Strapped for cash and struggling to find buyers, developers are offloading apartments in scores. And taking advantage of the situation, private equity (PE) funds and even high networth individuals are driving a hard bargain.
Real estate firms, sitting on large inventories, find they have little choice but to offer deep discounts — anywhere between 20% and 40% — but they need cash to complete projects. Gaurav Gupta, director, Omkar Realtors and Developers, confirms he is offering discounts for bulk deals explaining that off-loading apartments in bulk brings in cash flows that help him finish the project.
Kolkata’s Forum Project Holdings too has done a bulk sale to Piramal at its BKC project. Director Vidyut Saraf says that the advantage of money coming in up-front is that the developer is not loading debt or interest on to the project.
“Rather than selling the apartments to 10 different buyers over three years, I can get the entire money today by doing a bulk sale,” he explains.
Mridul Upreti, CEO, Segregated Funds Group, JLL India, which is looking to invest as much as R300 crore in such large deals, says he’s hoping for discounts of between 20% and 30%. Khushru Jijina, MD, Piramal Fund Management (PFM), too, is picking up apartments at an “attractive cost” such that he is able to generate an attractive risk-adjusted return over the holding period. “The strategy is to take advantage of the situation and create an aligned position with the developer. He can use the funds for construction and so will not be pressured to sell at an adverse price in a market where velocity is slow,”Jijina explains.
PFM had launched a specific fund with a R550-crore corpus for bulk buys last August. Recently, it invested Rs 125 crore across three transactions — Alta Monte project of Omkar Realtors and Developers’ in Malad, Mumbai, Forum Serendipity in BKC and another TVH Quadrant in Adyar, Chennai. PFM has another Rs 180 crore lined up to be invested in the purchase of bulk apartments in projects in Whitefield and Electronic City in Bengaluru, and suburbs of Thane and Kanjur Marg in Mumbai.
To be sure, buyers will only stay with credible developers but the deeper the distress, the deeper will be the discount the developer must cough up. An attractive price alone will give fund managers staying power and allow them to make good returns so they’re also taking care to structure the transactions efficiently. But they’re milking developers by lowering risks with an assured return built-in. “Funds are structuring these deals with a caveat of a minimum guarantee, anywhere upwards of 22% so it very much falls in the ambit of mezzanine finance,” explained Mudassir Zaidi, national director (residential), Knight Frank India. The responsibility of maintaining the asset till the time it is sold is at times that of the developer but at other times, the buyer might assume the obligation, Zaidi added.
Forum Holding’s Saraf admits that the terms and conditions put forward by the investors are tough. “The investor wants an assured minimum return at the time of exit, which could be 2-3 years down the line, failing we may have to buy back the stock. That’s a risk that we have to take,” he said. Saraf said he has managed to sell 65% of the project which has 95 luxury apartments.
Nevertheless, with unsold stock hitting the roof—-estimated at seven lakh units by Knight Frank across top eight cities in India—- developers have been painted into a corner since it could take as long as three to four years for the inventory to be cleared. Having made part of the expenditure, developers claim it is difficult for them to lower the price for all customers. Omkar’s Gupta claims, however, that individual buyers haven’t lost out since the price per sq ft at Alta Monte, is now Rs 16,000-16,500 per sq ft, and much higher than the Rs 14,500 per sq ft, when the deal with Piramal was struck. Indeed, Gupta believes the Piramal transaction has enhanced the value of the apartments. “Since there were fewer apartments left to be sold, once the bulk deal was done, the prices held and have actually appreciated,”.
That said, the fact that domestic funds are shying away from taking equity positions in projects signals low risk appetite. “Funds are not entering a project at the land acquisition stage since that would entail higher risks,”said Shashi Kumar, head (real estate investment advisory), Birla Sun Life Mutual Fund. The reaon for this is that a number of funds, which invested in 2006-2007, burnt their fingers barely recovering the principal. “They are therefore enforcing clauses to ensure a pre-determined return,” Kumar said.
Apart from Piramal, Aditya Birla Real Estate Fund and Blackstone have reportedly spent Rs 85 crore and Rs 175 crore, respectively, targeting bulk sales. While Birla invested in a Mumbai project being developed by Radius Developers, Blackstone backed Ozone’s Chennai project. Edelweiss also has an arm, which specifically scouts for bulk deals. Although FE could not independently verify the number of companies that are hunting for bulk-buyers, experts said, virtually all large players, especially ones that are reeling under unsold inventory pressure in the worst hit luxury segment, in particularly sluggish micro-markets such as south Mumbai are in the look-out for bulk-buying opportunities.