Realty players teaming up to cut costs, debt

With land prices soaring through the roof, real estate developers are opting for asset-light models to grow business through joint development (JD) and development management agreements (DMAs).

These strategies are reducing upfront capital costs and bringing down debt levels from the highly leveraged balance sheets of developers.

Joint development

“All developers are looking at joint development, DMAs and joint ventures as they want to cut down upfront liquidity pressure at this juncture. Outright land purchase is the last option,” Siva Krishnan, Managing Director, Developer Solutions, JLL India, told BusinessLine .

While DMAs have been in use for a couple of years now, joint development is the new buzzword where land owner brings in the land and the cost of development and construction is borne by the developer. The land owner gets a percentage of sales revenue or a percentage of constructed area in the project or both.

DMAs, in contrast, are a means of rapidly spreading a realty brand across cities where developer works on a fixed fee or takes a percentage revenue share, mostly 10 percent.

Some companies patronising the JD strategy include the listed Sunteck Realty, Godrej Properties and Shapoorji Pallonji group. “Joint development is a win-win for both as the landowner becomes partner in growth and enjoys further appreciation after development. And the developer does not have to make upfront investment in buying land,” said Kamal Khetan, Chairman and MD of Sunteck Realty.

“Land is often more expensive than the construction cost of a project. Many major players have a stronghold in certain areas and can facilitate the land and provide demographic knowledge. These collaborations can help the land owner to utilize their expertise and develop meaningful properties,” says Dharmesh Jain, CMD of Nirmal Lifestyle.

Nirmal entered into JD agreements with Shapoorji Pallonji in February, where Nirmal will provide land and obtain the permissions while Shapoorji will develop and market two residential projects in Mulund.

Avoiding delays

Recently, Sunteck too paid just ₹50 crore to the landowner for a 100 acre parcel in Naigaon on the outskirts of Mumbai. The landowner will have 27 percent revenue share in the project, which will have a saleable area of around 10 million sq ft. “The market value of the land is ₹1000 crore, against which we paid ₹50 crore as refundable deposit and 27 per cent of the revenues. If we had to invest immediately in buying this land, our balance sheet would have become heavy (with high debt),” Khetan added. Sunteck will now invest in construction in phases. It has one of the lowest debt-equity ratio in the industry at just 0.2 percent and that supports its profitability. “Our net secured debt is the lowest in the industry,” Khetan pointed out.

“Joint development plays a critical role in the development and financing of most large real estate projects. With the advent of RERA, time is of essence and the collaboration of two parties helps in creating quality projects within shorter timelines,” says Jain.

However, not all developers can become part of the joint development bandwagon. “Landowners will not enter into a deal with a developer who is not grade A or Grade B. It depends on their track record and the revenue sharing ratio they bring onto the table besides the landowner’s risk appetite,” adds Krishnan.

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