Tag Archives: Funding gap of real estate

Disadvantages of investors as project riders

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: While the investors may be advantageous to the developers in many ways, the biggest disadvantage is that the developer who is the first stakeholder in the project is not controlling the price.

Investors, Investors in real estate, Funding partners of real estate, Track2Realty, India real estate news, Indian property market  In many of the micro markets across the country there is a huge gap between the pre-launch sales price of an apartment and the revised price after every six months. What confuses the average homebuyers is the fact that in the wake of slowdown and slow sales when there is hardly any sale how come the developers are constantly increasing the price.

Worse even, in many of these markets there are much better and attractive offers available in the secondary market, further dampening the sales drive of the developer and yet there is no price correction to keep the business cycle moving.

The reason of this rigid pricing is the presence of investors and under-writers who have invested heavily into the project and they control the price point. That is the ground reality and off the record many developers admit that the price reduction is the only way to come out of the slowdown but the investors are not allowing them to do it.

So, while the investors may be advantageous to the developers in many ways, the biggest disadvantage is that the developer who is the first stakeholder in the project is not controlling the price. And he is not being fair to the long term of the industry prospects. 

Sahil Shah, Principal Partner of Square Yard Consulting agrees that the ability to scale up gets limited. If the developer wants to go to 20 cities or international and his books are manipulated with cash or other kind of funds then it gets complicated.

“Moreover, each investor wants to deal with the top management or the owner. So, if you are going pan-India that kind of bandwidth is not possible with the investors. In that case may be you will have no option but to go for crowdfunding,” says Shah.

However, Sunny Bijlani, Director of Supreme Universal does not see too many negatives other than the one negative that the developer has to compromise on the margin of his profit. He says one has to be very smart in terms of bridging finance and the timing and quantum of inventory that the developer wants to offload to the investors.

“Problem comes when you start compromising on margins to buy more land. This is where the developer has to be clear with the investor and there has to be a price restriction that the investor cannot sell below this much price and minimum lock-in period has to be there. Failing that, the biggest disadvantage is that if there are more than 20 per cent speculative investor into the project running the entire supply then it goes against the basic fundamental of the market because eventually that speculation will lead to comparison between your stock and other stock in the same micro market,” says Bijlani.

Devang Trivedi, Managing Director of Progressive Group says first and foremost, investor money is only for the short term. Secondly, a developer cannot start his next project on the existing investors because he does not know his financial bandwidth. So, every time one will have to find a new investor unless he gives him the exit. But even if the developer gives him the exit the investor will find five other developers and then may or may not come back to him.

“Another thing is that compared to debt investor is generally costly. He also has constrains with the cheque amount. Last, but not the least, investor is a problem when the market is slow and if it goes in reverse they are the first people that will offload and that makes a mess of the entire project. Real estate is anyway their side business. Moreover, the market buzz in this case that the investor has the inventory in this project is counter productive for the developer,” says Trivedi.

Beyond the argument of disadvantage from developers’ perspective, the biggest disadvantage is not for the developers but for the end users. It takes the project out of the hands of the developers also in many cases and makes it unaffordable for the actual buyers.

Even for the developers, if he is overly dependent on investor he will deliver a ghost town which is not a god thing for a developer for his subsequent project. Second thing is that an investor is a fair weather friend and the day he is not making money he will be harsh to the developer and talk about him in the circle that matters. That is enough to damage the reputation of the developer.

Last, but not the least, once the developer has sizeable number of investors in the project it is literally impossible for him to reduce the price. Even if the market is forcing him to reduce the price, that investor won’t allow him to reduce it. After all, in many of the cases the investors’ holding power is better than the holding power of the developer.

By: Ravi Sinha