Expensive land buys put developers in a bind

Expensive land buys put developers in a bind
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First Published: Tue, Nov 04 2008. 11 14 PM IST
Updated: Tue, Nov 04 2008. 11 14 PM IST
Bangalore: In November last year, Vijay Associates (Wadhwa) Developers acquired a plot of land in Mumbai’s new central business district, the Bandra Kurla Complex, for Rs821 crore, paying around Rs5.04 lakh a sq. m in what was then touted as the most expensive land deal in Mumbai by analysts and media. The company is yet to start developing this land.
A slowing economy, tight credit and lower demand for houses and offices have made things difficult for real estate developers, many of whom bought land at high prices and are finding it difficult either to develop it or sell it off. While developers across the country face this problem, it is most significant in Mumbai, where the sheer unavailability of land has seen real estate rates soar in recent years. According to an April article in Newsweek magazine, apartments in Manhattan cost around $1,263 (Rs61,381) a sq. ft, less than in some parts of Mumbai.
In 2005, Kohinoor Consolidated Transport Network Ltd bought the defunct Kohinoor Mill located on a 4.8-acre plot for Rs421 crore. Work on the project is stuck and the firm has been unable to sell the property. The same year, India’s largest developer by market value, DLF Ltd, bought the 17.5-acre Mumbai Textile Mill for Rs702 crore. Three years and many changes in design later, the company has only now finalized plans for the land.
Rajan Shirodkar, managing director of Matoshree Realtors Pvt. Ltd, part of the joint venture that bought the Kohinoor Mill property, said that when a plot of land was acquired at a high price, it was difficult to get desired lease rentals or find buyers. “We will either develop and sell it outright or sell it off in its present condition. We have been speaking to various buyers.”
A DLF official in Delhi, speaking on condition of anonymity, said the company had decided to construct a mixed-development project with both retail and office space on the Mumbai Textile Mill land. The project will take two years to be completed, the official said.
In some cases, builders are wrestling with formats, deciding which one will be more profitable. In others, they are looking to sell off all or part of the land acquired to raise money because they have been hit hard by the ongoing credit crisis. And still others, those who can afford it, are waiting and watching.
“We are at the planning and designing stage of the project and we will launch when we are ready,” said Vijay Wadhwa, the man behind Vijay Associates (Wadhwa) Developers. A real estate consultant familiar with the development said the project will be launched after a year. “(Vijay Wadhwa) can wait till he gets his desired margin,” added this person who did not want to be named.
Not all real estate firms, however, will be able to wait out the crisis. An October report by Macquarie Research says stocks of companies which had earlier leveraged themselves to buy land are being punished. The Bombay Stock Exchange’s realty index has fallen 81.12% since January compared with the 47.6% fall in the exchange’s benchmark Sensex index in the same period.
The country's two top developers, DLF and Unitech Ltd saw their net profit for the quarter ended September, the second of 2008-09 for both companies, decline by 4% to Rs1,935 crore and 12.48% to Rs358.92 crore, respectively, even as their share prices have lost 76.31% and 89.74% since their January high.
Profitability is the first thing that is threatened at such times, said an expert. “The sale price of the finished product is the first challenge because one needs to keep (in mind) the profit margin. When you buy land at a very high cost, then sometimes you are forced to negotiate on margins,” said Ashutosh Limaye, associate director, strategic consulting, Jones Lang LaSalle Meghraj, a property advisory. Limaye said many developers were selling some of the land on their books. “Typically, builders work on 12-14 sites but now they are exiting three-four sites selling them to funds looking to buy distressed assets.”
Housing Development and Infrastructure Ltd (HDIL), the country’s third largest developer by market value, which also buys land, develops surrounding infrastructure, and then sells it, has stopped doing so. “Land prices have still not come down even as property prices are softening and keeping the market conditions in mind, it is wise to finish what we have started,” said Sarang Wadhawan, managing director, HDIL.
Several recent auctions have not attracted any buyers. Developers have withdrawn their bids because they know they won’t make their margins after paying high valuations for land, said S.G. Maheshwari, former president of Estate Agents Association of India, an industry body. Citra Developers Ltd, a subsidiary of Indiabulls Group, withdrew its Rs676 crore bid for a plot in a distant Mumbai suburb. Maheshwari said the developer realized that the plot wouldn’t fetch more than Rs400 crore when developed.
Gagan Banga, chief executive officer of Indiabulls Financial Services Ltd, said in September that the bid had been withdrawn for “certain reasons” and that the company hadn’t decided whether it would reconsider the decision if fresh bids are invited.
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First Published: Tue, Nov 04 2008. 11 14 PM IST