After a shock default by the IL&FS Group, raising funds for real estate developers have become next to impossible. Non-banking finance corporations (NBFCs), that used to be prime source of finance for the real estate developers and builders are the worst hit, thereby, leading to extreme fund crisis in the segment.
To add to the problem is the present economic slowdown which has brought sales at a screeching stop. Sitting at the huge inventory pile-up and under-construction stalled projects, developers are having a nightmare in terms of not only completion of projects but also in mere surviving. To tide over the liquidity crunch, here is how some real estate developers are opting for alternative ways:
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Consolidation:
After RERA and GST implementation, it became tough for small developers to survive in the market. Consolidation and joint ventures have been all time high in Indian real estate with about 53% of the developers that were present in 2011-12 have already exited the market. Places like Gurugram and Noida saw a drop of round 70 percent since 2011 in the number of developers.
Such JVs create win-win situations wherein smaller developers help to get approvals and land rights while larger ones get the brand value.
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Barter System:
Another way which seem to come and go with the ups and downs of the economy is the barter system. Under this system, cash-starved developers pay one-third fee or some agreed-amount to vendors and service providers for their services and for the balance amount they offer apartments in the project once it is ready.
The system does not have watertight rules and plays as per personal rapport shared between vendor and developer.
“Whenever there is a downturn in the real estate, we have seen the trend of barter system emerging in the market,” Bloomberg quoted Pankaj Kapoor, managing director at Liases Foras—a real estate data analytics company, as saying.
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Selling instead of leasing:
Developers that are active in both residential as well as commercial segments are trying to sell off their commercial assets to get more liquidity instead of holding on to them for lease income. Developers are even selling under-construction commercial properties to get as much liquidity as possible.
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Switching From Residential To Commercial:
Commercial projects are believed to be more viable and feasible as compared to residential ones. Additional benefits like more FSI, or floor space index—ratio of saleable area to plot size, acts like cherry on the top as builder can build and sell more units in the same area.
Additionally, it is seen that commercial buildings are comparatively easy to plan. Odd-shaped plots can be planned to take out maximum space while a residential project require complex planning and chances of area getting unused and thus wasted are high.
More such property trends here.