Large firms step in as development managers for smaller developers in return for a share of revenue and profits.
Aproposed, luxury residential project on south Mumbai’s Hughes Road is finally ready to take off after eight years of waiting for approvals, but developer Rohan Lifescapes is not in a position to execute it.
The 150,000 sq. ft project of Rohan Lifescapes, which at one point had tied up with Trump Organization USA Llc to build a Trump Tower, has now been taken up by Radius Developers. Radius and Rohan Lifescapes have entered into a revenue-sharing partnership, where the former will develop the project.
This is the second project on Hughes Road, where the average property price is Rs.50,000 per sq. ft, which Radius has taken over. The first was another stalled venture by Hubtown Ltd.
Over the past year or so, Rohan Lifescapes, which has 10 ongoing projects spread across south and central Mumbai, has also sold a two-acre land parcel in Worli that it was to develop, and has formed an equal partnership with another firm for a property on Hughes Road.
“The real estate industry is going through a change, and going forward, there will only be a few developers with roles divided amongst them. There will be the ones who can clear the land, get the permissions and then there will be those who have the financial strength and development expertise to execute those,” said Rohan Lifescapes’ chairman Harresh Mehta.
The real estate sector in India, which has witnessed its longest, harshest slowdown that has lasted for more than two years now, is undergoing fundamental changes, property analysts say.
There are around 11,500 real estate firms registered with industry body Confederation of Real Estate Developers Association of India (Credai-National) and there would easily be a few thousand local developers across property markets who aren’t registered.
The sluggish market has led to a goldmine of opportunities for larger developers who are bailing out developers stuck with projects.
“There are way too many developers in the country and that will change,” said Anuj Puri, chairman and country head at property advisory JLL. “There are clear signs of consolidation in the sector where weaker developers, who can’t sell their own projects any more or don’t have the financial strength, are selling their projects or tying up with better, larger developers.”
As sales remained tepid and cash flows uncertain, a number of real estate firms have fallen into a potential debt trap and are borrowing heavily. Developers who banked heavily on valuable land parcels in Mumbai and the National Capital Region (NCR) suddenly found themselves stuck with expensive assets that they didn’t have the ability to develop.
Orbit Corp. Ltd, which at one point of time owned some of the best-located projects in south Mumbai, is now arranging capital to relaunch at least five of them, and looking to strike a partnership with other developers for its large proposed project in Alibaug and another one in Mumbai.
“There is not one project that has been delivered on time in Mumbai, leaving buyers sceptical on making a decision to buy a home,” said Orbit Corp. managing director Pujit Aggarwal.
With the Real Estate (Regulation and Development) Bill, 2013, approved by the Rajya Sabha last week and then by the Lok Sabha on Tuesday, the stage is set for some big reforms in the sector. The real estate bill takes a hard look at the developer community, particularly the ‘fly-by-night’ operators, and demands unprecedented regulation in the sector in the form of financial discipline, transparency and credibility. “The real estate bill asks for financial closures on projects and other reforms that will eventually make it tough for all kinds of developers to survive,” Puri said.
What earlier seemed to be ‘distressed sales’ by specific developers who wanted to monetize their assets, is now becoming a business strategy for many, who know that they can’t survive on their own in the current challenging market conditions.
This has paved the way for new forms of partnership models: development management, joint development and joint ventures to name a few.
Developers such as Godrej Properties Ltd and Tata Housing Development Co. Ltd have tied up with multiple developers in different markets, allowing them to enter into new property markets without buying any land.
In January, Godrej Properties signed a development management agreement with Lotus Greens to build a housing project in Sector 150 of Noida, marking the former’s entry into the Noida market. It has also entered into a joint development agreement with Vihang Group to develop 15 acres of land off Ghodbunder Road in Thane.
Pirojsha Godrej, managing director and chief executive of Godrej Properties, in an interview on 8 February said that it’s not necessarily distressed developers that approach the company. Companies that want help in monetizing their projects faster, with greater value than they can do independently, are also seeking partnerships.
“We are pursuing dozens of such opportunities and at any given point in time, we are discussing with a number of developers,” Godrej said.
Large real estate firms have stepped in as development managers for smaller developers and landowners, in return for a share of the revenue, share in profits or a management fee.
Radius Developers, headed by Sanjay Chhabria, has made multiple acquisitions and struck joint ventures in the past year and a half, partnering with firms such as DB Realty Ltd and Sumer Group in Mumbai.
