Cashed-up property developers in India snap up land bargains

The surge in Covid-19 cases and stress in the real estate and shadow lending sectors have combined to drive prices down, experts say

Mumbai, India. Distressed landowners in India are selling their properties to developers with strong balance sheets. Getty Images
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Indian property developer Kamal Khetan is in an unusual position. For the first time since the 2008-2009 global financial crisis, he is being inundated with offers to acquire land in Mumbai from distressed sellers.

“We feel that this is the time to do acquisitions,” Mr Khetan, chairman and managing director of luxury residential property developer Sunteck Realty, says.

Landowners “are coming at a very reasonable price because it's now the buyer's market, not the seller's market”.

The cracks started to show in 2018, when a crisis in the non-banking financial sector sapped liquidity for property companies. This was followed by the onset of the Covid-19 pandemic and now India's devastating second wave of coronavirus infections, which have combined to create a favourable environment for developers with strong balance sheets to buy up swathes of land.

Landowners – who in recent years were reluctant to give up their prized assets to developers – are now willing to sell. However, there are only a handful of developers in a position to buy, which means they are driving hard bargains.

The situation is pronounced in Mumbai, where land has long been scarce in the overpopulated financial capital.

But it is a trend found across many major cities in India, including the national capital of Delhi and the tech hub of Bangalore, analysts say.

“Definitely, the land prices have seen some kind of a correction in the last 12 months,” Piyush Gupta, managing director of capital markets and investment services for India at global real estate services company Colliers, says. “This is not only linked to Covid stress, but it's linked to the overall stress in the real estate and the non-banking sector.”

The turmoil in the real estate sector linked to stress among non-banking financial companies, also known as shadow lenders, forced many developers to exit the market as funds dried up. For years, the sector had been highly fragmented with smaller players that had been taking advantage of easy funding from the non-banking sector.

“Now, there are very few players who are active and who have the capabilities to acquire – both financial capabilities and operating capabilities – and develop large projects,” Mr Gupta says.

Land prices in the current market declined by about 15 per cent, but landowners are finding innovative ways to do deals by tying up with developers on projects, Mr Gupta says.

“Very few companies have a strong balance sheet or that kind of a pocket in this market to go and acquire land in the current situation, where the second wave is really bad in India,” Mr Khetan says, adding that land is being discounted by 20 to 25 per cent.

Mr Khetan's company, Sunteck Realty, last year snapped up 8 million to 9 million square feet of land in joint development projects with landowners, which are structured so owners receive a share of revenues from property sales.

“We are confident this year will be similar or better than last year” in terms of land acquisition, Mr Khetan says, adding his company will consider purchasing land parcels outright, as well as joint projects.

About 150km away in the city of Pune, Rohit Gera, managing director of Gera Developments, is also benefiting from landowners prepared to part with their holdings.

However, it is not only landowners who are selling – developers are also seeking to offload land to raise cash to pay off debts, Mr Gera says.

“The last thing a developer wants to sell is land, but now they are willing to do so,” Mr Gera says. “Normally, we'd be competing with these developers in order to try and buy the land.”

The board of Gera Developments “last year approved our highest ever capital outlay towards land acquisition for this year and my next two-year plan”, Mr Gera adds.

The developer is expecting to purchase 45 acres (18.2 hectares) of land this year, up from 12 acres in 2020.

At present, there is a lot of uncertainty in the market and that is rubbing off on the land prices as well

There are several factors that have played a role in the trend and "developers were buying land pretty indiscriminately for quite some time”, Mr Gera says.

In 2106, the government demonetised 500 and 1,000 rupee notes to clamp down on black money flows, while its real estate regulation act, which came into effect in 2017, also drove fly-by-night players out of the market.

The non-banking financial crisis then led to a tightening of credit, triggering financial distress among a number of developers and prompting further consolidation in the market, Mr Gera says. This led to opportunities for developers with strong balance sheets in a market now hit by a resurgence of Covid-19 cases.

Securing funding is not proving to be a challenge for his company and other major developers that have a solid track record, Mr Gera says.

“We have access to both funding on the debt side as well as funding on the private equity side,” Mr Gera adds.

However, the downside of the current environment is that the second wave of Covid-19 infections is impacting homebuyer demand, developers say.

This comes after the sector saw a strong rebound towards the end of last year as the spread of the virus eased and optimism improved on the economic outlook.

“At present, there is a lot of uncertainty in the market and that is rubbing off on the land prices as well,” says Aditya Kushwaha, chief executive and director at Axis Ecorp, a developer that specialises in building holiday homes in India. “As a result, some businesses are looking to exit at a reasonable margin. This is a trend that is being seen across the country as people have become a little cautious owing to the second wave.”

“[But] given the current climate and how things are shaping, we have been scouting for bargain deals in and around holiday destinations in North India.”

There are some areas in major cities where land prices have risen, experts say.

“While there have been some pockets where the land prices have come down and businesses are looking to make the most of it by bagging these bargain offers, things are not the same all across,” says Vinit Dungarwal, director at AMs Project Consultants. “Land prices have increased in some pockets with development potential.”

Despite the fact that developers are picking up cheaper land parcels, this may not necessarily translate into lower prices for homebuyers.

India's residential property market has already corrected and developers say they do not see much scope for prices to come down further despite the favourable land deals they are doing. This is partly because their costs, including labour and raw materials, are rising.

Mr Khetan remains optimistic about the outlook for demand for homes in India. He is expecting to see a spike in purchases following the second wave, as the work from home trend and the pandemic have prompted many people to prioritise home ownership.

He is also noticing a pick-up in interest from non-resident Indians who are returning home or want to have a house close to their family.

As a developer, “the market has not been good” for the past decade or so, Mr Khetan says.

But changes in market dynamics have aligned to create an opportunity for Sunteck to capitalise on, and the company does not want to miss out.

“We want to take this opportunity and grow our company the way we did, in fact, during the Lehman [2008 global financial] crisis,” Mr Khetan says.