Bangalore Real Estate Trends

The concept of forging alliance between landowners and developers for real estate development is nothing new but the impact of meltdown and liquidity crunch has accelerated the momentum towards joint development.Landowners now realise that they can no longer wait endlessly for buyers and property developers are convinced that they cannot undertake development unless cash outflow is kept to a low.The realisation on both sides has given a new twist to the joint development concept which seems to be the order of the day in residential property development in Bangalore.

The city's real estate development has picked up momentum with confidence level slowly returning to the market. As the developers are not keen to create more land banks,the preferred route is joint development for residential property over other categories.This is because office space absorption is 3.7 million sqft for the first two quarters of this year including absorption in STPI and SEZ premises.As a result not many developers are keen for commercial development though land owners are keen to do it.

The joint development ratio is based on land price prevailing in the area and not a matter of fixed percentage.There are two components mainly involved in joint development like land and construction cost.It is the land cost which governs the overall percentage.During cash flow planning land owners should factor in 6-8 months delay in construction from the date of planning sanction."This is because plan sanctions take anywhere between six months and one year depending on the project size",says Prasad Vijayapuram,CEO,Primia Constructions.

In a joint development the long-term yield will always be higher than the short-term return obtained on outright sale.According to industry sources,land owners should not ignore factors like value addition carried out by established developers while negotiating for joint development.Even a smaller ratio at a higher sales cost would yield more revenue than higher ratio at a lower cost.This is what differentiates between opting for Grade A and Grade B developers.Yet another factor is the need on the part of land owners to analyse the capability of the developers in areas such as financial stability,expertise in handling specific projects and capability to complete the projects on time.In a few instances landowners are stuck in litigation over delay in executing the project,according to industry sources.

Property lawyers caution that landowners should not mortgage their interest in the property.The suggested way is to sign an MoU which will get converted into a joint development agreement within a period of six months.Thereafter the landlord should give a power of attorney without conceding ownership rights.Then they can enter into a tripartite agreement between landowner,developer and purchaser for the undivided share of the land.Some even suggest that there should be a clause in the agreement to include the rights of the landlord to audit the sales record.

While 10 per cent of the land value is demanded as refundable advance,the ratio of built up areas in joint development exercise varies from 80:20 (landlord) in areas like Peenya and Nelamangala to 67:33 in Kanakapura,60:40 in South East Bangalore,50:50 in South Bangalore and 50:50 in north Bangalore,say realtors.

"The trend of late has been that developers have gone slow on buying properties and prefer joint development option in housing.Developers are undertaking in-depth studies to evaluate the potential use of development and asset class to develop - office,retail,residential or mixed use and at the same time taking into account the specific demand under each sector.Quite a few land owners are wanting to create income generating assets today.However,the challenge being whether the market can easily absorb such asset class.Landlords should take an informed decision on the developers' background and the asset class to ensure that the development is risk free,"says Ram T Chandnani,Deputy Managing Director South India,CB Richard Ellis.

From the tax planning point of view,joint development is the preferred route."The tax liability is deferred as capital gains liability arises only when the registration takes place",says R S Nambi,a financial consultant.Moreover,the lead time in the project implementation enables a landowner to plan his reinvestment exercise properly, he adds.

_{Source: The Economic Times, Bangalore Dt: 11-8-10}