Real estate companies scale back expansion plans

Real estate companies scale back expansion plans

Slammed by souring equity and loan markets, real estate firms are scaling down their growth plans on funding bottlenecks.

“We are going slow,’’ said K.P. Singh, deputy general manager (marketing) of Pearls Infrastructure Projects Ltd, a New Delhi-based real estate developer that has projects near the Capital. “We are not planning any new projects for which land has not been acquired," he added.

It is not just Pearls that is rethinking its expansion. Forced by a credit crunch and a slowing realty market, many small real estate developers in the New Delhi region are holding back their expansion plans.

“It does not make good business sense to launch new projects in this market," said Kaushik Sengupta, vice-president (sales and marketing) of Eros Group, a New Delhi-based real estate developer. Eros is withholding the launch of two of its projects for which it has acquired land.

The country’s central bank has increased its key lending rate to a five-year high and the government has also banned external commercial borrowings for developing integrated townships, closing the tap on easy loans. The market regulator, the Securities and Exchange Board of India, has already tightened norms for initial public offerings (IPOs) for real estate companies. And developers who had lined up public offers this year, fared worse than expected.

While India’s largest real estate firm DLF Ltd secured nearly Rs10,000 crore from the stock market with its IPO, smaller rival Omaxe Ltd raised around Rs550-560 crore through its IPO, which was half the amount it had planned initially. Bangalore-based real estate developer Puravankara Projects Ltd had a turbulent IPO, forcing it to lower the price band and extend the issue period to mop up funds.

“We are yet to decide how the scaling down of the IPO will affect future projects; the board is expected to meet soon to review the way forward," said Girish Puravankara, deputy managing director. The Puravanakara Group was expected to use a portion of the proceeds from its recently concluded IPO to repay corporate debts.

To add to the developers’ woes, while property prices in the suburbs of some of India’s top cities and some smaller cities have dropped by 15-20%, land prices have continued to hold high, lowering profits, said developers.

Pearls, which relies on its internal accruals for funds, has postponed buying land because “acquiring land is a much costlier proposition now", Singh said.

Developers who were bidding eye-popping amounts for land a few months ago have become increasingly wary of buying land at high prices. In a sign of the changing times, earlier this year, Delhi Development Authority (DDA), the Capital’s land-owning authority, did not receive bids for nine out of the 10 plots it put on the block.

In a recent auction where the authority did manage to sell the land, DLF bought a 14-hectare plot for a proposed hotel and convention centre in Dwarka, in West Delhi, from DDA for Rs901.8 crore, barely 0.2% above the property’s reserve price.

This is in sharp contrast to the DDA auction in March 2006, when the Emaar MGF Group picked up land at Rs100crore an acre in South Delhi, at more than 200% the reserve price.

The Gurgaon-based Ocean Seven Buildtech Pvt. Ltd, a real estate company which had plans of launching residential and commercial projects in the National Capital Region (NCR), is also adopting a wait and watch attitude.

“Every year, we have corrections. But this year the price correction is really high," says P.K. Sanyal, president of Ocean Seven. “It is 15% more than the normal correction, which happens during the lean period from April-September."

Small players are not inclined to build property in NCR because though the land cost is high, property prices have seen a big correction, Sanyal said. Ocean Seven is instead turning its focus to building smaller projects of 10-12 acres in small cities such as Jaipur and Goa.

Also, the profit margin has come down since there is no guarantee of a price appreciation, Singh said. “Earlier, we knew that property prices will increase. Now there is no guarantee," he added.

Even for existing projects, companies are struggling to find buyers, Sengupta said, and added, “Things have taken a real hit."

The investor community, which was driving sales earlier, has disappeared, Singh said.

Even older companies, such as Omaxe, admit that sales are not happening at the same pace as before.

“If we had launched a project last year, it would have sold on the same day. Not so now," said Arvind Parekh, chief executive officer (corporate strategy and finance), Omaxe.

In spite of the slump in the market, larger developers are not affected, claimed Kunal Banerji, vice-president (marketing and corporate communications) of Ansal API Ltd. “The land that older and larger players have are historical assets, which were acquired years ago at unbelievably low prices," he said. “So, this price correction, which has happened in certain pockets, does not affect us."

One of Chennai’s leading developers agreed that not everyone is feeling the pinch. Kamal Lunawath, managing director, Arihant Foundations & Housing Ltd, said his firm is not scaling back yet. “But there is some impact in the market. Sales are slightly slow because of the market condition and increase in home-loan lending rate," he added.

According to Parekh, it will be a while before the market picks up. “It will take eight-12 months for the market to improve," he said.

In the meantime, the industry will see many joint ventures between large and small companies, said developers.

“I think smaller developers who are not able to execute projects because of a credit crunch will enter into joint ventures by offering their land or project to the large developers," Sengupta said.

Archana Rai in Bangalore contributed to this story.