Land Banks lose ground

Developers will increasingly move away from land banking to avoid being tied down to an illiquid asset in an evolving market.

The last two years of slowdown saw companies with much-needed liquidity getting locked up in land even as they came under pressure as demand for built-up space dropped and prices corrected across all major cities.

Developers say they will be looking more at shorter time lines for development and delivery of projects and not invest in land for the long term. Unless a company has particularly deep pockets and is willing the take the risk, real-estate companies will shy away from acquiring land to build up stock. A spin-off from this could be a sobering effect on land prices, feel developers.

This point was emphasised at a recent meeting organised by the National Association of Realtors, where it was emphasised that joint ventures with land owners was a pragmatic approach to outright purchase. An added benefit is that the price discovery was more transparent as land owners get a clear idea of market price of the final product.

Shorter timelines

According to Mr Nakshatra Roy, Director, Corporate Operations, True Value homes India Pvt Ltd, companies have realised the need to be more agile and responsive to market trends.

A few years ago, supported by a buoyant market that seemed to be on a prolonged upswing, developers were interested in building up land stocks. Land was relatively low priced, and funds were available for acquiring land.

But the recent turbulence in the market and price correction has had a sobering impact. Also, with land prices getting overly heated, private equity players and other financiers were more cautious. They prefer to invest in projects rather than in land now, he says.

Mr Roy pointed out that a company with a few hundred acres of land faces a development time of over 8-10 years to fully exploit the land parcel and get the products to the market.

This made it vulnerable to changing economic and market trends. Developers have realised the need to look at the short term, ideally they prefer to buy smaller parcels of land that can be developed over three-four years and plan on having a pipeline of projects.

Take, for instance, Chennai, he says. In the last few years, four-five growth areas have emerged, including Old Mahabalipuram Road, GST Road to the south, Poonamallee High Road, up to Sriperumbudur, and Ambattur to the west of Chennai. Why would companies be locked up in any one location, he asks.

Mr R. Kumar, Managing Director, Navin Housing & Properties Pvt Ltd, said that the market trends that had allowed developers to invest in land over the long term no longer exist.

Previously, relatively lower land prices, a booming market for built-up space, availability of funds for land acquisition had all contributed to developers building up land banks. But now the focus is on liquidity and reacting faster to market trends. Developers now need to exploit land holdings and concentrate on completing projects.

Soaring land prices, even as prices of built-up space corrected, have also made land banks unviable.

Over the last couple of years, developers have cut back on prices in line with market trends but land prices have remained steady.

A leading developer pointed out that in all the major developing corridors on the outskirts of Chennai, land prices have soared 6-10 times in the last five years. In areas where land had been available for Rs 25-30 lakh an acre five years ago, the land owners are now demanding a few crore rupees.

The developer said that on the outskirts of Chennai — 25-30 km to the south or west — there is stiff resistance to prices of residential property. Most activity was in the price range of Rs 30 lakh an apartment but builders would not even recover the construction costs if they were to launch a new project on land purchased at current levels.

Joint ventures

Mr Chitty Babu of Akshaya Pvt Ltd, who has in the last five years tied up over 15 joint ventures on Old Mahabalipuram Road, popularly known as the IT corridor, said joint ventures are the way forward.

Akshaya had been among the earliest to launch residential and commercial projects on the OMR and had procured land through joint ventures to avoid locking up investments. Joint venture is an ideal option to meet expectations of developers, land owners and customers, he said.

While it may be tough to arrive at a mutually satisfactory price for land, prices of built-up space are relatively more transparent. The partners in a project can work backwards to arrive at a viable valuation for land pegged on the product price to be able to fairly share profits, Mr Babu said.

Business Line, 25, July 2010