New Delhi: Real estate developers led by DLF Ltd, India’s largest, say they plan to go slow on buying land as they sense a slowing of sharply rising prices that have marked land deals in the last five years.
The change in tack may signal an end to runaway land values—at least for now.
Developers including DLF, Unitech Ltd and Omaxe Ltd have decided to follow a conservative land bank model, after having burned vast sums of money in the last two years and bidding for parcels of land that fetched record prices in land auctions.
Unitech, which paid Rs1,583 crore to acquire land for a planned golf township development in the Delhi suburb of Noida, says it will continue to acquire land, but only to replenish land being turned into finished projects or to acquire it in new areas, but not to pad its existing land bank.
Cautious approach: A file photo of a DLF construction site in Gurgaon. Developers such as DLF Ltd, Unitech Ltd and Omaxe Ltd have all decided to follow a conservative land banking model. (Photo: Harikrishna Katragadda/ Mint)
“Land prices have been stable. The appreciation in land prices may not be the same as what we saw a few years back,” says R. Nagaraju, general manager, corporate planning and strategy. “We don’t want to lock up capital by buying land.” There is a holding cost involved in building land banks, explains Nagaraju. The holding cost varies, depending on the developer and the parcel of land involved.
Unitech claims that even if it does not acquire a single acre of land, it will still have enough land to build developments on for the next 10 years. Unitech has over 650 million sq. ft of developable area. This compares with 748 million sq. ft of developable area of DLF.
Land banks are parcels of land set aside by developers until the time of development. Large developers in India such as DLF and Unitech tend to have large land banks, in excess of 10,000 acres.
For developers, land is the main raw material and typically, they have made their money buying land cheap, holding on to it for a few years and building and selling homes on it after prices have tripled or quadrupled. Until recently, developers have been adding to their land banks as it does not make sense to wait until demand picks up, by which time their cost of buying land goes up and squeezes margins.
They may also not have enough land to build on when the demand does move up because acquiring land in India is a complicated and time-consuming process as there are no guarantees on the land title.
Arvind Parekh, chief executive officer, corporate strategy and finance, at Omaxe, agrees that building a land bank locks in essential capital in a market of diminishing returns. “The cost of land has gone up in the last couple of years and if we buy at the current price levels, it will not be possible to sustain margins,” says Parekh.
In the last couple of years, land prices have escalated by 50-100%, depending on the location. In some places, prices have risen by as much as 200%. As land prices vary, and as most transactions are in the grey market, Mint could not independently ascertain the extent of softening of prices.
DLF, for one, says it has always followed a conservative land bank model. “The only difference in our strategy compared to a few years back is that we had bought more land as we were going national,” says group executive director Rajeev Talwar. DLF is looking at replenishing land resources on an ongoing basis, without locking in long-term capital. “We are not thinking in terms of having a land bank,” says Talwar. “It is not the number of acres that matters. What is important is the developable area.”
India’s large developers no longer disclose their land bank figures in terms of the number of acres. That is a significant change from a year ago, when developers were publicising land bank figures during their initial public offerings (IPOs) to boost their valuations.
“The market regulator Sebi (Securities and Exchange Board of India) is not allowing developers to disclose their land bank numbers in terms of acres,” Anuj Puri, chairman and country head of real estate consultant Jones Lang LaSalle Meghraj, said. “They are only looking at the actual market performance of the developers, which is measured in terms of the developable area.”
The second factor that has changed the thinking of developers is private equity players, who also look only at the developable area. “Private equity companies only look at the land you can construct on. These two factors are forcing developers to rethink their land bank model,” Puri said.
Talwar believes land prices will continue to rise, but the jump in prices will not be very steep. “On a 10-year-window basis, land prices have gone up mostly because urbanization is spreading and land is a scarce commodity. We will still see an increase in land prices, but it cannot be very high because supply of land is expected to increase,” says Talwar. “Once the government releases land, prices will stabilize.”
Land prices are stagnant or falling in some places such as Delhi suburb Gurgaon, says Omaxe’s Parekh. “In places where supply of land is more than the demand, land prices are stagnant. But in certain pockets, such as south Delhi, Noida, Faridabad and in some places in Gurgaon, land prices are firm and it could go up.”
Omaxe, which had 150 million sq. ft at the time of its IPO in July last year, has added only 6 million sq. ft in the nine months since its share sale.