Deconstructing business

A number of prime projects are being abandoned as developers face a severe cash crunch. DLF has opted out of a project to develop a 5,000-acre township at Dankuni in West Bengal. In one of the biggest and most expensive land deals of its time,BPTP had won an auction for 95 acres of commercial land in Noida for Rs 5,000 crore. The developer recently wrote to the Noida authority to dissolve the deal. This extreme step was taken as the developer needs to reorganise its debts. Developers with large and ambitious housing projects on the anvil definitely should defer their implementation until market demand once again progresses to larger formats. The writing is too clearly on the wall to ignore, says Puri.

Navin N Raheja,MD,Raheja Developers,says,Developers facing serious debt crunch should not plan more projects that become unmanageable later. To reorganise debt,it would be better for them to shelve some of their big projects so that funds can be diverted to repaying debts and construction of held-up projects. Downsizing the company by offloading unviable projects,where investment and cash outflow are high,would be a good idea.

LANDS OF PLENTY? NOT NOW

Almost all developers have halted fresh land acquisitions. Some have even started selling off land parcels to restructure their debt. Sachin Sandhir,country head of Royal Institute of Chartered Surveyors,a UK- headquartered organisation that imparts training to develop real-estate professionals,says,Liquidation of land banks is another option that developers are resorting to,in order to raise capital,which can be channelised to service immediate debt or to complete existing projects. Developers need to prioritise their projects rather than shelve them altogether. Priorities should be based on factors such as the status of construction and commitments made to customers,rather than project size.

RESTRUCTURING DEBT

Ever since RBI began easing monetary policy and enhancing liquidity ,developers who have been struggling to service huge debts are queuing up to restructure as much as 50-60 per cent of their overall debt. Not just the big players,even mid-sized developers are restructuring their debts. Sobha Developers,a Bangalore-based real-estate developer that has about Rs 1,900 crore of debt on its balance sheet,is restructuring 45 per cent of it. Delhi-based Omaxe,which has been downgraded by international rating firm Fitch,is in talks with 14 banks to restructure its debt. Another Delhi-based player,Parsvnath Developers,is also restructuring its debt besides reining in some of its expansion plans. Developers are restructuring short-term debts into long-term liabilities and are seeking moratorium on repayment for at least one year. These steps are expected to bring down their cost of funds on outstanding loans from 14 per cent to about 12.5 per cent.

LOWERING PRICES

DLF,the countrys largest realty player,recently reduced the price of its residential project in Bangalore by 24 per cent. The revised price of the project, Westend Heights in New Town,is Rs 2,100 per sq ft as against the October 2008 launch price of Rs 2,775. Lowering prices is another instance of developers reworking their returns expectations. Other developers now need to emulate DLFs example of significantly cutting prices of their residential projects to get their inventories moving. This is a time to re-establish consumer confidence,not follow an outdated business agenda based on profit objectives alone, says Puri.

SURVIVAL TACTICS

Now that they are part of the ground reality,developers need to judge real demand. The basic change required in business models is a tweaking towards affordability. More than 12 lakh people lined up for just 5,000 DDA flats,which means there is demand which the business models have not factored in till now. RK Mittal,CMD of CHD Developers,says,Efforts must be made to provide quality housing options that suit buyers budgets. Developers should now offer more value to their customers and concentrate on profits through volumes instead of high margins. CHD Developers is developing affordable residential properties in smaller cities like Rishikesh,Vrindaban and Karnal.

Only by rationalising size,specifications,services,and cutting costs they can streamline themselves. Puri suggests companies should seek professional guidance on right location and format that are in sync with prevailing demand,and professional project management for all future projects to ensure that they are completed in time and within the projected financial estimates.

Developers will have to usher in operational efficiency by streamlining internal processes. According to Sandhir,some companies have begun strengthening their procurement strategy,clubbing projects to achieve economies of scale,and procuring directly from manufacturers. Developers must look at innovating to reduce project costs by adopting best practices in project execution and construction methods, he says. Raheja emphasises the importance of adopting better technologies to lower cost and improve quality.

SWIM WITH THE TIDE

What can save real-estate developers from a certain doom is realigning with the reality. The mindset that they can stick to their game till the downturn lasts is self-deluding and may even be suicidal. The drastic change in circumstances demands that they too change drastically. l

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