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LIC weighs plan for revaluation of realty portfolio

Freny Patel

Life Insurance Corporation of India is closely looking at a revaluation of its huge real estate portfolio. It may also go in for asset revaluation. An internal report of the organisation improvement cell of LIC says: "Real estate revaluation will be a critical lever to meet future capital norms". It also points out that improving returns on real estate could significantly help increase investment returns and provide cash flows to meet competitive challenges.

Booz, Allen & Hamilton in its report on LIC had pointed out the failure of the corporation to generate adequate returns from its real estate. The management is drafting a state policy to boost returns from its real estate portfolio.

LIC owns over 1,400 buildings across the country as part of its inheritance from the erstwhile insurance companies. Against the book value of Rs 7-8 billion, the market value of these properties is around Rs 300-400 billion, LIC managing director N C Sharma said.

"The net return on our real estate is low, and we are looking at ways to improve the yield," said chairman G N Bajpai. The gross revenue from the estate portfolio registered a growth of 18.13 per cent in 1999-2000 over the previous year and stood at Rs 1 billion. LIC has in the past considered real estate as a provider of facility rather than as a resource related to profitability.

Former LIC chairman M G Diwan had earlier said: "The valuation of LIC's assets are done on their book value or market value, whichever is lower. This ensures that there is sufficient implicit reserve." Since insurance companies have future liabilities to meet, they have to underplay the real value of their assets to have a hidden reserve to meet any unforeseen liabilities. Sharma, however, stated that there is no plan to sell any of the property.

The draft state policy, which will be brought to the board for approval shortly, highlights the need for increasing rentals as present returns from LIC's commercial and residential space is sub-par. However, increasing rents will be possible only if better laws are in place. "We may need to approach the government to amend the Rent Control Act in some states, which have not introduced the same," said Bajpai.

"Many of our tenants are paying pittance in terms of rent. We intend to reactivate and resort more strongly to the Public Premises Act," said Sharma. Tenants residing at Oval View, Queen's Court, Belvedar Court among others can expect a substantial hike in the rents.

Most of the real estate was rented out to public sector undertakings and other government organisations at lower than market rates.

LIC also intends to exercise its recourse to evict tenants who have wrongfully occupied property. The LIC estate officer acts as a magistrate and has the right to evict such tenants, added Sharma.

The draft policy further recognises the need for the corporation to occupy the least required space and let out the maximum possible. "This will require a major re-orientation of our real estate usage by redefining our own needs and relationship with our tenants," said Bajpai.

"We have to see that the space is used optimally, else we should let it out," said Sharma. In an internal report, it has been identified that the cost of space under LIC's own usage has been 3.5 per cent on a net return basis of the book value since the 1960s. An internal study highlighted that 55 per cent of the total commercial space owned by the corporation is used by LIC, and the balance is rented out.

Of LIC's over 2,000 branch offices, approximately 700 are housed in its own premises, while 200-odd offices are under construction. The report further added that another 1,100 offices have yet to be constructed.

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