MUMBAI: What cannot be learnt in the class room or the board room, is better learnt by market dynamics, that too, against the odds. The Indian real estate sector, in search of better finance and clear policies, seems to have learnt it on the job and hence, there seems to be a strategic shift in its operating methodology. This indicates that the market is on its way to maturity in 2014. Realtors have, of late, learnt to innovate. Different business models are now being used. One of the most popular models is that of setting up joint ventures with land owners, since developers have learnt the hard way that buying too much land, can hurt.
Even the most seasoned developers in the country have sold some of their land bank on which it did not have plans to construct soon. Others, while venturing into new markets, preferred to look for a local developer or landowner, so that it only had to invest in the building of the project. There are companies, even newer ones, who have been operating successfully without any land assets.
“This model allows the realtor more flexibility as the developer is not paying interest on loans taken to buy the land,” explains Pranay Vakil, chairman, Praron Consultancy. “He can go about a project by building and selling one completely, before starting on the next. It also gives him more holding power in a bad economy.” At least half the projects under construction now, follow this model.
Developers are also exiting from non-core businesses to focus on the core expertise areas. In terms of marketing strategy also, the developers are adopting various innovations to attract buyers. For instance, while selling some of its Mumbai flats, one of the real estate companies tried a unique model. They offered them in a price band instead of at a fixed price, in much of the way an IPO does and decided the final price only after receiving the buyer responses. Much like a successful IPO, it drew twice as many applicants as the flats it had to sell.
Moreover, new ways of raising funds are being tried. Hirco Plc, for instance, is using overseas funds in Indian projects in an ingenious manner. The company is listed on the Alternative Investments Market (AIM) of the London Stock Exchange. Its projects in India, however, are built and marketed by a different company called Hirco Developments.
The equity market, on a bullish run, is also opening up for developers. In the wake of retail investors going slow with the sector, Prestige Estates, for instance, raised Rs 365 crores through an institutional share placement in January, 2013. After the SEBI making it mandatory for the listed companies to dilute at least 25 per cent of the stake, at least, the listed realty companies have raised money at a price point that cannot be termed as compromising.
Sanjay Dutt, executive managing director, Cushman & Wakefiled, South Asia, maintains that despite a slowdown in the construction market and reduced number of investible projects in India, real estate features as the fourth most invested in sector, by private equity funds. It has traditionally been one of the most preferred investment categories on account of buoyant demand for real estate. “The fund raising environment (domestic and offshore), has consistently improved with more quality capital available for the sponsors with a demonstrated track record. Investors are willing to invest in real estate. However, they are exploring the market for the right real estate projects. We anticipate that in the next few quarters, after some regulatory and politico-economic environment regularisations, the momentum in the real estate market will pick up, throwing open more investible options for the investors,” opines Dutt.
For instance, a Mumbai-based wealth management fund, committed to buy 100 flats in Thane, from a developer, on unconventional terms. While the market rate for flats in the area is around Rs 5,000 per sq ft, the fund, by buying in bulk before the flats were ready, got them at Rs 3,750 per sq ft. The fund in turn, pre-sold some of the flats to its investors at Rs 4,250 per sq ft, the profit further reduced its own cost of acquisition but the money to pay for the flats was put in an escrow account to be released only in tranches as the construction progressed. The developer is thus, assured of funds, while the PE fund too, stands to gain as it will sell the flats at market rates once they are ready.
Neeraj Bansal, partner, Real Estate and Construction, KPMG India, says it is high time that the financial modelling of the business takes shape. According to him, it would be a myopic view to just look at the balance sheets. You also have to look at how much land bank they have, whether that is bankable land parcel and licensable. Right now, that is something which is not being debated in the right context. “When you look at the real estate companies, the focus is often like in the manufacturing industry and that is how the bank is also looking at it but to procure proper financing for the sector, you have got to give it an industry status and finance it the way you finance other industries, be it from banking or ECB or whatever. The realty industry gets finance at the project level but not at the level of land purchase which is the basic raw material for construction,” states Bansal.
There are others who believe that the strategic shift is needed at all levels, including at the policy makers’ level, in the year ahead. Strongly advocating for the subvention schemes as a saviour for the funding woes of the sector, Gaurav Gupta, director of SG Estates, says “The RBI was of the opinion that because of the diversion of funds by some of the developers, the credit history of the consumer goes for a toss. So, they stopped this but this was an innovation on behalf of the developers and a convenient arrangement between the customers and the developers and since both were happy, this should have continued at least for this year.”
Navneet Bhadla, director, Brys Group, says that the best evidence of the strategic shift in the sector can be assessed with the way the industry is maturing. According to her, the problem is that new land parcels are not coming up. “When you don’t have new land parcels coming up, how will you launch new projects? Rather, what people have done is that they have sub-divided their projects into different phases. Secondly, even the buyers and investors are also making strategic shifts – from over-heated markets to the emerging locations. For example, preference of Thane over south Mumbai or Noida over Gurgaon is a case in point,” points out Bhadla.
The sector has gone through a strategic shift at every level. The developers are changing; the policy makers have indicated change in the stance and even buyers seem to be changing their preferences over the locations and expectations. It thus appears that 2014 portends well for the Indian real estate.