Small realty cos rework deals with landowners

TCC-new-PortsmouthCampusWith reduction in land prices , an average 30% across India in the past 6 months, many medium-sized developers are trying to renegotiate the joint development agreements, they had signed with landowners earlier.

“Renegotiations have definitely started happening now with a drop in land prices,” says Cushman & Wakefield director (land & industrial) Manish Aggarwal. Players such as BL Kashyap, Sobha Developers, IVR Prime had entered into JDAs, when the real estate market was at its peak in 2007 and early-2008.

At the peak of the real estate market, several medium-sized developers found it too expensive to acquire land at very expensive rates in cities such as Gurgaon, Pune, Bangalore and Hyderabad. Then, JDAs emerged as the best option.

These same agreements are being renegotiated today because developers feel it is unviable to go ahead with projects in a slow moving market. But the agreement with landowners specifies a time limit for the project to be finished.

The market today is such that developers are being forced to offer lower cost housing, which will be impossible if they do not negotiate. To offer a lower cost product to customers, they will need to get land at a much lower cost.

On the other side, another pressure for some real estate developers is from their private equity partners who want better IRR (internal rate of return), as they perceive the market as higher risk today. Private equity players have, in some cases, increased their IRR expectation by about 10%.

“The land value and sale price along with the overall risk profile of projects have been altered considerably. Therefore, the structuring parameters will have to be adjusted accordingly too,” says real estate expert Anckur Srivasttava.

There are some developers who are trying to get out of deals completely. “Landowners have become more reasonable in the past 3-4 months. They are also willing to negotiate, as they understand that the market is slow and it might be difficult to get another deal in this scenario,” says Cushman & Wakefield’s Mr Aggarwal.

Developers and landowners today are renegotiating both on time as well as percentages. According to a source, in a renegotiation happening between a developer and landowner in Pune, the land valuation has been pegged 10-15% lower, and the developer is asking for at least another 6 months before he starts construction.

One Comment

  1. Arjun
    Posted March 17, 2009 at 6:39 am | Permalink

    Its good for small builders to collaborate and work with others.

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