Distressed builders offer large discounts to clear inventory

Q: I knew that this situation will come. PE and HNIs have read the situation very well, are driving a hard bargain.

Ketalpujara, Mumbai

31st August 2015

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Replies (4)

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 involve higher risks. 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 Ozones Chennai project.

Promit Dutta, Kolkata

31st August 2015

Comment

But they are only taking advantages of the developers by lowering risks with an assured return built in. Funds are structuring these deals with a warning of a minimum guarantee, anywhere upwards of 22% so it very much falls in the range of mezzanine finance.

Dwarkesh,

31st August 2015

Comment

Right Dwarkesh,
Even 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 which they may have to buy back the stock. That is a risk that they have to take.

Promit Dutta, Kolkata

31st August 2015

But the developers' have no choice. In spite of that, with unsold stock hitting the roof, estimated at 7 lakh units by Knight Frank across top 8 cities in India, developers have been painted into a corner since it could take as long as 3-4 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.

Nikhil Kanetkar, Pune

31st August 2015

You both are right!!!!
They read the market condition very well. It is also come to heard that Kolkata's Forum Project Holdings too has done a bulk sale to Piramal at its BKC project. Bulk sale gives huge money coming in up-front and it helps developer is not loading debt or interest. Rather than selling the apartments to 10 different buyers over 3 years, they can get the entire money today by doing a bulk sale.

Puneet Laskar,

31st August 2015

Comment

Hey Puneet!!!!
Ye to wahi haal ho gaya ki "Dhobi ka Gadha Na Ghar Ka Na Ghat ka". The plan is to take advantage of the situation and create an aligned position with the developer. They 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.

Dwarkesh,

31st August 2015

Bilkul Sahi Kaha Dwarkesh......
Last August, PFM had launched a specific fund with a R550 crore corpus for bulk buying. Recently, it invested Rs 125 crore across 3 transactions such as 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.

Puneet Laskar,

31st August 2015

No doubt, buyers will only stay with reliable 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 are also taking care to structure the transactions proficiently..

Nikhil Kanetkar, Pune

31st August 2015

It's true Ketal,
Short of cash and struggling to find buyers, developers are clearing apartments in bulk. We all know that Real estate firms are sitting on large inventories and it is found that they have very little choice but to offer huge discounts anywhere between 20% and 40%. At present they desperately need cash to complete projects.

Puneet Laskar,

31st August 2015

Comment

It is nothing but the time game. Private Equity (PE) funds and even high net-worth individuals (HNIs) are driving a hard bargain are taking advantage of the situation. But remember buyers they are offering huge discounts for bulk deals only. It helps them to bring cash flows that help him finish the projects.

Dwarkesh,

31st August 2015