, Donald Trump joked: “What’s the difference between Donald Trump’s hair and a wet raccoon? A wet raccoon doesn’t have seven f*****g billion dollars in the bank.” For Trump, who has survived four corporate bankruptcies so far, flaunting his wealth has always been a chronic weakness. Not surprisingly he believes he is worth much more than the $2.7 billion valued by Forbes. Back in India, there’s really no one in the realty business who can match Trump in self-aggrandisement although there are some who come close in terms of wealth.
There are developers who have made their billions by going public and others, such as the 62-year-old Niranjan Hiranandani, who’ve done it by staying private. Said to be worth $1.7 billion, Niranjan along with brother Surendra co-founded the Hiranandani Group, known for its iconic townships in Powai (eastern suburb) and Thane (outskirts of Mumbai). “I don’t know how they [Forbes] calculate my net worth as I am not listed,” chuckles the bespectacled Hiranandani, sitting in his plush head office at Olympia in Powai. “If at all, I have created more wealth for the residents of my townships who’ve seen the value of their apartments spiral over the years.”
Your, mine & ours
The parent company's development potential will ensure that the brothers work jointly until 2025
The sharp rise in property prices isn’t a phenomenon restricted to Powai — land prices in all of Mumbai have hit meteoric highs since 2003. But certainly, the Hiranandani brothers pioneered the concept of townships in a land-starved city and that too, at a time when the concept of planned townships was alien to big cities. Today, the ₹2,000-crore group finds itself mired in controversies and the formidable Hiranandani group is looking increasingly vulnerable as it faces charges of misappropriation of development rights in the Powai township and allegations of green violations in a proposed gas-based power project. More than that, though, it is internal family tussles and a unique succession and growth strategy that threatens to change the contours of the Hiranandani empire.
The Hiranandanis were among several families from Sindh (now in Pakistan) who crossed over to make India their home in the build-up to Partition. Lakhumal Hiranand Hiranandani, the father of Navin, Niranjan and Surendra, went on to become one of the leading ENT surgeons of the time. While the late Navin pursued his father’s profession, a piece of business advice from Durga Prasad Mandelia, a confidante of the Birla clan and a close acquaintance of Lakhumal, saw the other two brothers jump headlong into textiles. “Mandelia suggested that we supply grey cloth to Gwalior Mills, which would be later processed and sold by the company,” recalls Niranjan, who went on to set up a powerloom unit at Charkop in Kandivli, a distant suburb of Mumbai. It was around this time that Niranjan, then 27, got an opportunity to jointly develop a piece of land in suburban Malad — formally marking the brothers’ move into the world of real estate.
And the foray came about because of the textile union’s strong-arm tactics. In January 1981, a letter from the textiles union demanding 100% increase in wages landed on Niranjan’s table. “For me, it was divine intervention as we were undecided about pursuing real estate or textiles. And we were borrowing heavily in hundis at 2.5% per month for both businesses,” says Niranjan, who shut down the textiles unit soon after.
After constructing five buildings in Malad and Hira Nagar in Mulund around 1980, the duo saw an opportunity in the western suburb of Versova. Thanks to a common solicitor, they bought a plot from Kamlakarpant Walawalkar of Samarth Developers and went on to construct 11 buildings around the same time when Siraj Lokhandwala was betting big on his Lokhandwala complex nearby. While Niranjan handled the finance and commercial aspects, younger brother Surendra oversaw the execution.
Their big break came when they got the opportunity to develop a large township at Powai, a far-flung suburb. “I always wanted to build a habitat that would be much better than Malabar Hill, where I grew up. Though we did construct buildings in Versova, the surrounding were not inspiring,” explains Niranjan.
Then, in 1985, the brothers bought around 200 acres from two major land owners, the Sharma and Varma families, in Powai. “It was quarry land with just 20 trees,” recalls Niranjan. It was here that their ingenuity came to the fore, especially that of Surendra Hiranandani. “I was not impressed by our architectural education system, which was influenced by people such as Le Corbusier,” says Surendra. “For example, Le Corbusier thought that everything should be zoned, residential development should be one part of the city and commercial the other, that there should be distance in between.” Instead, Surendra read up extensively on the prevalent trends in the international construction industry at the British Council Library, and attended training programmes to upgrade his skills.
“We made our own building codes in 1989, much before the government implemented it in 2000,” points out Surendra, who is six years younger than Niranjan. The Hiranandanis were the first to introduce sewage recycling, rain water harvesting, copper plumbing and fly ash as construction material long before anyone else did. Their green initiatives changed the topography of Powai.
“Today, there are over 400,000 trees that are over 20 ft tall spread across 200 acres,” says Surendra, who shunned the Ashoka trees usually found in government complexes, instead, chose species such as gliricidia, sesbania, mango and jamun among others to attract birds. Powai became Mumbai’s first integrated township model – it included a hospital, supermarket and entertainment centre – with elements of Greek, Italian and Indian architecture. “Though KP Singh did create Gurgaon, the Hirandandanis were the first to think of building communities and, more importantly, an all-encompassing township that even DLF cannot boast of,” says S Sriniwasan, CEO of Kotak Realty Fund, one of India’s earliest real estate private equity funds.
Down but recovering
The Hiranandani haven't been immune to the crush in the realty market though prices have bounced back from their 2009 lows
But it wasn’t easy convincing people to move to such a distant location. “In the beginning, people don’t pay you for what you offer. But when they start living and breathing the environment, they realise the value proposition. That’s how we created the brand and over the years it has more than compensated for the growing pains,” says Niranjan. That’s evident in the rates charged by the brothers now though they had to cut prices following crash in the real estate market post the 2008 crisis. (see: Down but recovering). Ironically, the very township that brought the Hiranandanis fame has now brought them infamy.
Landing in trouble
In 1986, a pact was signed between the Hiranandanis (through a power of attorney), the state government and the Mumbai Metropolitan Regional Development Authority (MMRDA) for a township in Powai. According to the agreement, the Hiranandanis had to build tenements of 430 sq ft and 830 sq ft. A public interest litigation (PIL) filed in 2008 by the National Alliance of People’s Movements, led by activist Medha Patkar, raked up several controversial issues, forcing the MMRDA to conduct an investigation. Patkar says 230 acres of land was allotted to the Hiranandanis at 40 paise per acre and they violated with impunity the very public purpose behind the development scheme.
“The agreement clearly states that 1,511 flats of 430 sq ft and 1,593 flats of 830 sq ft have to be built. Of these flats, 15% were to be handed over to the state government at ₹135 per sq ft. So, there is a clear violation of the original agreement,” says Patkar. The MMRDA inquiry showed that of the 574,000 sq mt of built-up area allowed on the land, the developer used 76,120 sq mt, or 15%, for low-income housing and the rest was amalgamated into big flats and sold to affluent clients.
That’s an allegation Niranjan refutes. “In fact, those days even Mhada [Maharashtra Housing Area Development Authority] was unable to sell small-sized tenements as people were not willing to move to Powai. They urged us to build bigger tenements, for which we got permission from the state and MMRDA in 1989. It’s disappointing that after 20 years they are now saying that the order for amalgamation is not okay.”
In 2009, the MMRDA sought ₹1,993 crore in damages from the Hiranandanis, but a state-appointed arbitrator, Arvind Sawant, former chief justice of the Kerala High Court, cleared the developer of all charges. The Bombay High Court however, barred the Hiranandanis from starting any construction on the remaining area without its permission.
“While we appreciate the elegance of the construction and the intent at creating an architecture marvel for Mumbai, we see the specific intent of wholly ignoring the most vital, and perhaps the only, condition in tripartite agreement,” the HC ruled. Attempts by the Hiranandanis to seek the Supreme Court’s intervention in the case, too proved futile, with the court observing that the HC was justified in its ruling. Importantly, the HC order also states that the total number of amalgamated flats should not have exceeded 15% of the total housing units. The Hiranandanis, though, stick to their stand that the approval was not conditional. “All I can say at this point of time is that I haven’t done anything illegal,” says Niranjan, who is, of late, spending late hours closeted with his legal team.
But it’s not just the state authorities who are turning the heat on the brothers. Within the family, too, Niranjan appears to have ruffled quite a few feathers — those of his daughter Priya and brother Surendra.
All in the family
The trouble started when Niranjan allegedly veered away from an informal agreement the brothers had that no other family member would independently enter the realty business. Under Niranjan’s “Yours, mine and ours” concept, the brothers will continue to work together, and also independently pursue other businesses, including real estate with other members of the family. “The ingenuity of the young is unstoppable. And if you have to let them grow, with no stress in the system, this is the best possible solution. This is also a way of incentivising everyone to earn their share,” Niranjan explains.
The consequence: Niranjan’s son Darshan cut his teeth in real estate by building the world’s biggest residential tower — Marina 23, in Dubai, which was completed this February, while daughter Priya went public on the London’s Alternative Investment Market (AIM) with Hirco Plc in 2006.
Niranjan claims the brothers have an “unsigned agreement” that ratifies the new family arrangement, but Surendra denies any such deal. “There is no such paper. In fact, I was not informed about the AIM listing. I sent several mails to Niranjan but there was no response. Ultimately, they started on their own and I started on my own. It was not my choice, but being the younger brother I had no other option,” explains Surendra, who along with daughter Neha is now steering “their” side of the business under the House of Hiranandani brand.
But Surendra’s unhappiness with the present state hasn’t snowballed into animosity between the brothers and their families. The brothers continue to operate of the group head office in Powai, share the same fax number and still lunch together. “I can understand it’s not easy for Surendra to come to terms with the new arrangement, but being the eldest I had to make that decision so that the second generation creates its own growth trajectory,” says Niranjan. Family loyalties aside, both Niranjan and Surendra can take comfort in the fact that the growth under the mother brand is still phenomenal. The flagship Hiranandani business owns close to 1,600 acres currently — a development potential that could last up to 2025.
But Niranjan’s grand family business plan, which was aimed at eliminating a “pressure-cooker situation”, unfortunately ended creating one in his own family especially with his daughter Priya. The 33-year-old, who is now based in London, started her career with international consultancy firm Arthur Andersen, but left the firm in 2001 to set up a business process outsourcing (BPO) firm, Zenta. In just four years, Zenta became one of the top 10 independent BPOs in India and was sold to Chicago-based private equity firm, GTCR, in 2005 for $80 million.
Incidentally, in the same year the Indian government allowed 100% foreign direct investment in the housing, real estate and townships sector. Sensing an opportunity, Priya, who is married to Cyrus Vandrevala, nephew of former Tata heavyweight Firdose Vandrevala, entered into an agreement in 2006 with her father and brother Darshan, which also paved the way for listing of Hirco on AIM in 2006. Hirco raised $591 million to invest in two large townships back home, in Panvel and Chennai. According to the plan, Niranjan and Darshan were to develop the projects and profits split equally between all three.
But a series of subsequent events saw all three, Niranjan, Darshan and Priya, step down from Hirco’s board. In September 2010, Priya resigned as the chief executive following a strategic review by the company; Niranjan, too, quit later that year following a probe by the Central Bureau of Investigation against him for breach of the Employees’ Provident Fund Act. In October 2010, the Vandrevalas filed for arbitration over claims that the business association agreement (BAA) had been violated jointly by Priya’s father and brother, resulting in losses for her: the May 2006 BAA required that all business transactions (including acquiring and developing property) are to be undertaken by the three of them. According to media reports, the daughter has sought ₹1,400 crore from the family.
Not surprisingly, Niranjan is not too keen to discuss the case, since it is under arbitration. “There is a dispute over how we should be doing business in future and she is claiming some rights that are monetary in nature. Her contention is that she is entitled to many more projects,” he says.
Following the arbitration, Firdose Vandrevala, chairman and managing director of Hirco Developments, its construction and project management arm, is overseeing the operations of the AIM-listed entity in India. “I am no longer involved in the operations of Hirco,” points out Niranjan. Though Priya was unavailable for comments, the annual report of Hirco states, “Because the arbitration by its nature is private, we have limited visibility into either its substance or current procedural posture — though we have been informed that it may be resolved this year.”
Emails sent to Hirco Plc went unanswered. For the year ended September 2011, the company reported an after-tax loss of £273.3 million after the directors wrote down the group’s asset values following a previously-announced revaluation of their developments in Chennai and Panvel. In September 2010, the projects were estimated to be worth £824 millon but, following an assessment by commercial property adviser CBRE in September 2011, the assets were valued at just £342 million. Hirco Plc chairman David Burton states in the 2011 annual report, “Given that less than 10% of the total planned development is currently under construction, it is clear that Panvel and Chennai will not be completed for at least another decade.”
Meanwhile, Niranjan’s son Darshan has taken his father’s family strategy to heart and charted his own independent growth trajectory. After moving back to India from the US in 2003, Darshan found himself in a well-entrenched business with his father and uncle very much in control. “There was nothing challenging for me to do,” says Darshan, who nonetheless got a chance to prove his mettle in the real estate business.
In 2004, Darshan took a land deal offered to Niranjan and headed out to Dubai on his own with borrowings of ₹2 crore from his father. When Niranjan learned what his son was planning, he asked: “Build the world’s tallest residential tower? Are you out of your mind?” But Darshan stood his ground — “Which is why I want to do it.”
He did, but Darshan candidly admits that he was lucky his project, 23 Marina, didn’t get caught in the downturn that gripped Dubai post the global crisis. “If I had started the project two years later, I would have been finished. It was sheer luck — there was no great foresight,” remarks 30-year-old Darshan, who has since repaid the loan and returned to India.
That’s because the Hiranandani scion’s attention was caught by the infrastructure business. Initially, he toyed with the idea of building roads. “The nature of the [roads] business in India is to underbid and then make profits through variations, which is a business model we don’t like,” says Darshan, who shortlisted some contracting companies for acquisition but dropped the idea after initial research. “The few contracting companies that were affordable had so many holes in them that they were not worth it and those that were worthwhile were over-priced. So it didn’t really add up.”
Somewhere around July 2009, interaction with friends and business acquaintances drew Darshan’s interest to the power business. “I was clear that we wouldn’t be part of any subsidy-related business. So, the middle ground was natural gas-based power,” he explains.
The advantage with a gas-based plant is that, although it is more expensive than a coal-based plant, a gas plant can be shut down and restarted several times a day, depending on the requirement. “This will lead to savings on the cost of transmitting power and nearly eliminate transmission and distribution losses,” adds Darshan. Rather than other merchant power plants, which cater to the market for base power deficit, Darshan began looking at addressing the market for peak power deficit. On the cards is a 2,500 MW plant to be set up at a cost of ₹10,000 crore in Pune, Maharashtra, the biggest consumer of electricity and a state with the highest peak power shortage (around 5,000 MW).
To start with, though, Darshan’s Hindustan Electricity Generation Company will set up a 350 MW unit; the balance units will be of 700 MW each. Besides tying up gas from Gas Authority of India, as the plant is closer to its Dahej-Dabhol pipeline, the company is also looking to import LNG, for which it is setting up an 8 million tonne LNG terminal at Dighi port in Maharashtra. Hyundai Engineering & Construction has been shortlisted to the build the terminal. “Of the 8 million tonne, we will keep 40% for our captive use and for the rest we are in talks with potential customers in petroleum marketing companies, power and the fertiliser industry,” says Darshan.
Though the government has currently fixed the price of gas from Reliance’s KG D6 field at $4.2 mmbtu for five years from April 2009, Darshan is betting on higher prices once the stipulated period ends in April 2014. “You can never buy the cheapest gas and hope to never buy the most expensive one. So, we will go in for a blend of short, medium and long-term contracts depending on the situation,” says Darshan.
But rollout of Darshan’s power plans is proving to be a challenge. Farmers in Navlakh Umbre and Maval Taluka (villages near Pune), where the company has bought 200 acres, are objecting to the power project. They have moved the Supreme Court challenging the environment clearance granted by the state. Their issues: why did the company opt to locate its power plant on agricultural land instead of the adjacent MIDC land; and why is only five acres being reserved for a green belt, even though the environment ministry prescribes that a third of the land has to be earmarked for this purpose. Darshan’s response: “There is no land available in the MIDC plot. Besides, given that the first phase the power project is just 350 MW, we earmarked five acres. So where is the violation?” He is equally quick to dismiss rumours of the protest being orchestrated by elder sister Priya. “There are 50 companies vying for domestic gas in India and whoever bids first will get it. There is a lot more to the issue and my sister has nothing to do with it.”
The other half
If Niranjan’s plans for his family’s growth is facing headwinds, Surendra’s independent ventures seem to be firmly on track. Led by his 27-year-old daughter Neha, the House of Hiranandani is working on two major townships in Chennai and Bengaluru. “We want to create a giant slowly,” says Neha, who joined her father in 2008 after completing her degree in law. Between 2006 and 2009, the company had raised around ₹500 crore from three private equity funds as project-level equity.
“As and when the projects are completed, the PE investors will make their exits,” says Neha. Hiranandani Realtors, which is developing the Chennai project comprising high rises of 28 floors with over 2,000 apartments, is already generating cash. “We are developing 6 million sq ft and have already completed 70% of the project,” adds Neha. For now, the company is looking at improving its cash flows to fund future expansion and is not looking at aggressively acquiring land parcels.
More importantly, Anuj Puri, chairman and country head, Jones Lang LaSalle, believes House of Hiranandani and the parent company are creating a positioning for themselves that is distinctly different. For example, HoH is creating three different sub-categories of residential products — the ultra-premium Signature range, the premium Upscale range, and the mid-market Urbania range.
Sriniwasan of Kotak Realty, however, believes that the Hiranandanis have their task cut out in terms of breaking into new markets. “I am not sure whether the strategy of building a community township out of Chennai like they did in Mumbai will really work. For one, it’s a conservative market, sales velocity is low and the investor base is relatively non-existent, unlike Mumbai.” (See: Local lords). There’s also the risk of the brothers cannibalising each other’s market share since Hirco too is setting up a township, comprising 10,000 apartment units, in Chennai. But Niranjan rubbishes the argument. “There are several developers in the Chennai market and we are one of them. Besides, the distance between Hirco’s project in Oragadam and HoH’s township in OMR is more than 30 km, so where is the question of cannabilising? In fact, the projects will only ensure more brand visibility for the group.”
The Hiranandanis have yet to recreate their brand pull in markets outside of Mumbai
Interestingly, though the brothers are focusing on building their independent businesses, they continue to rely on common resources, barring finance and marketing. Both Niranjan and Surendra use the services of the architects and engineers of the parent company for their individual projects but, to avoid conflict, they’ve decided to not work on projects adjacent to those run by the main company. “We discuss everything over the table. The world is too big to bother about projects,” says Niranjan, who takes the decision on allocating capital jointly with Surendra. “The idea is to be wealthier.”
One reason the Hiranandanis have managed to grow their wealth and succeed in the realty business is that, unlike many of their peers, they didn’t buy land tracts in prime locations. “Our strategy has been pretty simple: avoid places where value has already been created instead, go to places and create value,” says Niranjan. That thinking continues in the brothers’ independent ventures as well. While Niranjan has bought tracts of land in Pune, Nasik Jaipur, Chennai and Panvel, Surendra has picked up land on OMR Road on the outskirts of Chennai, and Devanahalli outside Bengaluru. “We are not obsessed about return on investment or return on equity from day one. If we see there is an opportunity in the next 10 years we will jump into it. Profit may flow in late but it will follow for sure,” says Niranjan.
But when it comes to revealing numbers, mum’s the word. “We have over 150 companies and have never really compiled an annual report till date because we are not listed,” says Niranjan. However, when pressed, he reveals the parent company currently is growing at compound annual growth rate of 25% and clocked a turnover of ₹2,000 crore in FY11. Besides residential sales, the company has an assured cash flow of ₹360 crore coming from its large lease portfolio of 5 million sq ft. Niranjan’s plan is to double the leased area to 10 million sq ft over the next five years.
Some of the prominent leases, which range between three and 15 years, involve Tata Consultancy Services and Crisil. “We began with the lease model 15 years ago but it would make sense to make it a much stronger model. But that does not mean we are fixated with the 10 million sq ft number; it will be a subjective call and will depend on the kind of lease rates we get,” Niranjan points out.
On the bottomline front, Surendra points out that the average profit for the past three years has been around ₹300 crore. Importantly, the company claims to be debt free except for short-term working capital loans. “We are averse to leverage, especially when it comes to buying land and we only have bank loans. We keep replenishing our land bank with our profits and don’t rely on debt to buy land banks,” says Niranjan. A strategy that Sriniwasan believes stands the group in good stead. “The good part is that they have managed to stay conservative and yet grow,” he points out.
As part of its growth strategy, the group is now looking at a new focus area: slum rehab and redevelopment projects. Niranjan says, “Today, every other developer is looking to cater to the segment that we have addressed in the past, so where do you go from here?” The bullishness largely stems from the fact that roughly half of Mumbai is covered with slums, making land availability a critical issue.
“Slum rehab needs a separate skill set and I may not be as successful as I am in my core business, but that does not preclude me from entering that segment,” says Niranjan buttressing his point with examples of Tata Motors rolling out the Nano and Jet Airways too opting for the low-cost airline model. The company, which has an one-off slum rehab project in Parel for 300 tenements to its credit, is now looking at a rehab project in Vikhroli. The model the Hiranandani group is looking at is one of joint development where one partner will focus on the rehab and the other will develop the free sale area.
Anita Arjundas, MD and CEO of Mahindra Lifespace, feels slum rehab projects are a risky proposition. “We won’t enter the business because we don’t have the skill sets and also in a partnership model there is risk because a lot of the development hinges on the partner’s ability to resettle the slumdwellers… we are also not sure of how the partner will achieve it. The last thing that we want is something that tarnishes our reputation,” she says. However, the fear of losing their reputation is the least of their worries. Says Niranjan, “The idea is do things differently and to do it on a large scale. Having said that, we may possibly not enter the slum rehab business with the mother brand… we are still exploring options.”
Rehab aside, the company will perforce be entering the small tenement construction business. In its hearing on April 19, the High Court directed the developer to construct 3,100 flats in Powai, comprising tenements of 430 sq ft and 830 sq ft. On the face of it, the interim order appears to be an adverse ruling, but Niranajan views it differently. “The order refers to the size of the tenement and not the rate at which it can be sold,” he points out. In other words, the Hiranandanis believe they can sell the flats at current market rates and that could mean minimal damages for the group. According to Niranjan, the construction of the flats will cost around ₹1,000 crore and would be spread over 187,000 sq mt.
Going forward, another potential area for growth will be redevelopment — and this is one area where the brothers may end up in direct competition. Currently, the parent company is redeveloping a 11-acre property in the eastern suburb of Chembur. But Surendra’s HoH is also looking at “aggressive redevelopment” in Mumbai, according to Neha. “Though we haven’t competed against each other yet, I am sure it will happen, either today or tomorrow. Ultimately, it’s for the [housing] society concerned to decide whether they like my offer or his [Niranjan’s].”
For now, Niranjan’s ingenuity in accommodating family aspirations through the “Yours, mine and ours” concept looks like a masterstroke, but not having the same as a formal consensual agreement could be the grand strategy’s undoing. Kavil Ramachandran, professor of family business and wealth management at the Indian School of Business, says, “First and foremost, there has to be a buy-in from all factions of the family. More importantly, the roadmap has to be clear on how the future will pan out — there has to be both goal and process clarity.”
That’s lacking currently, but Niranjan isn’t worried. He believes that once the individual ventures of each family member gain critical mass, the allure of the parent company will steadily wane. “If you keep growing the other businesses, then the mother business will itself look so small that nobody will bother about it.” Adding a dash of pragmatism, the elder brother says, he will split the company if it serves the company’s interest. “My belief, however, is that if you prepare for a separation it will never happen; it’s only when you don’t envisage such a situation that splits occur,” he says. If that indeed turns out to be the case, it will be no mean feat for the brothers who created history by carving out geographies.