Facing liquidity issues, big realtors eye new development management models

Godrej Properties, the real estate arm of the Godrej Group, recently signed a development management (DM) contract deal with Pune-based developer Solitaire to develop a project of 25 million square (sq.) feet (ft) and invested its money in 50 per cent of the land cost.  

In a normal DM model, Godrej would not have given money for the land. It would have just lent its name to the project and carried out the construction, marketing, and sales for a fee which is 12-15 per cent of the top line of the project. It has already paid around Rs 500 crore and is giving some more money to its partner.  

Godrej signed a similar deal with a Bengaluru-based developer recently. In the new version of DM, Godrej may or may not charge a fee, as it’s a 50 per cent partner in the project.

Goods and services tax and the Real Estate (Regulation and Development) Act (RERA) created liquidity challenges for small developers. For instance, RERA bans the pre-launch of projects before approvals and mandates that 70 per cent of a project proceeds have to be kept in an escrow account. 

 It is these liquidity issues that have led to landowners/developers failing to fund projects, damaging the reputation of their partners who are normally big brands. Faced with financially troubled partners in DMs, top developers, such as Godrej Properties and Shapoorji Pallonji Real Estate, are looking at new DM models to safeguard their interests. 

In a DM deal, landowners have to take care of approvals and funding but need not bother about the hassles of construction and marketing a project. For the other company, it is a way of earning additional revenue with a DM contract.

"DM works where partners have strong balance sheets. Today, not many partners are available. That’s why we invest our own capital in the land," said Mohit Malhotra, managing director, Godrej Properties, adding the company will also earn revenue from their investment.

 Shapoorji Pallonji Real Estate plans to focus on DM fees from institutional platforms where developers and large investors tie up for a number of projects and ensure financial closure of a project. 

 It is also looking at opportunities where a bank has restructured a project and is looking for a DM partner to develop the project for them, said Venkatesh Gopalkrishnan, chief executive at Shapoorji Pallonji Real Estate.

"Due to liquidity crunch, financial closure for projects has become more and more difficult. Shapoorji Pallonji does not go ahead with a developer without financial closure. Hence, some of the DM projects are going slow," said Gopalkrishnan. 

 He said his company is very careful with the DM model as it throws the full weight of its branding, marketing, and construction teams behind it. 

 Currently Shapoorji Pallonji’s DM business has a fee potential of Rs 2,500-3,000 crore in the next four to five years. "We have around 88 million sq. ft of residential development in the pipeline, of which around 12-15 per cent will be DM projects," said Gopalkrishnan.

 However, some prefer to stay away from the DM model, owing to the high brand risk. One such company is L&T Realty whose chief executive Shrikant Joshi is aware of the possible pitfalls. 

 "The original developer/landowner remains in charge of all clearances and funds as well as delivery, while the DM partner is mainly responsible to sell and ensure cash flows. The DM arrangement is extremely easy to enter, very difficult to deliver, and impossible to get out of, with the customer and the brand at great risk," said Joshi. 

That’s why, as Godrej’s Malhotra explains, his company puts its own funds in at the stage of land acquisition and takes full control of the project, including delivery.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel