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Indian Real Estate Developers Demonstrate Higher Risk Aversion

Submitted by on Thursday, 18 March 2010No Comment

BangaloreDevelopers in India are ordering feasibility studies before launching new projects and taking other cautious measures to avoid the excesses that resulted in the real estate downturn in 2009, it is claimed.

They are sending out a message that aggression in the market is no longer acceptable and massive projects are to be replaced by developments that buyers rather than speculators will want.

According to property consultants they are entering into strategic tie-ups for raw material and labor, appointing project management consultants, and outsourcing construction work for quicker delivery. Such measures are fairly new for a sector dominated by family-run businesses.

‘Builders are back with a bang but not an aggressive one. They want to try out new locations for projects and are trying to test a product before launching it,’ said Aditi Vijaykar, executive director (residential) at Cushman and Wakefield India.

DLF, India’s largest developer by market value, said it will not buy land in 2010 and 2011 or launch projects until it has regulatory approvals. Its working capital model will depend on cash flow from pre-sales, customer advances and bank debt. ‘It is difficult to stop speculative buying, but a system like one home per family is required. The chances of end users exiting projects are less because property investments are usually a lifelong affair for them,’ said DLF executive director Rajeev Talwar.

Mumbai based DB Realty said it is conducting feasibility studies on the sizes and pricing of homes to ensure the right profile for its projects. Consultants said this was rarely done in previous years.

Also, real estate firms that are raising money though initial public offerings are aiming to use the funds for ongoing and proposed projects or to retire debt, according to J.C. Sharma, managing director of Bangalore based Sobha Developers.
The firms are monetizing land banks and reworking sales strategies to reach a larger clientele, he explained. ‘This is very different from what they did in 2006 and 2007 when everyone was raising money only to buy more land,’ added Sharma.

Developers are also looking at special purpose vehicles or joint ventures instead of purchasing land outright. Parsvnath Developers said it is looking at a month-on-month delivery target for faster completion. The company wants to construct around 45 million square feet of space in the next 24 months and build around 1.25 million square feet in the last quarter.

Ramesh Jogani, managing director and chief executive of Indiareit Fund Advisors said developers need to ensure their projects are rational in profile. ‘Even in residential projects, what is the need to build 30 to 40 story towers which take five to six years to finish one needs to travel the middle path and offer mid-range products which assure quality,’ he added.

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