The Hindu Business Line : Joint venture, order of the day

Are joint ventures an option for developers to get around the resistance to land price correction? Yes, say developers who believe that it helps to arrive at a happy medium with the land owners on the crucial issue of land valuation.

While prices of built-up residential space are better tuned to the prevailing slow market conditions, land prices have bucked the trend across cities. Land owners who are under no compulsion to sell are resisting any reduction.

Land prices in most cities continue to remain stable — resistance to land prices only means transactions do not happen as land owners prefer to hold on to their property rather than opt for lower prices.

In vogue in the South

But joint ventures are in vogue in southern cities, especially in Chennai and Bangalore, say developers. The markets in the North, however, have not taken to this option due to traditional working styles with a preference for outright sale of land.

Joint ventures are a ‘no cash’ or ‘low cash’ deal — an advance payment of 10 per cent of the land cost. The land owner partners with the developer to promote a project. Income for both is from the sale of developed property.

According to Mr T. Chitty Babu, Chairman and Managing Director, Akshaya Pvt Ltd, a leading residential property developer in Chennai, his company has finalised a handful of joint ventures in recent weeks in prime areas in the city.

Joint ventures strike a happy medium between the land owners’ expectations and that of the developers. The price for the land is based on the estimate of final selling price of the developed space.

“You simply work backwards from the product cost” taking into consideration the construction and development cost, he said.

Despite the depressed market conditions, there is a demand for residential units in specific market segments. The partners are confident that the money will be realised after the product is delivered in a couple of years’ time. Hopefully, the market too would be in a growth phase, he said.

Both partners benefit — the developer gets around the issue of liquidity constraint and the land owners wishing to sell see a better deal rather than wait indefinitely for a buyer.

‘Cashless’ option is welcome

According to Mr R. Ramaseshan, Chief Executive Officer, BHI Capital Advisor, a private equity player that also promotes its own projects, developers are willing to look at any ‘cashless’ option in property development.

Typically, there is a demand for residential units in the Rs 25-lakh range and within the city limits, a project offering 100-200 units is something that the developers are confident will move fast. Joint venture is such an option that those in the business are looking at in these days of tight liquidity. Developers who do not want to commit funds on land and owners who hope to get more than market rate for land are both interested in jointly promoting such developments.

Mr T.S.S. Krishnan, Appaswamy Real Estates, says joint ventures are being explored in earnest by those few developers who are looking at launching new projects despite the current depressed market conditions.

Land transactions have come to a standstill and joint ventures appear to be a viable option under the circumstance. Land valuation is not the central issue in a joint venture.

It is the price of the end product price which is more or less fixed for each location and quality of construction in any urban centre. It is only an issue of the percentage share of the revenue from the project between the partners. This again depends on the location.

Advantage of transparency

The developers also point out that the reason for the preference for joint ventures between land owners and developers is the relative transparency possible in arriving at a valuation for land. The selling price of built-up space in any locality is more or less well established, depending on individual developers’ brand.

So it is only a question of working backwards to arrive at a realistic valuation of land after allowing for the cost of construction. But in an outright sale of land there are no fixed measures except for perceived value and individuals’ expectations which continue to remain high as they recall the recent buoyancy in the market, say those tracking the real-estate market.

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