Liquidity crunch: Small realtors being forced to bank on bigger cousins

Mounting liquidity constraints and tough rules under the Real Estate (Regulation and Development) Act or RERA have pushed smaller developers to change tack. They are relying more and more on much larger developers to complete projects.

While it is not always a value proposition for smaller players, such tie-ups help them get the requisite financial backing for completing projects. 

The move, observers, say, has helped the sector regain some confidence. What has also happened is a consolidation of sorts, as the cost of regulation was steep for the non-serious entities, leaving a larger portion of the realty pie for the serious ones. 

“In the last 12 months, the market has witnessed multiple collaborations between developers itself.  In fact, many of our ongoing joint developments are with fellow reputed developers, especially in markets outside of Bengaluru, and this number is larger than deals with traditional landlords,” said Ashish R Puravankara, managing director of Bengaluru-based realty entity Puravankara. The company has seven residential joint development projects under construction in Kochi, Chennai, and Pune, apart from Bengaluru.

Industry experts believe more consolidation in the real estate space is on the cards and this will continue in 2020. According to Anarock Property Consultants, more than 90 per cent of the current consolidation is at project level, with more of cash-starved developers reaching out to organised and financially sound ones to take over their stuck projects. 

The prevalent routes are joint ventures (JVs), land monetisation or development management contracts. Consolidation has been on for years, but the recent mergers, acquisitions, and joint developments are underscoring this trend like never before. 

“Also, with the liquidity squeeze, it becomes imperative that affected builders collaborate with financially sound players to overcome obstacles and, thus, leverage mutual strengths. More than anything, such collaborations will help lakhs get completed homes. From our data, nearly 560,000 units worth Rs 4.5 trillion are stuck or delayed across the top seven cities,” said Anuj Puri, chairman of Anarock. 

He gives examples. “Debt-stressed Nirmal Group forged alliances with other developers. Shapoorji Pallonji and Nirmal will jointly develop two projects — Olympia and City of Joy — in Mulund (Mumbai). Both these projects will be branded jointly. Similarly, Nirmal had a partnership deal with Godrej Properties to build a residential project in Thane. This has helped the Nirmal Group to raise money and thus reduce debt,” he said.  

Industry experts speculate that this will become a regular occurrence. “Implementation of RERA has increased the scope for JVs in the sector and the trend will surge in the near future, as regional players can monetise their land and take additional projects with collaborations,” said Kishore Jain, president of the Bengaluru arm of the property developers association, CREDAI.

Small builders say it will take a while for them to get accustomed to the change in laws. In 2017, before RERA came in, a builder says he built an apartment wherein he constructed 23 units in a 7,500-sq. ft lot in Bengaluru. Now, on a 20,000 sq. ft lot, he can build only 30 units. There is a sense of loss among them. 

“The minute the cost of a flat crosses Rs 80 lakh, a buyer would not like to come to a small builder like me but would want brands. So, to do business, we are collaborating with the bigger players to get a portion of the profit for the investment we are making,” says Avinash Reddy, co-founder and managing partner, Vyapt. The profit-sharing proportion is 30-40 per cent for JV projects, with the bigger ones taking the larger chunk.

  Banking on a bigger player

• Omkar Realtors and Developers signed an MoU with Godrej Properties
• Piramal Realty signed a development agreement with Omkar to develop a 12-acre project in Mahalaxmi.
• Bengaluru-based Ozone Group signed several development management deals to develop land under its own name
• Rustomjee Crown project in Mumbai’s Prabhadevi is also being jointly developed by DB Realty and Rustomjee Group
• Sunteck Realty acquired beleaguered developer Orbit Corp’s project Baug-e-Sara in Mumbai’s Malabar Hills