Renegotiation Wave Hits Indian Real Estate
Background
A significant 30% reduction in land prices across India over the past six months has prompted numerous medium-sized developers to revisit their joint development agreements (JDAs) with landowners. These agreements were initially signed during the real estate market's peak in 2007 and early 2008.
Market Dynamics
At the height of the market, acquiring land at premium rates in cities like Gurgaon, Pune, Bangalore, and Hyderabad was prohibitively expensive for many medium-sized developers. JDAs emerged as a viable alternative. However, with the current market slowdown, these same agreements are now being renegotiated due to concerns over project viability, particularly given the specified time limits for project completion.
Pressure to Offer Affordable Housing
Developers are under pressure to offer lower-cost housing to stay competitive in a slow market. This necessitates negotiating for significantly lower land costs. Additionally, private equity partners, perceiving increased market risk, are demanding better Internal Rate of Return (IRR), in some cases increasing their IRR expectations by about 10%.
Expert Insights
“The land value, sale price, and overall risk profile of projects have changed substantially. Thus, structuring parameters must be adjusted accordingly,” notes real estate expert Anckur Srivasttava.
Renegotiation Landscape
- Time and Percentage Adjustments: Both developers and landowners are renegotiating terms, focusing on time extensions and percentage adjustments.
- Example from Pune: A developer is seeking to peg land valuation 10-15% lower and is requesting an additional 6 months before commencing construction.
- Developer and Landowner Reasoning: Landowners have become more open to negotiations over the past 3-4 months, recognizing the slow market conditions and the potential difficulty in securing alternative deals.
Quoted Perspectives
- “Renegotiations have definitely started happening now with a drop in land prices,” says Manish Aggarwal, Director (Land & Industrial) at Cushman & Wakefield.
- “Landowners have become more reasonable in the past 3-4 months. They are also willing to negotiate, as they understand that the market is slow and it might be difficult to get another deal in this scenario,” adds Mr. Aggarwal.