Realty firms turn development managers for smaller companies
Large firms get revenue without putting in equity; smaller ones earn brand credibility to sell in weak market
Large realty firms seem to have found a way to keep alive their revenue stream in a sluggish market, stepping in as development managers for smaller developers and landowners in return for a share of the revenue.
It’s a win-win proposition for both parties involved. While the smaller players who already have land parcels and project approvals will gain execution bandwidth and brand credibility to sell in a weak market by associating with the larger and well-established ones, the latter will get project revenues without putting in equity.
The company executing the project or the so-called special purpose vehicle will raise debt needed for the execution of the project, which is then marketed and sold under the brand of the development manager.
A case in point is that of Tata Housing Development Co. Ltd which has taken on the role of a development manager, its first such assignment, for a 12.5 lakh sq. ft residential project in suburban Mumbai’s Bhandup area. Construction on the project was started by Neptune Group, until Tata Housing took over midway.
“The project will be sold under a joint brand name and revenues will be shared. We have a lot of land and will be focusing on some of our other projects,” said Nayan Bheda, co-founder, Neptune group.
A Tata Housing executive, who didn’t wish to be named, said there are many such opportunities in the market and the company is exploring a few of them.
A more than two-year long slowdown in India’s real estate sector has sharply separated the developers associated with large corporate identities and years of execution track record from the rest.
Homebuyers, who have been fence-sitting for long, are willing to take the plunge and buy a home but often look for a credible, known name.
“We have had sovereign funds, large real estate brokers turned developers and land-centric small developers approach us saying that they have the land, but don’t have the bandwidth to construct a project. In some cases, they have the money but don’t have the customer relation management and sales skills. While these are opportunities for us, we sign definitive agreements saying we can’t be terminated in between. We are open to do joint branding and will help raising working capital for projects,” said Vineet Relia, managing director, SARE Homes, part of London-based asset management firm Duet Group.
SARE Homes has signed a memorandum of understanding (MoU) for three such projects in Lucknow (Uttar Pradesh), Coimbatore (Tamil Nadu) and Noida where it will be the development manager.
In the last two years, the sector has witnessed different kinds of collaborations including joint ventures between developers, or bigger developers buying out projects of smaller firms as distressed opportunities.
The development management route allows even bigger builders to be asset light and property markets across the country are flooded with ongoing transactions, said analysts.
“The development management or DM model is gaining traction now. Buying land and building is considered a risky proposition for developers now as it blocks money, and it is easier to partner with developers who have the land bank but not the expertise or money. This will continue for sometime till the market revives,” said Mudassir Zaidi, national director, residential, Knight Frank India, a property consultant.
Earlier, development managers and their partners often opted for a stock-sharing model, sometimes with joint branding, Zaidi said. “Today, many opt for a profit sharing or revenue sharing model or sometimes development managers charge a flat fee,” he said.
Godrej Properties Ltd, one of the first developers to follow the development management route even in a normal market scenario, has 4-5 such projects under this route. “We have projects under this route in Mumbai and Bengaluru and we are looking in NCR (National Capital Region) as well. In a slow market, lot of smaller firms are struggling and aren’t confident to sell projects themselves giving us opportunities of all types,” said Pirojsha Godrej, managing director and chief executive, Godrej Properties Ltd.
Not just large, established developers, but newer, smaller firms too are taking the DM route.
Sujay Kalele, former chief executive of Kolte Patil Developers Ltd, who is on his way to launch his start-up believes there is a goldmine of opportunities in catering to smaller developers, 90% of who are non-branded names.
“We want to offer end-to-end development solutions to such firms, including sales, marketing and construction, without really owing any of the real estate ourselves.”