Private equity funds sell homes cheap to gain market foothold

Private equity funds sell homes cheap to gain market foothold
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First Published: Mon, Sep 14 2009. 08 58 PM IST

Launch strategy: A DLF construction site in Gurgaon. Funds do not have the brand name of developers and need to ensure cash flow through sales. Rajkumar/Mint
Launch strategy: A DLF construction site in Gurgaon. Funds do not have the brand name of developers and need to ensure cash flow through sales. Rajkumar/Mint
Updated: Mon, Sep 14 2009. 08 58 PM IST
New Delhi: Private equity funds are aggressively chasing the nascent revival in Indian home purchases by undercutting the more established realty companies such as DLF Ltd and Unitech Ltd, sometimes by as much as half the going rate.
Launch strategy: A DLF construction site in Gurgaon. Funds do not have the brand name of developers and need to ensure cash flow through sales. Rajkumar/Mint
The funds, which have tied up directly with landowners, are willing to sacrifice margins to push sales and make up for being unknown to prospective homebuyers.
South Asian Real Estate Group (Sare), First Indian Real Estate Capital Fund Pvt. Ltd, or FIRE Capital, and Red Fort Capital have launched projects in locations such as Gurgaon, Noida, Ghaziabad, Indore and Bangalore.
Crescent Parc, a company promoted by Sare, launched Royal Greens two weeks ago in Sector 92 in Gurgaon at Rs1,397 per sq. ft. Royal Greens will have low-rise apartments of ground plus four floors with amenities such as a gym, a swimming pool, a school and a hospital.
In comparison, DLF’s New Town Heights, the company’s affordable housing project in the adjacent sectors of 90, 91 and 86, is priced at Rs2,150-2,250 per sq. ft, and Raheja Developers Ltd’s Navodaya in Sectors 92 and 95 is priced at Rs2,475 per sq. ft.
The funds say they want to establish a brand name for themselves and attract buyers in a market where demand has just started to pick up.
FIRE Capital, a $250 million (around Rs1,220 crore) real estate focused fund, has launched integrated township projects in Indore, Nagpur, Bangalore and now plans to launch in Chennai.
In Bangalore, for instance, FIRE Capital has gone in for a soft launch of villas at itsproject, The Empyrean, onthe outskirts of the city near Whitefield at Rs2,000-2,500 per sq. ft whereas the market rate in that location for a similar project is Rs4,000-5,000 persq. ft, said Om Chaudhry, founder and chief executive of FIRE Capital. “Initially, wehad to do penetrative pricing because the market didn’t know us.”
Margins in such projects are either low or negligible. “But even if I don’t make too much profit, I need to establish a name,” said Chaudhry.
Once a brand name is established with little or no margin, prices can be increased gradually, he added. “That strategy is working for us. We now have an established brand name in Indore.”
In the case of Sare, a $400 million fund, the company said it consciously chose a lower price because that is the rate at which the market would have accepted a new developer. Sare claims to have sold 180 of the 360 apartments in Royal Greens at Gurgaon.
Sare has kept its profit margins at a bare minimum, said Ravi Saund, vice-president (sales). “We could have increased prices and then given a huge discount to buyers, but we wanted to be transparent to our customers.”
While Sare has launched its project at rock-bottom prices, the company plans to gradually increase it. “I think the market will improve and when that happens, we will increase prices,” said Saund.
Sanjay Sharma, founder of Gurgaonscoop, a real estate portal, said this is the first time he has seen a developer offer such low prices relative to the market. “The location where Royal Greens is coming up can easily command a price of Rs1,800 per sq. ft,” he said. “It is a knock off of at least 20% of the actual price.”
Funds came into India with a specific focus on affordable housing, so they bought land at Rs200-300 per sq. ft, said Anuj Puri, chairman and country head of Jones Lang LaSalle Meghraj. Developers on the other hand have just started to focus on affordable housing, he added.
Costs for the better-known developers could be high because they may not be developing affordable housing on land specifically bought for that purpose.
The big-name developers have launched affordable housing projects by reducing the size of apartments, with the price per sq. ft still on the higher side. For instance, Unitech’s affordable housing project, Unihomes in Sector 117 of Noida, costs around Rs2,960 per sq. ft, but the overall cost of the apartments range from Rs17-30 lakh as they are sized between 580 and 990 sq. ft.
If prices are too low, developers may slack off on some projects, said Sharma.
“When the margins are so low, eventually it might make sense for a developer not to complete a project and execute another one that gives profits,” he added.
Red Fort Capital recently picked up a 50% stake in Lotus Boulevard, an integrated township project in Sector 100 in Noida being developed by 3C Company, a New Delhi-based developer. The project will have 3,000 residential units and according to Red Fort, around 1,500 apartments have already been sold.
The apartments of between 987 and 1,850 sq. ft are priced at Rs2,825 per sq. ft. “Apartments cost less because of a combination of smaller size and reduced price per sq. ft,” said Subhash Bedi, managing director of Red Fort.
Margins are similar to what the fund expects in every project, said Bedi, without divulging the figures. “We need to generate goodwill in the market and establish a brand name,” he added. But Red Fort is not looking at increasing prices. “That is not our game plan.”
FIRE Capital’s Chaudhry said his fund is bringing in technology and reducing overhead costs to lower the cost of construction.
Navin Raheja, managing director of Raheja Developers Ltd, said that for his company, the cost of construction works out to Rs1,500 per sq. ft. “We cannot go below that unless we build low-rise apartments, have less expenditure on steel and minimum specifications for the apartment,” he said. “Also, land cost is a huge component, so if someone gives me cheaper land, then I can make an apartment priced at below Rs1,500 per sq. ft.”
In the short-term, the developers may not be able to compete with funds unless they acquire land at cheaper rates, said Puri, and added that even if they do, developers will still not be happy with a lower margin of say 20%. Funds do not have the brand name of developers and they need to ensure cash flow through sales.
Moreover, funds only need to give their investors a return of 20-25%, he said, and added that as long as they can make that return, they are happy.
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First Published: Mon, Sep 14 2009. 08 58 PM IST