Big realty companies picking up stakes in distressed developers

There are several such opportunities in a market where there is still a credit crunch and smaller developers are looking for a rescue

Madhurima Nandy

Bangalore: The partial revival of the residential property market following last year’s crash and money raised from qualified institutional placements (QIPs) is allowing bigger real estate companies to buy out builders who haven’t recovered from the slump.

Real estate companies such as Ackruti City Ltd, Sunteck Realty Ltd, Orbit Corp. Ltd, Oberoi Constructions Pvt. Ltd and Sunil Mantri Realty Ltd are picking up stakes in distressed assets or taking over completely from smaller developers stuck with land parcels without the money to build on them. Such assets carry the added advantage of having approvals in place and therefore being quicker to complete.

Graphics: Sandeep Bhatnagar / Mint

“These are good associations for both the smaller and bigger builders because while the latter would not have money to buy new land, it’s a good construction and sales strategy for the former,” said Ramnath S., director (research), IDFC-SSKI Securities Ltd, a brokerage firm. “Also, many small players, (who) would have concluded land payments and now don’t have money to build, can depend on a big brand name to sell the product.”

“For us, any land which we buy has to be available at a reasonable price,” said Vimal Shah, managing director of Mumbai-based Ackruti City. The company, which has a debt overhang of Rs900 crore, plans to build residential projects with land it has acquired from distressed sellers. “These properties came to us at good rates.” The projects will be renamed and sold under the Ackruti banner, he said.

There are several such opportunities in a market where there is still a credit crunch and smaller developers are looking for a rescue.

Over the past few months, Ackruti has concluded three deals, picking up stakes in projects in Mumbai from small firms that have been stuck after buying land during the boom. The deals cover a total 2 million sq. ft, according to Shah.

DLF Ltd, India’s biggest developer, has gone the other way however, exiting land deals that were signed in 2007-09 during the property boom.

Ackruti is co-developing the Hindoostan Spinning and Weaving Mills Ltd property at Prabhadevi in south Mumbai with Chennai-based entrepreneur C. Sivasankaran after DLF exited the special purpose vehicle earlier this year, selling its 66% stake to the latter.

A DLF spokesperson said the aim of the company was to reduce debt through the sale of non-core assets.

“This property Hindoostan Spinning Mill was best suited for a hotel and since we are not too keen on hotels, we decided to exit from this,” said the spokesperson, who can’t be named. “Also, it was a readily cashable deal which worked for us.”

Shah said premium serviced apartments and a hotel are planned on the sea-front plot.

Orbit Corp. has set aside Rs150 crore, part of which was raised from its QIP in August, to buy distressed assets, which was one of the state aims of the fund-raising programme.

“We are negotiating with three developers who are also landowners for properties in south and north Mumbai,” said Pujit Aggarwal, managing director, Orbit Corp. “These are good opportunities for us because it reduces at least two years of work for us and makes it easier to start the project.”

The developers declined to disclose the names of their partners, citing confidentiality terms in their agreements.

Developers said that the pile-up of assets is the consequence of a three-year boom, during which landowners without any track record or expertise in property development, turned overnight into builders to cash in on the bubble.

“In the current situation, these firms, which are sitting on big land parcels, are scared to execute the projects and don’t have the money,” said Sunil Mantri, founder of Sunil Mantri Realty. The opportunities aren’t limited to the bigger markets such as Mumbai, he said. Mantri has completed deals for distressed assets in Hyderabad and Pune.

Large firms believe that it is a better business model to form joint development agreements with smaller, local partners rather than buying out the land or forming a joint venture, analysts said. While buying out usually proves to be more expensive, joint ventures result in an equal sharing of cost and value, which is not suitable for such partnerships.

“Joint development agreements, in such cases, are suitable because we acquire the property and then give back a percentage of the built-up land to the partner,” said Kamal Khetan, managing director, Sunteck Realty. “In such cases, the larger developer, of course, provides and looks after aspects like construction finance, marketing and sales of the project.”

Sunteck has entered into a joint development deal for a large, 2.6 million sq. ft slum redevelopment project along the Eastern Express Highway in Mumbai and is also negotiating for four such projects across the city, he said.

“It’s a win-win situation for both and small developers are smart in tying up with a bigger developer, which has a good track record and brand value, to joint develop a project,” said Vikas Oberoi, managing director, Oberoi Constructions.

Source: http://www.livemint.com/2009/11/22224920/Big-realty-companies-picking-u.html

Realty is a fragmented market. Local factors are the biggest influence

Real estate price corrections in Hyderabad being prevented by extensive market inefficiencies, cartels and unscrupulous business practices.

In a free market economy, demand and supply create a check on unrealistic prices – at least that is what theory says. So when demand is less, then prices should fall. This is not happening in Hyderabad, though the real estate market has been down for over a year. The correction in pricing has been minimal compared to the unrealistic growth in prices earlier (for several years). Plus, it has not factored in and reduced prices because of the new reality – the reduced number of buyers today and the buying power of the current buyers.

If we look at the US real estate market nationwide statistics, the prices are already down 24% from peak prices. Economists are expecting another 10% downward price revision from peak price in 2009. The peak was reached in 2005. During peak, the price in Hitech city was 4000/- This means, by US standards it should have been around 3000/- now and go down to 2600/- next year. I don’t think apartments in My Home Navadeepa (Next to Cyber Towers, Madhapur) are being sold for 3,000/sft.

I am not saying that because US had a correction of 34%, the same price percentage should come off from price of apartments in Madhapur. My point rather is that I have not seen any meaningful correction in real estate pricing in Hyderabad.

Even after the global recession, there is no lay-off in Hyderabad and there is no correction in the sticker price (the sarcasm intentional!). However, I have seen ICICI close down the entire Home Loan origination office in Begumpet and made everyone pay including those of branch managers into commission basis. A good friend of mine who is head of Sales in another mid-size real estate firm has also converted been into commission pay. However, there is no change in sticker price of real estate.

The reason for this honestly is that – cartels and unscrupulous business practices prevent realistic price correction. Greed and fear also are preventing businesses from adjusting prices downwards. Real Estate Business people are unwilling to accept anything less than exorbitant profits from their business.

The best explanation of market inefficiency can be drawn from my personal experience with the stock market. The day there are good prices in stock market my online stock trading system does not work as well. The prices are not refreshed as quickly, I place orders with older data and obviously I don’t get to fully grab the opportunities. Frustrating but true. When systems don’t work during the times that favor price corrections – it reduces price correction.

However, when prices have been increasing, media acts as a force multiplier (for the small price of a Journalist colony in that area). Every new area – Madhapur, Gachibowli etc has a Journalist colony. I wish there was a footnote after a very glowing article in the newspapers about an area saying, this journalist is being considered for a plot in the Journalist colony coming up in the same area.

Cartels work in a different way, I was in a Gold shop the day prices fell. Another shopper said Gold prices are lower the last few days, to which the shop owner said – “Yes, papers are quoting lower prices but there is no supply. If you find anyone who has supply tell me, I want to buy a few kgs of gold too!’ Cutting off supply ensures the transaction cannot be made. So price benefit does not reach the customer.

I recently spoke to someone in Bangalore and they said the price of a apartment in Bangalore is around Rs.2,800/- with decent local builders in Whitefield.

I know for a fact the apartment prices in Madhapur or Gachibowli, which are equivalent locations in Hyderabad, are definitely higher. Is there anything that makes the market value of Hyderabad better that Bangalore. I don’t believe so. The fact remains that Bangalore is still the IT capital of India. The only top5 IT firm headquartered in Hyderabad is today in doldrums.

The only reason that the prices are higher are probably because of the greed of builders, the absence of smaller builders and the immaturity of the buyers.

As we all know, there are two sets of people who get jobs in Hyderabad. People from outside AP – mostly Madhya Pradesh, Chatisgarh, Orissa, West Bengal, UP etc. Or non-hyderabadis from rural and small towns. A vast majority of both these segments are new to Hyderabad and have no idea of the real estate price history in Hyderabad. They are isolated and easily fooled by the realtors. Non-Andhra people compare prices with Mumbai and Delhi and get fooled.

While, the problem with Andhra people are that they have a long and very established history of being extremely speculative plus having a little bit ‘unrealistic and exaggerated sense of their own’ capability – mostly derived from seeing too many movies of their favorite Tollywood hero. Well, I may be exaggerating a bit. But there is nothing wrong at taking a good hard look at our attitudes and expectations. Wisemen, say when you ‘Know Yourselves’ you have less chance of making mistakes!

Hyderabad-india-online.com a Hyderabad India blog that publishes opinions and content on Real estate in Hyderabad and other developments in Hyderabad.

Source: http://www.farticle.net/26393/realty-is-a-fragmented-market-local-factors-are-the-biggest-influence/