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Can joint ventures help Indian real estate companies navigate complexities and create value?

Institutional channels of funding will be much more willing to enter into JVs to support distressed projects that hold potential and are available at attractive terms.


Vikas Wadhawan

With the entire judicial and regulatory system taking a strong stance in favor of homebuyers waiting for possession of their homes for indefinite periods across India, delivery has become the key to survival for a number of real estate players in the market.

From the Apex courts to the Real Estate Regulatory Act (RERA), the kind of provisions and verdicts the authorities have enforced in the recent past leave no doubt that the real estate developers need to get the rubber hit the road.

Amidst this scenario, there would be two types of real estate companies: those who despite all the intentions to deliver their projects are stuck due to some genuine reasons and the ones who do not want to move ahead at all.

For the latter, there is going to be a much more pain in the offing and perhaps even the Bankruptcy proceedings, which is often the last resort may not offer the way out. In the third week of May 2018, the government made amendments to the Insolvency and Bankruptcy Code, giving homebuyers a stronger say in the resolution plan for the developer in question. The homebuyers are also provided the status of financial creditors unlike earlier when only banks and lending institutions were recognized as financial creditors eligible for receiving the insolvency proceedings on a priority basis.

The former ones, on the other hand, will have a rising level of support systems. For many of the developers who wish to complete their projects, joint ventures (JVs) will be the potential way to overcome the state of distress and find synergies. Real estate projects get stuck mainly due to unavailability of funds, approvals and dearth of management capabilities, and these are the typical challenges which developers can handle by joining hands with each other and leveraging on mutual strengths and capabilities.

More or less, the teething troubles caused by the slew of reformatory measures one after another in a short period of time, are going to fade out. The sector is settling in fast and things are likely to be in order sooner than later.

On the positive note, the investor community is now much more confident about the real estate sector in India. It is a no brainer that the sector is shedding off its dubious distinction of being an unorganized business fraught with issues and challenges related to transparency right from planning through to operations and management.

Institutional channels of funding will be much more willing to enter into JVs to support distressed projects that hold potential and are available at attractive terms. Developers who will offer their projects at fair valuation and terms, therefore, are slated to get a helping hand.

Although, this may not happen as smoothly as it appears to be! Until some time back, it was witnessed that despite a persistent slowdown in demand, the sector preferred to hold the horses. Prices did not move an inch, if not up, then not even down, for a long period of time. Nonetheless it changed, but quite slowly.

So maybe this new-year could usher the sector into the path of recovery, the magnitude and speed of change will only be realized in times to come.

With the real estate sector moving towards corporatization, the coming months will also bring about mergers and acquisitions (M&As) in this space. Until now, not much happens on the M&A front as the real estate companies in India generally do not have the level of transparency needed for such transactions. However, there have been a few transactions that indicate towards the emerging scenario. This includes Mumbai-based Sunteck Realty’s Rs.35 crore acquisition of distressed developer Orbit Corp’s Baug-E-Sara project situated in the Malabar Hills. There are several other developers who have expressed willingness to buy distressed asset. Lakshadweep, a JV between Suraksha Asset Reconstruction Company and Mumbai-based Dosti Realty, for instance, was recently in news for their offer to takeover beleaguered real estate giant Jaypee Infratech at Rs.7,350 crore.

The judicial system of the country is also open for promoting ways that lead to delivery of projects to buyers rather than insolvency proceedings. Recently, the Supreme Court allowed three developers viz. Galaxy Group, Kanodia Cement and IIFL-Viridian consortium to complete NCR-based Amrapali Group’s 12 projects stalled at various stages.

However, it is noticed that only the projects that are not entangled into approval or regulatory hurdles and have financial viability are evincing interests from other developers. Companies want to work on projects that have all necessary approvals in place and that are under advanced stages of construction.

From the homebuyers’ perspective, developers forming JVs is a sigh of relief as all they want is delivery of their homes for which they pay huge sums in advance, bearing the double whammy of home loan EMIs and rent on existing home.

The trend will fast cascade down to the core real estate development sector sooner than later, hopefully in 2018 itself.

The writer is Group Chief Financial Officer, Housing.com, PropTiger.com and Makaan.com.
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First Published on Jun 18, 2018 08:06 am
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