Slump turns realtors into contractors

Dwindling cash flow due to crash in property prices and sales is forcing many builders to fall back on contractual projects to maintain a steady flow of revenue into their business.

These projects are helping them come around their working capital problem as developers have to spend less on construction projects taken on contract compared with those floated by them.

Revenues of Sobha Developers, which is mired in huge debts and is looking to raise capital to deleverage its balance sheet, are already skewed towards the contractual segment at 40%. Company officials say this is likely to go up further if the current market condition persists.

JC Sharma, managing director of Sobha Developers, says it was the uncertain real estate market that was pushing him to up revenues from contracting business.

“There is surety in income from contractual projects while a real estate projects is dependent on fresh sales. Today, our ratio of contractual revenue may be higher, but if the market improves, real estate will generate more revenues,” he said.

By altering the business mix of his company, Sharma wants to improve the monthly cash flow to Rs 100 crore from Rs 50-60 crore now. Sobha is currently developing 4 million square feet (sq ft) under its contractual business — a part of which is for Infosys. The real estate firm recently began construction work for HCL also.

Its rival Silverline Realty, which also has a contracting division, is also looking to push up its revenues from contractual business from around 10% to 15-22% by 2010.

Pranav Vakil, chairman of KnightFrank, says builders were following such strategies to optimise their utilisation of resources in a market that has been hit by slowdown.

“Most of them have two options before them. They can either ask their engineers to leave or find contracts to keep them occupied. Since they believe the downturn is a short-term phenomenon, they are looking at the latter option,” he said.

Sunil Mantri, who heads Sunil Mantri Realty Ltd, confirmed the trend though he said it is restricted to developers that operate in both the segments — contractual and real estate — like L&T, Shapoorji Pallonji, Sobha, Nagarjuna Constructions and others.

“These companies would be able to ensure faster turnover and keep it rolling though their contracting business,” he said.

Some weeks back, Bangalore’s Purvankara Projects even floated a construction company - Starworks Construction Infrastructure Ltd — though for a different reason. Ravi Ramu, director -finance of Purvankara, said it was a move to increase its focus on construction and infrastructure projects.

“We haven’t yet started looking for contracting projects in real earnest,” he said.
However, as builders expand their contracting revenue base, they will take a hit on their margins. Sobha’s Sharma says his firm earns around 15% margins on contractual projects while it is 35% on real estate project.

This was one of the reasons that Sobha’s reported its lowest EBITDA margin of 12.5% in the fourth quarter of FY09.

KnightFrank’s Vakil said margins tend to be lower for contractual projects because of lower risk.