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Realty firms collaborate to monetize land banks

LiveMint logoLiveMint 19-05-2014 Madhurima Nandy

Bangalore: A growing number of real estate developers are selling stake in their landholdings to other developers or inviting them to collaborate through a joint development model in a bid to monetize their assets quickly.

Joint development models, common among land owners and developers working together, are unique between two real estate firms. While some are clearly resorting to this because they aren’t in a position to develop them, others are doing so to generate quick cash or reduce debt.

Earlier this month, Bangalore-based Sobha Developers Ltd said that it has acquired a 50% stake in a 17-acre land parcel in the Marine Drive area of Kochi, Kerala, owned by another city developer Puravankara Projects Ltd. Sobha paid `330 crore for 1.5 million sq ft of saleable area.

A 3 May HDFC Securities Ltd report said Sobha has already paid `160 crore to Puravankara and will pay the rest within nine months or on receipt of (project) approvals.

Analyst Adhidev Chattopadhay said in the report that it’s a win-win situation for both parties. For Puravankara, the deal means it can reduce its net debt by `330 crore in financial year 2014-15 from `1,490 crore as of 31 December, 2013. Sobha will be undertaking construction of the project and will be entitled to the cost of construction plus a markup of 10% and an additional 5% of project profit after tax (PAT) as project management fees from Puravankara, the report said.

In the city of Pune, where the real estate market is now booming, Kumar Urban Development Ltd has taken a strategic decision to collaborate or sell off land parcels of under 1 million sq. ft city locations and under 3 million sq. ft on the outskirts. Chairman Lalitkumar Jain said, “We don’t want to spread ourselves thin. So we have decided we will focus on fewer but larger projects.”

Jain added that while joint development agreements with other local builders are easier and quicker than selling outright, he is open to both options.

Recent transactions show that many more such deals are underway, said property analysts.

Ambar Maheshwari, managing director, corporate finance at property advisory firm Jones Lang LaSalle, said although such deals are not common, more are likely to be struck at a time many developers are trying to pay off their existing debt.

“This is a good way to fast-track development of projects, particularly in large developments which a developer may not want to execute on its own,” said Maheshwari.

Shashidhar Pai, managing director Citrus Properties Pvt. Ltd, said these are “surrogate deals”—where developers are unable to develop part of their land and therefore give it out for development.

“These are detailed and structured transactions with a revenue or a profit sharing model between partners,” he said.

In another such transaction this year, Mahindra Lifespace Developers Ltd, the real estate company of Mahindra Group, entered into a joint development arrangement with IREO Management Pvt. Ltd for a residential project in Gurgaon. While IREO has tied up with a hospitality partner in the past, this is the first time it has formed a joint venture with another developer, said a spokesperson for the firm.

Anita Arjundas, managing director and chief executive of Mahindra Lifespace, described the venture as a joint development agreement with a profit-sharing arrangement.

On the concept of developers collaborating, she said there are developers who have substantial land banks, but do not have the execution capability to develop these “and we will see them making these collaborative attempts.”

“Developers have three options—to keep the land without developing it, to divest or sell it off or to resort to such arrangements where it can monetize it without exiting it completely. While both partners may be developers, there is clear demarcation of roles between them,” said Arjundas.

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