Small Developers Selling Their Land Due To Cash Crunch

Due to the depressed real estate market, all projects of small developers (grade C & D) are up for sale as no development has started because of severe cash crunch. And the big developers (grade A & B) are said to be scouting for these kinds of projects as they are proving to be more viable for them.
According to sources, this phenomenon is more evident in tier II cities but, slowly moving to metros as well.
Explaining the reasons, the sources said that whatever support was available in terms of short-term financing or private equity is now focused only on large developers with stronger balance sheets because of their ability to hold out longer.
Several smaller developers are so badly hit that they are choosing to sell their land parcels to larger developers. The cities that are witnessing these kind of transactions are Amritsar, Chandigarh, Karnal, NCR, Indore, Mumbai, Pune, Bangalore and Chennai.
In fact, small developers, reeling under the impact of cash crunch, feel that holding onto their projects will bleed them more, and thus they are forced to sell them to larger developers. A number of such damage-control transactions are expected in many smaller cities and metros.“Lack of liquidity is a very serious problem for almost all developers today.
The current environment is like a perfect storm for the developer community, as almost all sources of financing have dried up, at a time when the real estate markets may also be moving southwards. Having said that, it is the smaller developers who are worst affected — so badly hit that they are choosing to sell their land parcels to larger developers,” said Sandeep Singh, director, capital markets group, Cushman & Wakefield India:
A bigger impact of the liquidity crunch is from the bank-debt side. Banks are being very choosy about whom they are lending to and for what kind of project. While large developers are still able to get bank loans, it’s the smaller ones who are having a tough time. Most of the developers expanded so fast in the last three to five years that they do not now have any ability to pump in more of their personal equity in any given project.
Explains Pawan Swamy, MD, Jones Lang Lasalle Meghraj: “In this scenario, the smaller developer has an underperforming project that was not doing well to begin with. Regardless of the state of the market, he would wish to sell it off to a larger developer, since the project is not taking off in the first place. It is a straight forward transaction based on logic rather than the liquidity issue.”

2 Comments

  1. Posted July 29, 2008 at 12:37 am | Permalink

    Rising interest rates and a falling demand may dent the realty market in India. However, the long-term prospects for the sector continue to be good, feels the industry. There are around 21 India-dedicated real estate funds that are raising money in the international market. In the next nine months, nearly $7 billion will be entering the country through various India-dedicated funds. While long-term players are looking at India, short-term players based in the US and Europe, such as the hedge funds and private equity players, are more interested in their local markets.For more view- realtydigest.blogspot.com

  2. Real Estate India
    Posted July 29, 2008 at 4:49 am | Permalink

    This was bound to happen with the sudden increase in prices and inflation ..
    I think these trends will continue until the prices of commodities , construction costs ..etc come down … and the market gains some stability

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