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BANGALORE: Sky high land prices, unclear titles and a clear need to conserve cash are forcing some real estate companies to do joint development
with landowners rather than splurge money in buying and holding land at expensive rates.

Bangalore-based developers, such as Nitesh Estates, Prestige, Puravankara, Brigade and Mumbai-based Godrej Properties are adopting this route to develop properties, aware of the keen need to save cash in a market that is becoming increasingly tight-fisted for real estate firms.

“Developers no longer want put cash upfront and invest inland. The JV works both for developers as well as landlords,” said Amit Mookim, director, transaction advisory service (real estate), KPMG.

Under the arrangement being discussed by some firms, landowners team up with developers through a special purpose vehicle (SPV). The owner comes on board as an equity partner in lieu of the land he puts on the table. When the project gives returns, the landowner gets a fixed percentage of the revenue in proportion to his equity holding.

The developer invests in the construction and marketing costs, but avoids tying up his funds in land. Bangalore-based Nitesh Estates will use this model to undertake new projects. “This is expected to allow us to deploy our capital towards development expenses and the expansion of our operations,” a company official said.

Currently, Nitesh’s six out of seven ongoing projects and four out of the five forthcoming projects are being undertaken through this model. “It reduces the upfront land acquisition and our total project financing costs, though it requires us to either share revenue generated from such joint-developments or a portion of the developed area with the landowners,” said the official.

The need to conserve cash appears to be the paramount motive for the real estate firms in adopting such route. The slowdown last year greatly crimped the ability of real estate firms to raise cash. Though there was a rebound in the middle of the year when some companies did qualified institutional placement in a buoyant market, many firms seem to have realised the need to play it safe.

Recently, the Reserve Bank of India ruled out another round of restructuring of bad real estate loans, dealing a blow to property firms which had hoped to get their loans reclassified as performing asset. That would have boosted their credit rating and helped them raise more money. However, with this option ruled out, companies don’t have any choice but to save cash and cut down on unnecessary stuff.

“Joint development model works for us as it is capital light and also contains risk. We do not have large debt on our book as compared to many other real estate companies,” said Adi Godrej, chairman of the Godrej Group. Godrej Industries’ real estate arm has lined up Rs 2,000 crore of investments for developing five projects over 30 million square feet (sq ft) in Bangalore.

The Prestige Group plans to offer around 50% of its proposed eight residential projects in the luxury and non-luxury segment under the joint model. “Land owners are more keen to go in for joint development rather than out right sale of land parcel,” said Irfan Razack, CMD, Prestige Group.

Brigade Enterprise, which plans to develop 8-10 million sq ft in the commercial and residential spaces by March 2010 will have 30% of the
development. “In outright land purchase there are many intangible and it calls for 8% registration and stamp duty charges. But in joint development model, one has to pay only 2% tax,” said Kailash Advani CEO Brigade Group.

Some firms such as Puravankara Projects are not embracing this route completely. “Purchasing land outright is the best possible as the appreciation is in land and not in construction,” said Ashish Puravankara director Puravankara Projects. “We will go for joint development model only where project demand and it will depend on case to case basis,” he added.

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