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