Friday, February 18, 2011

Realty Market can only fall to strategic ploys

In a dynamic market, where real estate investments are soaring, can new entrants hold their own against established players? This is an issue being seriously debated by a host of players in the industry and the corridors of the ministries of finance and urban development. The biggest issue in real estate development is the fact that it is capital intensive and requires a large amount of money to sustain itself through the long gestation period of the project.
While established players could leverage their brand equity and unlock the value of their land banks to secure formal loans for new projects, new players had to fend for themselves. For over five years now, the real estate market has been growing at a healthy 30% per annum. Investments from banks, financiers, high networth individuals (HNIs) and small investors was at an all-time high.
When the going was good and investors were underwriting large numbers of units for future gains, finances were never a problem. Prelaunches were a means of securing money upfront for use during the construction period. "The logic was that during a pre-launch, an investor was taking greater risk as he was putting money upfront for a project before the mandatory sanctions were in place. He, therefore, invested a smaller per sq ft cost. When the sanctions were secured, the developer sold at a higher cost, thereby allowing the investor to sell in the secondary market at a value above what he had purchased and below the market cost," explains a real estate investment advisor.
While this practice was not necessarily legal, it fetched a lot of money for many small investors and a huge access to funds at the critical starting period of a project. During the boom cycle, developers could afford to be complacent and take money in pre-launches and delay the start of construction till enough funds were raised from investors - big and small.
Explains one of the big developers who did not want to be named: "Funds did not invest in land but came in when the sanctions were obtained and the project was about to start. But that was also the time when in a buoyant market, retail investors were pumping in money and there was enough money available with the developer to complete the project." This bridge period from the launch to money inflow was then met by the banks with short-term loans to developers, as the banks themselves had a problem of too much liquidity. As a result, banks were willing to fund all kinds of projects and even new entrants could raise loans on the basis of future developments.
But in a slowing market with higher interest rates, where the buyers are normally end users who want possession of their apartments for self-use at the earliest, developers cannot afford to be complacent and slow in completion of the project. So where do the new entrants raise finance? Experts deliberated this issue at the Credai NCR Conference on Investment Environment and Funding Mechanisms in Real Estate in New Delhi last week.
Explains Abhishek Kiran Gupta of Jones Lang Lasalle Meghraj: "There is no dearth of finance for real estate development even today." There are plenty of private equity funds bringing funds for property development. And good projects always find takers. That's the issue today. New entrants have to set their house in order, secure clear titles for land, make meticulous plans for the developments and explain to the funds and new financiers how the project will move through its lifecycle.

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