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Realty market fall: Developers find JVs attractive

May 19, 2009 09:54 IST

Cash-strapped property developers, who had leveraged aggressively between the boom years of 2005-2008 to fund land buying, are now increasingly opting for joint ventures with owners to save cash while developing land, developers and consultants said.

Developers who are launching new projects are opting for this route, as they need not pay the entire amount in one lot and owners need not forego the potential rise in value.

As much as 70 per cent of land deals in the country take place through this model now, against 40-45 per cent a couple of years earlier, say property consultants.

If some developers return built-up space to land owners for their contribution, others share a percentage of revenues with owners. The model changes depending on location, price and potential.

Unitech, the country's second largest developer, has developed 1.5 million sq ft of space in JVs with local companies in Chennai and has launched an office property project in Mumbai in a JV with the local Omkar group.

Delhi-based Raheja Developers, which has 100 acres of land under joint development, is planning to launch an 18-acre luxury residential project in Gurgaon in the next six months under the JV route, wherein they are giving 30 per cent of the apartments to land owners.

Mumbai-based Sunil Mantri Realty, which entered into eight JVs in the past year, gives 10-50 per cent of built up area to the land-owners depending on the project.

Tata Housing, a unit of Tata Sons, recently launched a Rs 100 crore low-cost housing project in Bhoisar, in the Mumbai outskirts, in a JV with a local company, wherein Tatas share a certain percentage of revenues with the latter. Tata Housing plans to follow a similar model in other cities and is talking with state governments for public-private partnership agreements, said Brotin Banerjee, managing director.

"The downturn and drying up of bank funds has forced developers to work out this option. A plenty of such options are available today, where developers need to take care of only development and construction cost," said Sunil Mantri, promoter of Sunil Mantri Realty.

Analysts say developers are in a difficult situation today due to leveraged balance sheets and fall in cash flows, which is forcing them to look at new options.

"Aggressive land acquisition through leveraging the balance sheet was the mantra during FY 2005-08. Real estate companies hit the equity markets and raised funds to build up a land bank, with the additional intention of reducing debt from operations. However, the with economic slowdown from January 2008, cash flows dried up significantly,'' said stock brokerage Emkay Securities in a recent report.

Developers say the fall in stock and property markets, coupled with slowdown in the economy, is also forcing land owners in places such as Mumbai to opt for JVs with realtors. "Earlier, this concept was popular in the north and south. Now we are getting proposals from cities such as Mumbai too, as land owners are exploring different options to raise money," Mantri said.

Adds Anshuman Magazine, chairman and managing director of property consultant C B Richard Ellis: "Terms are in favour of developers when markets are down. It depends on the profile of a developer in such agreements.''

Though the concept is getting popular, some developers and consultants have apprehensions about the model. "Though we are not averse to joint development, we prefer outright purchase, as one gets full control of the land and avoids dealing with land owners later," said Rajeev Piramal, executive vice-chairman, Peninsula Land.

Says Mantri: "It is fine as long as the deal is structured properly. If the sharing is unreasonable, then it will put both developers and land-owners in trouble."

Raghavendra Kamath & Neeraj Thakur in Mumbai/New Delhi
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