The Hindu Business Line : Breaking new ground

While international real-estate majors have adopted a variety of business models, Indian companies are still at the experimentation stage in tapping market opportunities. Here is a walk-through of a few business models being tried out by players in the realty space.

Integrated Townships: While the “sell-or-lease decision” largely arises in the commercial and retailing segments, the residential space too offers considerable scope for unique models. Integrated townships, for instance, ar e fast catching up with developers, who were earlier only building apartments in cities, but later started moving on to the non-metros. Going by the experience of companies such as D.S. Kulkarni Developers or Ansal Properties, such diversification appears to provide better project viability. This strategy primarily helps developers complete projects in phases, allowing them the flexibility to modify their plans to suit the changing consumer preferences. D.S. Kulkarni Developers, for instance, started its DSK Vishwa as a mass housing project which generated lower realisations, but gradually moved to higher-end segments such as villas, malls and office complexes in the remaining phases. Ansal Infrastructure is also into developing townships. The company, however, does follow the strategy of realising some revenue from sale of plots once the basic infrastructure is built in the township; this generates working capital to meet the needs of the project. Sale of plots together with developed buildings not only maintains margins but also (more importantly) ensures there are sufficient funds for carrying out the projects.

Slum rehab: Another interesting housing model came to light with the listing of Akruti Nirman early this year. This company is into slum rehabilitation schemes (SRS) in Mumbai. In return for clearing slums and building low-cost housing for the slum-dwellers, it received transferable development rights, often with a higher floor space index (FSI) permit. The company is free to develop such land or sell the rights to third parties. This essentially means building low-cost housing in return for high-value land.

This model, currently limited to Mumbai, is certainly more profitable than regular residential projects, but there are several practical difficulties. These include getting the consent of the slum-dwellers, evacuating them, and providing alternative dwellings until completion of the new buildings. It also calls for compliance with scores of legal procedures. Further, income from such business tends to be lumpy, without offering visibility or steady growth. For companies with a presence in Mumbai, this model may be lucrative, provided it constitutes a small proportion of their total business. SRS, for instance, accounts for 15 per cent of recent IPO candidate HDIL’s business. This may help propel margins without exposing revenue streams to too much risk.

Constituting a slightly differentiated model are the redevelopment projects undertaken by players such as Orbit Corporation. This involves identifying buildings that are classified as dilapidated by the Mumbai Housing and Development authority, and getting the approval of the regulatory authorities and the tenants to sell or co-develop the area, after providing suitable rehabilitation packages.

While a comparison reveals that this may not be as lucrative as SRS, it nevertheless holds tremendous potential in the island-city of Mumbai, which has large number of dilapidated buildings. While both the above models are restricted to Mumbai, similar moves by other State Governments may throw open more opportunities for players.

SEZs: The Special Economic Zone (SEZ) concept is also fast catching the attention of real estate developers. An SEZ is a duty-free enclave, intended to provide companies with trade and fiscal benefits and superior infrastructure to imp art a global competitive advantage.

Two important issues that need to considered for companies following this model are: Revenue flow from SEZs are long-term in nature as it involves building a self-contained zone with infrastructure and technical facilities conducive for industries to grow. While building an SEZ takes time, for the developer to break even after the area is let out on lease, may take even longer.

Second, SEZs are meant to be large in size to derive the benefits of scale. With little help from the government in acquisition of land, only a handful of the proposed SEZs (such as those planned by Reliance, Unitech and DLF) appear to be viable at this stage.

Mahindra Gesco Developers has been an early bird in this space, building India’s first SEZ in Chennai under the public-private partnership model. The company’s brand image appears to have largely helped in client relationships for leasing. SEZs may be a wait-and-watch game, until the model takes shape and is clear of legal issues.

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