Partnerships between developers and real estate companies offer security as the economy slows. But there are obstacles to handle too, writes Niranjan Mudholkar
Synergy is defined as the cooperative action between two or more parties towards a common goal. It can be seen in the construction industry when a real estate firm ties-up with a construction company.
Take for example, the tie-up between Sahara India Pariwar and Shapoorji Pallonji & Co Ltd. Sahara has roped in the latter for Sahara Grace, its brand of residential complex at Kochi. Such associations are likely to perform well on key fronts like delivery, costs, branding and market reach. When Indian realty company DLF set up a JV company with UK-based infrastructure player Laing O’Rourke in 2006 no eyebrows were raised. It was seen as a trend.
It is simple market dynamics that’s fuelling this trend. Anshuman Magazine, chairman & managing director, CB Richard Ellis (CBRE) – South Asia, sees good reason for the trend. “The ambition to scale up from local to national, the need for better project management and execution, and the demand for superior product quality are key driving forces behind it,” Magazine says.
When a real estate firm ties up with a good construction company, it has the assurance that no time will be wasted in project execution. Sumith Reddy, head, residential vertical, south India, Maytas Properties, feels that such partnerships are happening due to the manifold benefits involved for both sides.
“For a real estate developer, some of the advantages of tying up with construction companies and making them preferred vendors are fast execution of projects and speedy deployment of resources and workforce needed. One can get competitive prices and avail their project execution skills and resources, always, irrespective of scale of project,” Reddy says.
Maytas Properties joined hands with construction firm Maytas Infra, after the latter won a bid on the basis of parameters like cost, quality and timelines. Of course, the construction company too has its share of the advantages.
“The biggest benefit that construction companies derive from tie-ups (as preferred vendors) is the security that they will get work on a continuous basis. Usually, property development companies and construction companies equally benefit through tie-ups,” Reddy adds. Maytas Properties has also tied up with Nagarjuna Construction Company and Chourasia Group of Companies.
Nikhil Mansukhani, director, MAN Infraprojects Ltd, also feels that collaborations between realty players and construction firms augur well for both parties as it allows them to focus on their respective strengths and thus deliver fantastic results.
“It is a win-win situation. The construction company can concentrate on delivery while the real estate developer can focus on marketing. This cuts down the cost, brings down delivery time and creates a quality product that maximises the benefits to both players,” Mansukhani says.
Considering the possible gains from such associations, it is not surprising that quite a few are happening even in times of slowdown. In fact, it is because of such partnerships that many parties are not ruing the slowdown factor.
“Also, the developer can optimise costs which is a big benefit during a downturn in the market. For the construction companies, the partnership is beneficial as they are assured of a contract,” says Sudarshan KS, chief operating officer, Ozonegroup.
Speaking from a developer’s perspective, Sudarshan says: “Primarily a tie up enables the real estate developer to have better cost optimisation and improve quality while reducing the contract management time, efforts and costs. The other advantage the partnership offers is to facilitate a 100% control for the developer over the back end as well as assure the desired quality.”
When the Indian construction and real estate market opened up, it marked the beginning of a new era with the entry of international players. For most of these players, establishing a joint venture with an Indian firm was and still is a practical and relatively safe option for testing the market.
On the other hand, tying up with an international company would not only mean a better brand impact but also imply access to better construction technology and methods. Magazine says that it also gives Indian companies good exposure to international design. For an Indian company planning to expand its geographical presence, this can be an ideal opportunity. JC Sharma, managing director, Sobha Developers, thinks that it is only natural that once a market starts maturing, it will look for synergies.
“It is basically about creating a national brand as against being a local name,” Sharma says.
The organised players find it easier to extend their market reach through big tie-ups. Most of these tie-ups are synergistic by nature and are likely to impact the market positively, according to Sharma. “The synergy between two good players leads to excellent control over the project, which simply translates into time and cost savings,” he adds.
Magazine of CBRE feels that the synergy between the two parties results in better systems, processes and overall experiences. Consequently, the quality of the product is also bound to improve.
In a partnership between an Indian real estate developer and an international construction company, the India partner stands to gain through exposure to and implementation of superior systems of construction compared to the conventional methods.
“There are definite advantages of collaborating with an international set-up in terms of better technology, efficient project management, faster delivery, superior quality and strong branding,” says Sunderlal, sales head, Sahara Real Estate Business.
Jayesh Kariya, partner, Deloitte, agrees. “Indian realty firms get an opportunity to work with new equipment, technologies, high quality standards that would make them able to deliver quality commercial, residential, hospitality and healthcare needs,” Kariya elaborates. “The tie up with the globally reputed construction companies increases credibility of the project and significantly enhances marketability thereof,” he adds.
Of course, it is not just the Indian partner who reaps the benefits. “The international players, particularly from the western world, get access to a new market that has tremendous potential. The real estate markets in Western Europe and Northern America are reaching a saturation point. Hence it makes good sense for players from these markets to explore the Indian space,” feels Sunderlal.
“The foreign construction companies get value for their investment in an emerging realty market like India along with an opportunity to enter into the Indian realty market,” says Kariya.
Rajesh Vardhman, managing director, Vardhman Group, also concurs that partnerships are here to stay; but he feels that foreign companies may have a gain over the local partner in these relationships.
Perhaps the greatest advantage that an Indian firm brings to the table is its thorough understanding of the market conditions.
“Foreign construction companies get the benefit of a local experienced partner who is well versed with the local regulations and practices which otherwise could make a longer experience curve for the foreign company,” states Kariya. This can indeed be a deciding factor in a market that’s getting tougher by the day.
“Considering the sensitivities and complexities attached with the real estate sector, local experience and wherewithal is critical,” adds Kariya.
Challenges to face
It would be too simplistic an approach to believe that there are only advantages to come out of such partnerships.
There are challenges too. Kariya of Deloitte draws attention to the market scenario while discussing the challenges.
Global slowdown and the recent downturn in the Indian realty market in itself is a significant challenge according to Kariya. He also feels that it is not easy to find a trustworthy and long term partner in the market.
“Another significant challenge is convincing a foreign construction company to share equity risks of the project and to contribute to the initial cost of land, which generally accounts for 40-50% of the cost of the project,” Kariya says. It doesn’t end here.
“It is essential to look into issues related to transparency in dealings and corporate governance, and terms with arbitration in the overseas country and agreements subject to overseas jurisdiction in case of dispute resolution,” he adds.
Sharma of Sobha Developers says that reaching a good understanding can be difficult in the initial stages. But this is only natural since both companies would be coming from two different backgrounds and it is likely that their standard operating procedures and their work cultures may be poles apart.
Sunderlal of Sahara too is of the opinion that coordination could be a bit of a problem if the two players involved come from diverse backgrounds. “The shortage of skilled manpower in India can also be a key issue,” Sunderlal says.
The way ahead
Synergy is the key if such relationships are to survive and do well. And synergy can happen only when the basics are right. The basics begin with choosing the right partner. Kariya says this can be done by carrying out a robust due diligence of the prospective partner, through a professional third party from commercial, legal and tax perspective.
“Both parties need to adopt a give and take approach while negotiating commercial terms,” Kariya adds.
Sunderlal, whose firm is yet to enter any such partnership, says that given the market dynamics, going ahead it will no more be a matter of choice. “What’s required is a change in mindsets if synergistic associations are to be formed,” he says. With the customer becoming quality conscious and the competition growing stiffer, one cannot but agree with him.