Will real estate development management model take a hit under RERA?
Mumbai: Stringent partnership rule under the new real estate law is likely to disrupt the development management (DM) strategy, an asset light model followed by large developers like Tata Housing Development Co. Ltd and Godrej Properties Ltd to increase the pace of their growth and expand their brand.
Under the DM model, large realty firms step in as development managers for smaller developers and landowners, in return for a share of the revenue, share of profit or a management fee. Pioneered by branded builders like Tata Housing and Godrej Properties, this partnership model got a boost in the last two-three years due to the rising distressed projects in the real estate market.
While most states are in the process of notifying their guidelines as per the Real Estate (Regulations and Development) Act (RERA), the Maharashtra regulatory authority has specifically asked all partners involved in a project to be called co-promoters if revenues are shared between them. This move is likely to force developers to relook at the model because of the added regulatory risks, according to builders and consultants.
“There is going to be a lot more onerous responsibility on the DM developer which wasn’t the case earlier. This would slow down DM projects. Developers are not signing as quickly as earlier,” said Anuj Puri, chairman, ANAROCK Property Consultant.
He said due to the added legal implications, branded builders would be far cautious than in the past on entering such a partnership with local developers.
“Earlier if anything went wrong, the reputation of the brand would have taken a beating but legally they could walk away as they were only acting as a DM agent. Now they would be legally responsible under RERA because they are being termed as co-developers,” Puri said. However, the structuring of such an arrangement would change post RERA and roles between the partners would clearly be defined in the contract to avoid any legal problems in the future, he added.
Brotin Banerjee, managing director (MD) and chief executive officer (CEO) of Tata Housing, said the company would take fewer projects under this model in future because of the regulatory risks. “At least for the next six to 12 months, we have to be very careful. We are in a wait and watch period as other states are yet to come out. However, we are clear that in cities where they make us a co-promoter, we will not get into DM but rather for joint development or a joint venture with driving stake in it,” he said.
Until last year, the company was betting on the DM model to expand into micro-markets of large cities expecting about 25-30% of its future projects to come from such partnerships. At present, it has over two DM projects in Mumbai.
For Godrej Properties, the added clause of calling co-promoter under the Maharashtra RERA would not impact its development management business though it would be a major setback for fly-by-night operators which have relied on such partnerships to revive their stalled projects, said Mohit Malhotra, MD and CEO, Godrej Properties.
“Our first preferred model has always been profit sharing model even before RERA got implemented because of the inherent risk that exists in DM... While RERA has added legal liabilities to us as co-promoter, we have always been selective with whom we partner as our brand is attached to the project,” he said, adding that developers would now look at the risk part more substantially.
At present, the company has 12 ongoing and upcoming projects under the DM model, of which six are based out of Mumbai and the rest are located in Bengaluru and Noida.
Executives of other developers like Radius Developers and Wadhwa Group said development managers need to be more flexible and should have the capacity to become co-promoter or co-developer when entering into a DM agreement.
“The regulatory landscape has gone through a shift. We have to solve past issues associated with the project if there are any. So the overall risk has heightened and if you don’t comply to the regulation there are bigger implications,” said Ashish Shah, chief operating officer, Radius Developers.
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