Consolidation Saved A Few Real Estate Projects, But Hasn’t Driven Sales

A year ago, the sector was still limping out of the setbacks of Prime Minister Narendra Modi’s overnight cash ban in November 2016 and the goods and services tax rollout when a non-bank crisis broke. As AAA-rated IL&FS group defaulted on repayments, credit dried up for non-banking financiers and builders, aggravating stress.

Residential towers worth Rs 4.62 lakh crore with 4.54 lakh homes have been stalled in the top seven cities, according to a JLL India report. New Delhi-National Capital Region and Mumbai, the nation’s two largest real estate markets, account for about 90 percent of that.

Yet, Ajay Piramal, chairman at Piramal Enterprises Ltd., says not all non-bank lenders and developers are in trouble and there is a need to distinguish good companies from bad. “Among our developers (top 10 percent of India’s developers) the quality of assets has not deteriorated,” said the billionaire referring to borrowers of the group’s non-bank financial company.

The NBFC arm has been able to collect about Rs 19,000 crore principal, interest and some pre-payments, he said, adding that it has also found new developers and even co-lenders for stressed projects.

How Consolidation Works

Larger builders can choose a stressed or stalled project and help complete construction or find buyers, either in return for a share in revenue or profit or for a fee. And usually this marriage is facilitated by the lender — which can be non-bank financial company, a bank or a private equity fund.

The first step is to ask a stressed developer-borrower to cut prices to drive sales, according to Piramal. “At times, we find that certain developers are not able to either get funding for their projects or they have not been able to sell enough. We move projects from one developer to the other,” Piramal said. “Sometimes we get a co-lender in as well. It’s a combination of many of such steps.”

Among the projects taken over by Primal Group includes the one by Omkar Realtors & Developers Ltd. in Mahalaxmi, Mumbai. V Raheja Group and DB Realty also saw their stalled projects being revived by incoming partners.

The V Raheja Group launched Varuna in Mumbai’s Andheri area in 2013, promising to deliver apartments by 2017. But it could complete only 60 percent of the construction by then.

Aditya Birla Equal Opportunity Fund, the main financier, then brought in Bengaluru-based Ozone Group. It rebranded the project to The Gateway, taking care of sales. Ozone Group acted as a service provider in return for 10-13 percent of the project receivables. The Gateway is complete and the developer has applied for occupation certificate, with only three-four of the 69 units remaining unsold, Rajat Khandelwal, chief executive officer for the Mumbai market at Ozone Group, told BloomberQuint.

In 2009, DB Realty launched its luxury project called DB Crown in Prabhadevi, central Mumbai. This was an ultra-luxury project launched by DB Realty in 2009. But the project was stalled. Lender Housing Development Finance Corporation Ltd. roped in Rustomjee Group in March 2018, which took over in return for revenue through area-sharing.

When Rustomjee took over, 24 floors of Tower A, 25 floors of Tower B and ground floor of Tower C had been completed, the developer told BloombergQuint in an emailed response. Today, 58 floors of tower A, 57 floors of Tower B and 12 floors of Tower C are ready. Construction is still on.

HDFC declined to comment while emailed queries to Aditya Birla Group and Axis Finance, which saw a similar project takeover, went unanswered.

According to Gagan Banga, vice chairman and managing director at Indiabulls Housing Finance Ltd., among the NBFCs worst affected from the liquidity crunch stemming from IL&FS crisis, the mortgage lender has seen five projects it funded being taken over by new developers.

These include Shapoorji Pallonji Group taking over Minerva in Mumbai from Lokhandwala Infrastructure; Godrej Properties Ltd. taking control of Chorodia Group projects in Pune; and Birla Estate tying up with Anant Raj Ltd. to develop a Gurugram project.

“Every city will have five-six large developers who will sustain and eventually control the market,” Banga said.

Amit Goenka, managing director and chief executive officer at Nisus Finance, a real estate-focused private equity fund, said such consolidation is a natural progression where developers come together to rescue stressed assets.

Nisus Finance has sealed development management deals in Bengaluru, including a transaction with Shriram Properties. Several others late-stage deals where an existing developer has tied up with a larger corporate player for either joint development or management are under closure, Goenka said. It is actively looking at stressed projects and plans to raise Rs 700 crore from domestic investors, he said.

Multiple Models

Joint development is nothing new and has been happening for years across residential and commercial sectors, said Sudhanshu Kejriwal, managing partner at EverVantage, a property consultant. But while most transactions earlier were partnerships between a landowner and a developer, he said builders have started tying up after the rollout of Real Estate Regulation Act.

What has aided consolidation is that lenders and asset reconstruction companies are now willing to take a haircut on loans. “In last few months, we have seen some promising signs of market realisation and the fact that the incoming developer has to make some money,” said Sanjay Dutt, managing director and chief executive officer at Tata Realty & Infrastructure Ltd.

Developers follow multiple models, with development management being the most popular. Here, the incoming builder doesn’t take ownership but provides services for a fee or gets a share in revenue and profit.

For some projects, builders enter at different stages and take full control or acquire a stake.

Ozone Group used the service-based model to enter Mumbai in 2017. “Financial viability and a right set of partners are important prerequisites during evaluation of a new project,” Khandelwal said. “Our revenue share is about 12-15 percent of the project, depending on the stage and complexity of development,” he said, adding that the developers rebrands the project, markets it, takes care of funds. “We can be termed as third-party service provider.”

If a project is under-construction and registered with RERA, the new developer requires consent of two-thirds of the homebuyers for rebranding.

For Tata Realty & Infrastructure, being just a manager doesn’t work. “As a group we have a clear strategy. We would not like to enter a project where we do not have full control,” Dutt said. If the original developer stops construction because of lack of sales or some other reason, the development manger’s reputation will suffer. “Therefore, we are considering joint development or outright purchase of land,” Dutt said. “This is to ensure that we deliver on all customer promises and have financial closure.”

Nisus Finance takes up stressed projects for both joint development or management. But it considers the record and credibility of the incoming developer, Goenka said.

No Sales Boost

Companies like Godrej Properties have been the biggest gainers as the portfolio of joint development has spiked. But consolidation in the industry hasn’t necessarily pushed home sales.

Given the economic slowdown, people have put off property purchases or feel they can get a similar ready-to-move home at a similar price, according to Sadh. Unless prices come down, and there is no for buyers, he said.

A JLL report said home sales in the seven top cities fell 1 percent year-on-year in July-September and developers have turned cautious on launching new projects. Anarock’s estimate was even more worrying as it pegged the decline at 18 percent.

According to Anurag Singhvi, managing director at Xanadu, a Mumbai-based real estate sales and marketing firm, consolidation is happening at the project level and that too not at a rapid pace that is needed to stem the industry-wide slowdown. And stressed sales haven’t greatly helped the cause of large-scale projects with hundreds of units which are the mainstay of the industry, he said, adding sales are not happening as market conditions don’t support demand.

A small number of developers with a decent balance sheet did venture into consolidation driven by ambition and to expand their portfolio, Singhvi said. “But as things are panning out in these projects, the risk appetite in the market has gone down and developers are being very cautious, realising this model is not sustainable for a longer period.”