Tag Archives: Investors in 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

Why developers prefer investors as project riders?

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: Developers prefer investors as project riders because the investors are least interested about timelines and quality.

Homebuyer, Home Finance, Indian property market, Indian housing reforms, Property market regulations, Real estate understanding, Real Estate tips, Real estate guide, Track2Media Research Pvt Ltd, Track2Realty, Homebuyers Knowledge, NRI Investors, NRI investment pattern“Today approvals can take anything but not less than one year. During that phase nobody is going to stand by you except the investor. Even the banks are not going to fund you. All the organized funding starts once you have something ready to offer to them. But you cannot keep waiting that once the project gets approved then only you will launch it; you need some quasi investment at each every level,” says a candid Sunny Bijlani, Director of Supreme Universal on the advantages of having an investor as project rider.

Not many developers would publicly admit it but the fact of the matter is that there are many advantages for the developers to have investors as project anchors. They are the one who bring to the table initial investment, often even without any collateral or receivable. The developers need investors to provide cash, to give them money even for land, and only the investor will give them money at that early stage.

There are two models that work in the real estate investment. Mostly it is a pure investors’ pre-launch with minimum amount of understanding as to what kind of a project it would be in future. The second kind of pre-launch is crowdfunding where there is little higher understanding.

In this case the developer has the plans of what would be the shape of the project but he does not have sanctions. He has the layouts ready, even floor plans and unit plans ready and he would go for crowdfunding. So, it is a mass pre-launch and not depending only for the select set of investors.

Though the law of the land does not allow this kind of opaque transactions but it is an open secret in the Indian property market today. It is often done in an IPO model when the entire city knows about it. The advantage of this IPO style pre-launch for the developers is that the price point here is higher than the price point at which they offer it to the select set of investors.

However, the developers have their own reasons to hail investors. Devang Trivedi, Managing Director of Progressive Group goes to the extent of calling the investor as more or less a gentleman. According to him, unlike end users the investors are not problematic to ask so many questions. Even if there are some escalation charges, it is easy to deal with one such gentleman than 15 or 20 other people who will keep fighting. He will understand it. So he is an easier person to deal with once he comes in.

“Whatever I am saying is unfortunate reality and you must give credit to the developers to weather so many variables and still he is delivering despite of all the odds. Everything is against him – court, ministry, municipality, local factors, environment and market forces. The fact is that investor remains an asset for the developer. It is not just about his entry that brings money to the table. But even when he exits in many cases he does not sell it to the end users but sells it back to the developer, who buys it at thousand odd rupees cheaper than the price at which developer will sell to the end user,” says Trivedi.

So, other than the fact that the investor brings first flush of money to the cash starved sector, what also suits the developers is the fact that the investor is not going to ask them so many questions, like whether the apartment is vastu friendly or where is the wind blowing.

They just want a certain number of flats; not even bothered about the floors etc. He is not questioning the carpet and built up area. He is an easy guy to deal with as opposed to an actual user who will ask uncomfortable questions and make their life miserable.

Moreover, once the investor has given in his money he is non-interfering. Whereas an actual user wants to visit the site every month and then he will seek explanation about the pace of construction and every other thing. But for the investors all that matters is that his money keeps growing and hence he has a win-win relationship with the developer.

By: Ravi Sinha