Bangalore: It’s at the cusp of a recovery, but India’s usually aggressive real estate sector is being cautious about expansions this time.
Excesses by large realty firms—such as aggressive land buying, massive projects with long gestation periods, and venturing into new territories such as power and logistics—as well as the downturn had pushed the sector into a deep slump in 2009.
Now, as growth returns, developers are ordering feasibility studies before launching projects, entering into strategic tie-ups for raw material and labour, appointing project management consultants, and outsourcing construction work for quicker delivery, say property consultants.
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Such measures are fairly new for a sector dominated by family-run businesses.
“Builders are back with a bang,” said Aditi Vijaykar, executive director (residential) at Cushman and Wakefield India, a property advisory. “They want to try out new locations for projects and are trying to test market a product before launching it.”
DLF Ltd, India’s largest developer by market value, said it will not buy land in 2010-11 or launch projects until it has regulatory approvals. Its working capital model will depend on cash flow from pre-sales, customer advances and bank debt.
“It is difficult to stop speculative buying, but a system like one home per family is required,” DLF executive director Rajeev Talwar said. “The chances of end users exiting projects are less because property investments are usually a lifelong affair for them.”
Mumbai-based DB Realty Ltd, which has aggressive plans in suburban Pune, is conducting feasibility studies on the sizes and pricing of homes to ensure the right profile for its projects. Consultants said this was rarely done earlier. Shahid Balwa, managing director of DB Realty, did not respond to Mint’s queries.
Also, realty firms that are raising money though initial public offerings (IPOs) are aiming to use the funds for ongoing and proposed projects or to retire debt, said J.C. Sharma, MD of Bangalore-based Sobha Developers Ltd. The firms are monetizing land banks and reworking sales strategies to reach a larger clientele, he said.
“This is very different from what realty IPOs in 2006 and 2007, including Sobha, did. That time, everyone was raising money only to buy more land,” added Sharma.
In February, Housing Development and Infrastructure Ltd (HDIL), the country’s third largest developer by market value, announced a 1.2 million sq. ft slum redevelopment project valued at Rs2,000 crore.
HDIL, which had turned its focus from slum projects to residential development last year, has big-ticket launches coming up this year. It plans to launch another two or three slum projects in the next six-seven months.
Hari Pandey, assistant vice-president (finance) at HDIL, said execution has become crucial for the firm. If pre-sales account for more than half the units of a residential project within three months of its launch, it has a high chance of being self-funded, he said.
“We are outsourcing about 80% of construction work to contractors, which we would do ourselves earlier. This is for speedy delivery as we are also scaling up our plans,” Pandey added.
Developers are also looking at special purpose vehicles or joint ventures instead of purchasing land outright.
Parsvnath Developers Ltd is looking at a month-on-month delivery target for faster completion. The company wants to construct around 45 million sq. ft of space in the next 24 months, and build around 1.25 million sq. ft in the last quarter.
The company has outsourced construction and appointed a project management consultant to keep a check on the work, as well as tied up with vendors for long-term supply of key materials.
“We are also looking at a project-on-project basis of funding either through debt or private equity (PE) channels,” said Pradeep Jain, chairman of Parsvnath Developers.
PE investors are also enforcing some good practices. Ramesh Jogani, MD and chief executive of Indiareit Fund Advisors Pvt. Ltd, said developers need to ensure their projects are rational in profile.
“Even in residential projects, what is the need to build 30-40 storeyed towers which take five-six years to finish?” asked Jogani. “One needs to travel the middle path and offer mid-range products which assure quality.”
Graphics by Yogesh Kumar/Mint