Now, tie-ups a realty
Trends The real estate industry in Bangalore has come a long way. Post-recession, the realty sector is picking up. With increased foreign funding and tie-ups, it is only poised for further exponential growth, writes Ruth Dsouza Prabhu
Bangalore’s real estate has seen it all... the IT boom of the early 90s, the stabilisation at the turn of the century and more recently the real estate crash. Not unscathed, the industry now is steadily climbing the growth charts. A home of a crore is no longer the privilege of the rich but rather the want of the average IT manager. Apartments rule the roost and to give the average builder competition, big names in the development fraternity now incorporate shopping complexes, multiplexes and even schools and clinics into their projects. Present day real estate present independent homes styled on European and western world lines... your very own piece of the world in Namma Bengaluru.
A step up for developers
The construction industry is not a fledgling one. Until recently the sector was filled with fragmented players and lacked a corporate approach and look. It is only now that the construction industry has taken on a more corporate and organised approach. This gives it better potential to get into real estate funding venture.
Those observing the real estate market find that the market for real estate finance has grown in leaps and bounds in the recent past. Funding for construction of newer housing projects was earlier accrued by developers pre-selling their houses. Potential buyers had to shell out the money, often times before the ground-breaking ceremony even took place.
This ensured that the developer’s capital was safe. Granted that was a great means of financing projects, till the demand went through the roof, along with the choice of facilities that had to be included. Pre-selling of real estate soon failed to work. This set the stage for the next rung that was real estate funding.
Commenting on the impact of such tie-ups on the real estate sector Ananth Bir Singh, Head - Capital Markets (Bangalore and Hyderabad), JLLM says, “For the real estate sector, foreign tie-ups work well simply because they open up more sources of equity for the company. This gives the Indian entity as well as its projects a certain amount of sustainability. Also builders in India are able to make use of the experience that foreign companies have to share and implement this knowledge in India. It is
also beneficial to the Indian companies as it helps them grow faster and spread their wings that options such as an IPO would allow.”
Ashish Puravankara, Director, Puravankara Projects Ltd (PPL) talks of their tie-up with Keppel Land Singapore and says, “Under Keppel Land, we have already started handing over residential units to customers. Keppel is one of the leading developers of Singapore and is a Government of Singapore enterprise. They have wide experience in the real estate field and have operations in several countries and therefore, they qualify the most as a foreign JV partner.”
Observers of the real estate industry feel that it was long overdue in its entry to the listed category. It has finally come of age with the increase in real estate funding. There are several reasons why this has come to happen, Central government introducing FDIs and the like are just some. The funding that is acquired is primarily used for the creation and development of newer projects. What the fund is used for also varies from deal to deal. Also how the deal is structured varies on each, in terms of the division of ratios.
A win-win situation
Every venture in the business world is done with the end goals and a great deal of returns kept in mind. Real estate funding proves advantageous to Indian builders simply because they can now launch into volume construction; townships, IT cities and the like.
Getting into a funding deal of any form will ensure cash flow for the project and the collaboration will also prove beneficial in the long run. Also in such cases, the turnaround time is much faster; one need not worry that only a certain amount of stock is sold and that funds are stuck or anything of the sort.
Adding to this Ashish Puravankara comments on the ease of exit for Indian Builders and says, “Currently, under FDI regulations, there is a lock in period of three years for a FDI project.”
He adds, “However, since large projects take this long to complete, the condition is not harsh. In so far as the local developer is concerned, it would be an additional advantage when it comes to marketing etc as international expertise is available to the customer and the quality of the product would be outstanding and different.”
Ananth Bir speaks of the advantages for the foreign company saying, “For the foreign entity he would expect a higher percentage of returns than he would get outside India. The figures are slightly variable, but a foreign company will factor in a certain risk weightage and base their returns. It also helps these foreign companies gain a foothold in the Indian market and expand their presence in terms of projects and venture. With an Indian company, their base widens. For the Indian company, it is simply a matter of additional means of equity.
Minimising risks
Sometimes, smaller companies would prefer the route of a Special Purpose Vehicle (SPV). The funding involved would be for a fixed number of projects and time frames and the profits shared on a mutually agreed basis. Speaking on its viability, Ashish Puravankara says, “It is easier to structure the investment through a SPV as it will not involve any valuation etc issues and hence, it is quicker to close as entity level investment would involve longer discussion on various aspects.”
He adds, “In any case, it also gives flexibility to both the parties to exit upon completion of the project or go for new projects. We are expanding the business of our JV by launching new projects.”
Ashish points out that in view of lock in of the investments by the foreign company, the investment has to be in the SPV or in the main entity. In the main entity, sometimes, there would be smaller projects which are non FDI compliant and hence, structuring the investment as a SPV becomes inevitable.
Risk in every business venture is inherent and this can largely be put aside if both parties involved ascertain that work is done in such a manner as to ensure returns to both. The construction and housing industry today has reached the status of being a commodity.
What about the consumer?
In the end, all of this is being done in order to increase the benefits provided to the consumer. Would such foreign tie-ups lead to a price escalation of the project? Ananth Bir Singh does not see why? He says, “The prices of projects should not escalate because at the end of the day they are still being made by the Indian companies. What comes in is largely financial helps that aids the builder in sustaining the project, especially when it is being built in phases. Such funding will allow the Indian builder to maintain the prices at a fairly good level.”
Cost involved
Ashish Puravankara reiterates this point by adding that foreign tie-ups need not escalate the cost of the project. If the foreign party has vast experience, then by virtue of their systems, the cost control mechanisms would be better and quality of the products would be different.
Hence, cost is not an issue to be worried of so long as the value is seen by the customer in terms of the quality, timeliness and discipline in delivery etc. He continues by adding that what percolates down to the consumer is quality of the product, disciplined approach, timelines of delivery etc and hence, customer is also the beneficiary of such tie ups.
Ananth Bir Singh takes a slight tangent when he says that he would not really say there are some exclusive benefits that may come. If the tie-up is for expertise, then of course, there may be some unique features that have been tailored to Indian needs that will be
introduced.
Since most tie-ups are financially related, the benefits to consumers don’t really vary. Though many may feel real estate funding is in the nascent stage, it has already come a long way in bringing real estate developers several steps ahead in the process of corporatising themselves.
Streamlining of internal processes and an overall transparency with increased fervour to deliver are just some of the good results of real estate funding. With the demands of the public evolving due to increased exposure, international tie-ups go a long way in ensuring that construction is on international standards.
