On Tuesday, DLF, India’s largest real estate company, priced its project on Old Mahabalipuram Road, Chennai, about 25% cheaper than the prevailing property rates in the area.
With debt drying up, small fry runs to big builder to finish projects n Big builders, in turn, seek private equity funding
Tinesh Bhasin\Joel Rebello
MUMBAI: On Tuesday, DLF, India’s largest real estate company, priced its project on Old Mahabalipuram Road, Chennai, about 25% cheaper than the prevailing property rates in the area.
Sign of impending crack in real estate prices?
It could be more a case of crunching financing pipeline.
Rajeev Talwar, DLF’s group executive director, said the pricing in Chennai was kept low to benefit buyers and investors.
“We are leaving something on the table for our customers and investors,” he said.
What such pricing does, said an analyst, is give DLF cash flows for the 60-acre project.
That is the crux of the problem facing developers today: money is increasingly hard to come by.
The Reserve Bank of India started closing the easy-finance tap in October last, when it asked banks to keep aside more money from profits every time they lent to the real estate sector - called provisioning.
“Those worried include even recently listed companies,” says the managing director of a real estate fund linked to a US-based private equity giant. He does not wish to be named.
“Their finances also depend on how the global markets fare. If exposure to emerging markets is cut down, the bigger developers, too, will start feeling the cash crunch,” he said.
To have a project financed at lower costs, developers are increasingly approaching dedicated private funds.
“In past six months we have seen proposals increasing exponentially. Even the big boys are coming up with interesting deals,” he said.
“Till about eight months back, they dictated terms,” he points out. “Now the boot is on the other foot.”
Companies such as DLF agree equity funding has become very important.
“We look at all options of funding and go for the cheapest. If an equity deal for a project is the best, we go ahead with it,” Talwar said.
DLF’s move is also a sign that the big developers have started changing their business models.
Classically, developers have mostly adopted a build-to-sell model — which is to acquire land, build on it, sell, and then start the process all over again.
“This approach keeps them cash-flow negative. Many realtors are now planning to retain commercial properties to have constant cash flows in their balance sheet. In two years or so, many of them will start renting out commercial properties rather then selling it,” said Roopa Raman, analyst with Fitch Ratings.
But now, with the debt door shutting, equity ideas are sprouting, with partners being roped in as a bailout.
“Those affected are now looking at equity options to complete projects,” said the unnamed private equity honcho.
The worst affected seem to be the smaller developers, who are being forced to go to the bigger players for project completion as banks are chary of financing.
Godrej Properties’ recent deal with the Happy Group in Mumbai is a case in point, points out an analyst. Godrej took over a project called Happy Highrises for Rs 100 crore last month.
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