Bangalore: Hyderabad-based PBEL Property Development (India) Ltd has a new strategy to break into unfamiliar markets: partner with local developers to complete projects quickly.
The realty firm wants to divide its 42 acres on Old Mahabalipuram Road off Chennai into four or five portions, each of which will be handed over to local developers for building residential apartments.
“We don’t know much about the Chennai market and think it’s a good idea to bring in people who have the knowledge,” said Anand Reddy, director of PBEL Property, which has a project pipeline mostly in southern India. “Of course, we will keep a portion of the land which we’ll develop ourselves.”
A number of large developers are similarly forming joint ventures (JVs) or special purpose vehicles with smaller, local developers for specific projects on a revenue-sharing model.
“We will see more developers getting into such JVs depending on what the local partner brings to the table,” said a senior research analyst at First Global Securities Ltd, who didn’t want to be named. “It could be land, local domain knowledge or even good building capacity.”
Mumbai-based developer Sunil Mantri Realty Ltd, for instance, prefers local partners with the potential to speed up projects by procuring building approvals and helping in the conversion of land status quickly—often, the most time-consuming aspects of development.
“A good local partner also helps in getting the product mix or even the pricing right,” said promoter Sunil Mantri. “Having multiple partners across cities also helps us to scale up faster, which may not have been possible on our own.”
Such partners gave Mantri the confidence to enter unfamiliar markets such as Gwalior and Bangalore. The firm is planning two projects in Gwalior and Bangalore, at a combined Rs700 crore, with local partners.
Some months ago, the strategy for large developers such as Orbit Corp. Ltd and Ackruti City Ltd was quite different; they bought distressed properties from small builders who had the land, but not the money to execute the projects. Both firms are now looking at JVs with smaller builders.
“This is a reverse trend because big realty firms realize that some help is needed to pull off their expansion plans at the execution level,” said P. Kumar, chief executive, Three Quarter Earth, a Bangalore-based property advisory. “Real estate is a local game, which is why few have succeeded in becoming truly national.”
DLF Ltd, India’s largest developer by market value, had a taste of local realities in 2009 when the local civic authority said its maiden residential project in south Bangalore hadn’t got a mandatory approval.
Rajeev Talwar, group executive director of the Gurgaon-based DLF, said the firm is not actively looking at local partnerships but isn’t averse to such tie-ups.
“All the biggies, post-downturn, are looking at such joint ventures,” he said.
PBEL, too, had evidence of difficulties posed by new markets before it got into Chennai. Reddy said the company decided to enter into partnerships with local developers after a market survey showed that realty companies from outside the region had performed dismally in Chennai.
Companies that have turned to real estate in recent years are also keen on striking such partnerships.
Essar Realty, an Essar Group company set up in 2007, is in advanced talks with Bangalore-based AM Builders and Developers, for a JV to develop a 16-acre township in Electronic City.
K.S.M. Shabbir, promoter of AM Builders, said the revenue-sharing model hasn’t been worked out yet with Essar Realty but the talks are in the final stage. Essar Realty didn’t respond to an email and phone queries.
A property analyst, who also didn’t want to be identified, estimated the project cost at Rs600-700 crore, depending on its profile and format.
For a local partner, the advantages are many.
Samira Habitats, a developer in Alibag, a small coastal town near Mumbai, is in talks with developers from the financial capital for projects. Mihir Nerurkar, director, Samira Habitats, said Mumbai developers had burnt their fingers in Alibag and now want to make a cautious entry.
“Larger partners with deeper pockets help us. These are private equity deals where either the developer comes in with capital or it’s a 50:50 joint venture where they pay me half the value,” said Nerurkar.