India’s real estate developers have been struggling to raise funds as lenders turned selective after a shock default by the IL&FS Group triggered a liquidity crisis in the economy. Non-bank lenders that lent heavily to developers have been the worst hit, which made refinancing difficult.
That, coupled with an economic slowdown, stalled a nascent recovery from the disruption caused by Prime Minister Narendra Modi’s note ban and a stricter housing law that armed homebuyers against frauds. The developers are now staring at a huge inventory pile-up.
There’s absolutely no refinancing today and lenders have become very selective, Ramesh Nair, chief executive officer and country head at JLL India, told BloombergQuint during an interaction. That’s why many developers are going through massive challenges in terms of liquidity to complete their projects, Nair said.
And with homebuyers litigating for on-time delivery of projects, some developers are forced to come up with alternative ways to complete unfinished projects.
BloombergQuint spoke with real estate stakeholders to find out the ways they have adopted to tide over their liquidity crunch.
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Barter System
Cash-starved developers pay one-third fee to vendors and service providers for their services and for the balance amount they offer apartments in the project being built.
“Whenever there is a downturn in the real estate, we have seen the trend of barter system emerging in the market. This trend is based on pure negotiations and personal rapport between vendor and developer. Barter deals come to the rescue of developers who don’t have easy access to liquidity and could use some more time to settle vendors’ fee,” said Pankaj Kapoor, managing director at Liases Foras—a real estate data analytics company. This method is used by developers to advertise their projects in newspapers, Kapoor said.
Consolidation
Small and big developers come together to complete a project. While smaller developers help to get approvals and land rights, larger peers get the brand value. Several joint ventures were signed after the implementation of Real Estate (Regulation and Development) Act and the trend continues even now. Developers such as Godrej Properties Ltd., Piramal Realty Ltd., Larsen & Toubro Ltd. are following this model.
“Across India there has been a massive developer consolidation with nearly 53 percent of total developers that existed in 2011-12 leaving the market by 2017-18,” said Samir Jasuja, chief executive officer at realty research firm PropEquity.
The number of developers in Gurugram, Noida, and Chennai reduced by around 70 percent since 2011, while in Kolkata and Bengaluru the number has come down by 65 percent in the last six years, Jasuja said.
‘Development Management’
When a project is delayed, not only homebuyers but lenders lose money, too. While several lenders turn to renowned developers to complete stressed projects, a few developers also approach financial institutions to facilitate “development management” where large developers take over projects from smaller peers for a share of revenue or profit.
Bengaluru-based developer Ozone Group, which entered the Mumbai market in 2016, follows the “development management” model.
“We have adopted an asset-light development management model for all our projects in Mumbai. Our model is simple, we approach the lenders who introduce us to the developers whose projects are in distress due to liquidity crunch. With full support from the lenders and the developers, we enter the project under development management and infuse the capital needed to complete the project,” Srinivasan Gopalan, chief executive officer of Ozone Group, told BloombergQuint. “We also re-brand the project under our brand. Once the project is ready and sales are done, we are out of it.”
The revenue-sharing model, Gopalan said, is different for each project. “As of now, we have five such ongoing projects in Mumbai, including The Gateway at Andheri and Kingsville at Wadala. A few others are in the evaluation process (studying their financial viability).”
Sale Of Commercial Properties
As the liquidity crunch deepens, commercial projects, which are operational, are being sold to private funds. Overseas private equity funds, too, are scouting for such projects to build their portfolio.
“If a developer is in commercial as well as residential real estate business, the trend was to hold on to commercial property to get the lease income. Nowadays, developers have started selling their commercial assets to get more liquidity. For example, Radius Developers sold their ‘One BKC’ building in Mumbai to Blackstone Group in June,” said Paresh Karia, CEO of Acquest Advisors LLC. “With the success of Embassy’s REIT, I feel many more such deals will follow.”
Some developers are also selling their under-construction commercial properties. Mumbai-based Omkar Realtors and Developers is in talks to sell their 2-million-square-feet commercial real estate in Andheri in suburban Mumbai.
Converting Residential Projects To Commercial
“There are some developers who started to do residential projects but after comparing the feasibility of commercial and residential, opted for former,” Vilas Nagalkar, architect and member of Practicing Engineers, Architects, and Town Planners Association, told BloombergQuint over the phone.
Also, there are additional benefits in terms of more FSI, or floor space index—ratio of saleable area to plot size—so builder can build more units in the same area, Nagalkar said. Cost of additional FSI for commercial area, he said, has come down substantially.
Besides, commercial buildings are comparatively easy to plan and can fit in odd-shaped plots, whereas residential buildings require complex planning, according to Nagakar. But this can be done only in cases where builders are working on vacant plot of land and in certain cases where housing societies sell their entire buildings to the developer because the area is no longer liveable, he said.
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