Grappling with a slowdown across segments, the Indian property market is heading towards the next phase of consolidation. Liquidity crunch in the real estate market is beginning to drive many mid-sized and small developers to scrounge for cover. Many want to liquidate their land and incomplete projects by selling them to bigger developers or private equity players even at lower valuations. What's forcing them to take this step is a stagnant market, with property rates undergoing major correction in some cities. Around 15 deals in real estate sector have fallen through in the past two months with investors developing a cold feet, said industry officials. Consider a few cases.
A mid-sized builder at Chembur in Mumbai has put its 14-floor commercial property in central Mumbai on the block. The developer wants to raise around Rs 150 crore which would help him complete his upcoming project. A Hyderabad-based real estate group has started advertising to attract high networth investors to generate Rs 50 crore against bulk purchase of its housing project in the city. A small developer in Mumbai, pushed to a corner on account of mounting payables for construction material, is now offering its project at Juhu-Versova in Mumbai at about 35% discount to the current market price.
In Delhi, some developers have approached property consultant to sell their income generating commercial properties to finance some of the unfinished projects. Real estate funds and established developers admit that they are working on various proposals. "Even in the normal circumstances we used to get offers from mid-sized developers to buy out their projects. But now, the numbers have increased considerably," said Hiraandani Developers chairman Niranjan Hiranandani.
The Bangalore-based developer Nitesh Estates said that it has received similar proposals, mainly from markets like Pune, Nagpur and Bangalore. "Every second day we are getting a proposal either to pick up equity in the project or to buy out fully. We have not concluded any such deal so far," said Nitesh Estates chairman Nitesh Shetty. Industry observers said that the commercial property market, stagnant for the past few months, is showing signs of crack, especially in suburban Mumbai and many tier-II & III cities.
The volume of commercial property sales has dropped by 30% in the past two months in the wake of rising interest rates. "Developers, specially small developers, are under pressure now. Fund flow into this sector has begun to dry up.
Selling incomplete projects to big developers or private equity firms is an option explored by many such developers," said a senior official with KnightFrank India, a property consultant. Thanks to tigher fund raising norms and a weak stock market many developers are knocking the ddors of private equity investors who are driving hard bargains on valuation and. Even on a reduced valuation, PE firms are putting various clauses to safeguard their money. In last May, the finance ministry had said that all foreign funds raised by Indian companies through partially convertible, non-convertible and optionally convertible preference shares, would be treated as debt and would be subject to guidelines applicable for external commercial borrowings (ECBs).
This had made it tough for developers to access foreign funds, since ECBs are allowed only in large real estate projects and the conditions are far more stringent than FDI. "The developers are ready for a compromise on valuations. The risk adjusted returns have gone up by 20-25% during the past few months,"said Starwood Capital India head Balaji Rao.
Published at: www.indiarealestateblog.com.
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