Bangalore: Godrej Properties Ltd, the real estate development arm of the Godrej group, has reconfigured two key projects to have more residential spaces and drastically reduced the sizes of both the developments, raising questions about the company’s strategy.

Godrej Group chairman Adi Godrej.

In its Oasis project in Hyderabad, the developer has changed the asset mix from pure commercial to mixed development (68% residential and 32% commercial) and reduced the development size to 7.2 million sq.ft from 9.6 million sq.ft.

“The development strategy has been changed to residential from IT SEZ (special economic zone) and we expect residential to do much better," Adi Godrej, chairman, Godrej Properties, said in a recent call with analysts after the company announced its results for the financial second quarter.

As the office and retail segments continue to be sluggish, real estate developers are depending on residential developments for cash flows.

Analysts say the 2008-09 trend that saw many such transitions of project formats continues particularly in large projects that depend more on changing market dynamics.

Godrej Properties has, in fact, said the reduction of capital-intensive, low-return commercial projects will free huge financial bandwidth that can be used for value-augmenting acquisitions.

“Capital efficiency is of paramount importance as is risk-free cash flow," Godrej told analysts in the call.

In Godrej’s Ahmedabad project, though, the change in format was forced by a change in the government policy.

According to a report by brokerage Prabhudas Lilladher Pvt. Ltd, the office space portion of the project shrunk when the Gujarat government converted its integrated township policy, which governed the Godrej property, into a residential township policy with a greater emphasis on residences.

“The change in development plans at its largest Ahmedabad project will raise further concern around Godrej’s development strategy, given it has continued to add a number of projects in joint development agreement across India but has not been able to ramp up construction to monetise them," analyst Aatash Shah of Nomura Structured Finance Services Pvt. Ltd said in a report.

Operationally, Godrej Properties has been unable to ramp up construction as it continues to build around 0.4-0.5 million sq.ft per quarter, he said. “The annualised run rate of around 2.0 million sq.ft a year remains a concern given it has nearly 74.5 million sq.ft to develop."

Despite the lowered development potential in Ahmedabad and Hyderabad projects, Godrej expects the increased residential proportion to add to their value, given sluggish momentum in the office space segment in such tier II cities.

Chintan Patel, associate director of real estate practice, Ernst and Young, said developers have to be flexible with larger projects and willing to make changes.

“The company has to understand the current dynamics of the city and plan accordingly," said Patel.

Godrej is also taking up more projects where it will play the role of a development manager for a fee, in addition to its joint development strategy.

After entering into such an arrangement earlier in October with group firm Godrej and Boyce for the latter’s Vikhroli land in suburban Mumbai, Godrej Properties has entered into a similar deal for a premium residential villa project in Bangalore’s Electronic City with Universal Builders.

“Acting as a development manager (in Vikhroli, Bangalore and Nagpur), the company has tied in a steady source of low-risk revenue by levering on its brand equity," said the Prabhudas Lilladher report.

A Godrej Properties spokesman said the company is open to more deals of this nature but it will be wrong to interpret this as a shift from the joint venture development strategy.