New Delhi: When Alpha G Corp, a real estate developer launches its new housing project in Kurukshetra in a couple of days, it will not put its own money into the project. Instead, it will be managing, constructing and marketing the project for a fee. In a slowing market, conservative financial practices, a low appetite for risk and debt seem to be on the mind of most real estate developers as they launch new projects. While Alpha G Corp does acquire land and launch and build its own projects from time to time, its CEO, S.K. Sayal points out that given the present market scenario he prefers not taking too much risk.
“We are also trying to ensure that we do not have to put in too much of our own money in new constructions in order to minimize risk,” he says. He also says that his company does not begin construction till the time it can ensure a financial closure
Some real estate developers like BPTP say that they will only begin construction when they have secured 50% of sales from new projects. This will ensure that they have enough money in the bank to finish the project. In the present scenario with the banks charging high interest rates and customers being few, a number of developers have had to halt construction because of lack of funds.
According to real estate firm CB Richard Ellis CEO Anshuman Magazine, earlier, in a typical project cycle, a developer would take some debt, announce a project, do some presales and put the money raised towards construction. With lesser buyers entering the market, this is not happening anymore . Builders thus have to look for new and less risky fund sources. “The nature of investment for developers is changing very drastically. While earlier debt formed a very high percentage of development cost, now they are exploring other alternatives,” he says.
This is also true because debt has become more expensive to service and some are looking at avoiding it.
Developers are also looking at several other financial structures in order to spread their risk. Ansal’s API that launched Megapolis, a township in Greater Noida in July says it is also looking at several funding options. Its marketing president Kunal Banerji says “Banks have become more careful in lending and debt is a problem. Every large scale developer will need funding from outside. He will have to explore different ways of funding including private equity, financial institutions etc. We are exploring private equity ourselves.”
Magazine too holds the same view. He says that financing in the real estate sector has become more sophisticated on the whole. “Builders are now getting into alternative financial practices, designing SPVs and taking on multiple partners to spread risk and not take it on their own,” he says.
It will be sometime before we know if these alternative model is working. But if it’s not, a serious downturn in the real estate market could be near.