The Hindu Business Line : How developers are coping

Companies with unique business models and those that have quickly changed their product mix to push sales, even if it means a sacrifice on price, appear to be the ones that are combating the current challenges reasonably well.

DLF was among the earliest to make a strategic shift to middle-income housing, after maintaining its premium housing image in the NCR for a long time. The company’s aggressive price penetration in new regions has fetched it the much-needed volumes that are a key to keep inventory moving in a dreary market. Puravankara too has now launched housing for the lower mid-income segment through its subsidiary, with offerings beginning at Rs 10-20 lakh. Unitech and Omaxe are other players moving towards such a strategy. However, this changing business model would entail developers moving from operating profit margins as high as 50-70 per cent to more realistic margins in the 20 per cent range.

Companies with unique business models such as Akruti City, Orbit Corporation and HDIL have also done well so far, mainly through their entrenched presence in the lucrative slum rehabilitation/city redevelopment in Mumbai. Recent court ruling that brings the pre-1940 buildings under the redevelopment universe would be a shot in the arm for these players.

The earlier law permitted only those buildings that were in dilapidated condition and approved by the Development Authority for re-development.

These players also enjoy the option to sell their ‘transferable development rights’ to other developers thus providing them with fresh lines of funding as and when required. All of these players, however, remain highly geared at present. A few other companies have been diversifying into other businesses, hoping to offset a possible slowdown in realty. Forays into insurance and telecom by Unitech, Indiabulls Real Estate’s entry into the power segment and plans to foray into infrastructure by almost all the other players are evidence of this trend.

However, such moves may need to be viewed with caution as this would result in diverting resources to these sectors at a time when most players are already strapped for resources, to fund the realty business. While a few such as Indiabulls have garnered sufficient resources, a diversification move for players such as Omaxe could be a risky bet.

Quest for cash

A few innovations have emerged on the funding side as well. While Indiabulls managed to raise resources by listing its real estate investment trust (REIT) in Singapore, players such as DLF and Unitech have delayed similar plans. They have however, managed to attract private equity financing for specific projects. For the others, an increase in debt has been an inevitable choice, what with FDI norms imposing restraints on finance to realty projects.

Discretion pays

Most players have in unison taken a few steps to weather tough markets. For one, most of them have slowed down on new launches. This is likely to curtail the possibility of excess supply and prevent players from forcibly reducing their list prices to stoke demand. Players such as Indiabulls, which came up with ambitious plans in new markets such as Chennai, appear to have turned more discreet and prefer to focus on the more familiar mill lands in Mumbai.

Aggressive additions to the land bank kitty have also seen a marked reduction. Developers have cut back on their hunt for land for two reasons – one, a good number of them are already in possession of a land bank that could well last for a decade. Two, there appears to be little logic in locking precious capital needed for current projects, into land that still remains exorbitantly priced.

VIDYA BALA