Developers step up land spends; Strong home sales push land capex to 27% in Q3 | The Financial Express

Developers step up land spends; Strong home sales push land capex to 27% in Q3

Developers agree that they are scouting for good opportunities in the market.

Real estate, real estate developers, real estate sector, realty, land capex, housing projects
Shobhit Agarwal, managing director of Anarock Capital, said that given the overall decline in inventories and stable margins, developers will look to replenish their project pipeline — which will translate into healthy demand for land.

Property developers have stepped up land-related capital expenditure due to strong sales and a decline in inventories in metros, analysts have said. Land-related capex surged to 27% in Q3FY23 against 18% in Q2, largely led by significant investments by Godrej Properties (GPL), according to a recent report by Nuvama Research.

GPL continued to lead in this field with 49% of collections in the first nine months ended Q3FY23, Nuvama said. “Free cash flow generation was the highest for DLF, followed by Lodha; GPL continued to have the largest cash flow deficit, largely due to its greater land capex,” Nuvama said.

Sobha, on the other hand, had land-related inflows during this period, it said. Apart from GPL, Puravankara and Shrirram Properties had cash flow deficit during the quarter.

Developers agree that they are scouting for good opportunities in the market.

“Joint developments and joint ventures have reduced now. Today we have to buy land through NCLT and banks, for that we need to pay cash upfront,” said Venkat K Narayana, chief executive officer of Prestige Estate Projects.

Prestige is setting up a residential platform with Kotak Realty Fund, wherein it will develop projects and Kotak will invest. “Such platforms help us in scaling up the business,” Narayana said.

Prestige has set a sales booking target of Rs 25,000 crore for FY26 and is looking to cross a target of Rs 12000 crore for FY23.

Vikas Oberoi, chairman of Oberoi Realty, said: “Residential cycle is well-entrenched, and we believe that the euphoria will last. We like to buy large land parcels from reputed corporates that are free of encumbrances. Our existing projects will generate substantial free cash flows in coming years, and we are actively scouting for premium land parcels in Mumbai and Delhi NCR.”

Oberoi said they are well-positioned to acquire, develop and deliver capital intensive projects.

He said there are enough opportunities available in market through joint ventures, outright acquisitions, public private partnerships, auctions, and sale of distressed assets. “However, there are few organised players with the ability to write big-size cheques. While there may be few contenders, profitably developing projects with sustainable margins is key and will shape the future landscape of real estate in India,” Oberoi said.

In a recent interview to a business newspaper, Pirojsha Godrej, chairman of Godrej Properties, had said they are in the sector’s second or third year of a cyclical upturn. “Therefore, we have 5-6 very positive years, ahead of us, and securing a land portfolio for development for that time frame will generate a lot of value. Many developers got into difficulties when they acquired a lot of land using debt. We intentionally raised equity, significantly strengthened the balance sheet and that allowed us to make the investments,” Godrej said.

He added that in 2020 and 2021, Godrej Properties raised almost `6,000 crore. That has given the company a solid balance sheet to acquire these land parcels.

A Godrej Properties spokesperson said they were travelling and hence could not comment on the matter.

Shobhit Agarwal, managing director of Anarock Capital, said that given the overall decline in inventories and stable margins, developers will look to replenish their project pipeline — which will translate into healthy demand for land.

“Inventories for Delhi NCR and Bengaluru have seen a declining trend in 2022, with sales outpacing new launches. While MMR has seen strong sales, launches have been moderately higher than sales. Developers have largely maintained their pricing power, with the ability to pass through increases in input costs,” Agarwal said.

However, Agarwal said, good quality developers do not have trouble finding land owners who are willing to partner with them on JV/JDA basis. “…financial institutions avoid JV/JDA arrangements with developers, preferring upfront cash, or assured cash flows, necessitating the developer to have ready availability of capital or credit lines to leverage such opportunities. But whichever be the mode of acquisition for a developer, the latter will still need to put up capital for premium payments for approvals for which capital would be required,” he said.

Mahaveer Shankarlal, director, India Ratings and Research, agrees.

“Land capex has gone up due to strong sales velocity in the last few quarters. Developers are extrapolating the current demand into subsequent quarters. Typically land cost in a project is 20-40% and developers would like have a mix of development pipeline with their own land and JD/JVs,” Shankarlal said.

He said financial institutions are sitting on NPA portfolios which require outright settlement, and as such developers are willing to commit funds as they are generally available at a discount compared to purchase from land owners. “This is true for non-tier 1 players, where land owners are preferring either outright sale or JDAs only with tier 1 players,” he said. He does not expect higher capex on land to lead to an increase in debt for tier 1 developers. “Post IBC 2016 and RERA, developers are treading carefully. Many of them have a leverage policy and prefer a balance between growth and leverage. JDA/JV would be most preferred model over outright purchases for at least the tier 1 developers. Land owners are wary of entering JDA with non-tier 1 players. Expect debt-led capex to be more phenomenon with non-tier 1 players,” he said.

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First published on: 06-03-2023 at 06:15 IST
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