2022 in review: Joint developments in real-estate sector flavour of the year

Why JDs became popular

The cash-starved developers needed money for constructing and marketing projects. Distressed developers, sitting on prime land, found an opportunity to partner with big developers who could utilise the land to execute their expansion plans.

The massive disruptions, first caused by COVID-19, and, later, by the Russia-Ukraine war, made things worse for financially weaker developers.

Rising interest rates came as a triple whammy for the debt-laden developers who were finding it difficult to service debt, leave aside raising funds for project completion.

Also, bank funding has never been easy and high interest rates made business unviable for small and medium sized developers. NBFCs, once an easier and favourite source of funding, had also dried up, thereby aggravating the financial position of weak developers.

According to industry statistics, at the end of FY22, the stressed debt of the real-estate sector stood at $2.5 trillion.

While some developers completely took to the asset-light JD model, forming joint ventures with land owners, including small developers, others resorted to a hybrid model - a mix of JD and outright purchase of land. This gave a new boost to JDs. This is clearly evident from Anarock report, which said that the top eight cities saw 68 land deals, accounting for 1,656 acres until September 2022.

Opportunities for large developers

There were also stressed opportunities for large developers for outright purchase of land, which helped fuel their expansion plans. Many lenders, including banks, went for distress selling of land belonging to players with non-performing assets.

Indiabulls Housing has been divesting land of Ambience group to recover its dues. Bengaluru-based Shriram Group has recently acquired 2-3 such distressed land parcels in the market.

Godrej, Sobha, Macrotech, Mahindra Lifespaces, and DLF are among the large developers which have gone for the JD model. There are a whole lot of other developers like  Conscient Group, Rustomjee Group, and Tribeca Developers, which also have taken the JD route. Godrej, too, has been aggressively adopting a two-pronged strategy of JD and outright land purchase.

Expansion plan of companies

In the current fiscal, Godrej has already added eight new projects worth Rs 16,500 crore, surpassing the guidance of Rs 15,000 crore. Macrotech Developers has inked multiple joint venture pacts in FY22 with Rs 15,000 crore sales revenue potential. Its target is to launch 16 projects worth Rs 10,300 crore in H2FY23, comprising 7.3 msf.

These projects are a mix of fully owned and JD with land owners. Godrej has announced investments worth Rs 7,200 crore over a year and a half through joint ventures and outright land purchase, focusing on MMR, Delhi-NCR, Bengaluru and Pune.

Birla Estates has also decided to opt for the JD model to undertake its future expansion.

According to its CEO, K T Jithendran, the company is going for an asset-light model to source joint ventures in NCR  besides Mumbai, Pune and Bengaluru and Gurgaon.

It should be noted that for large, branded developers, funding from banks, NBFCs and private equity funds has been easy. They have been getting bank funding at a single-digit interest rate. In such a scenario, matchmaking in the form of partnerships between financially weak developers and developers with strong financial muscle made business sense, a win-win for both.

Timely construction and marketing capabilities of big, branded players helped sell units faster, making early financial closure a possibility. As such, many small- and mid-sized companies made JD an essential part of their business strategy to gain operational efficiency.

A recent Ernst & Young survey has established that companies adopting an asset-light model have performed better, giving superior value. The JD model helps smaller players lessen their burden by giving non-core functions of construction and marketing to tech-savvy stronger players, which have better project execution and marketing capabilities.

The pitfalls in the JD model

There is a downside to this, especially when there are multiple partners in a JD model, leading to disputes particularly with regard to partial or late delivery  or non-delivery.

The lack of a fool-proof business plan and functional mechanism, clearly spelling out the role and responsibility of each partner, profit-sharing and long-term objectives may also lead to disputes.

A leading Mumbai-based listed developer and a mid-sized NCR developer are currently engaged in a legal battle over profit-sharing in a joint development pact.

Big, branded developers are also getting an opportunity to form joint ventures with foreign funds. In 2022, DLF set the pace for new launches with a luxury project -- One Midtown in Delhi -- in partnership with Singapore-based fund GIC.

Brookfield and Bharti Enterprises, Bain Capital, L&T Realty and Capital Land, Canada Pension Plan Investment Board (CPPIB)  and TARC (earlier Anant Raj Group) are other examples of joint ventures of Indian real-estate companies with foreign funds. More recently, British PE firm Actis and Mahindra Life space Developers have agreed to form a joint venture to develop industrial and logistics centres across India.

As the real-estate market consolidates further in 2023, the JD model is bound to witness further traction.