There are three types of partnership models available in real estate development: Joint Development also commonly known as JDA (Area Sharing or Revenue Sharing or Profit Sharing), Joint Ventures (JV) and Development Management (DM). With the real estate sector maturing in India, many landowners are willing to evaluate Develop Management model (DM Model) in real estate vis-à-vis JDA or JV models for developing different types of real estate projects.
There are different aspects of partnerships which guides landowners’ decision for selection of development model in real estates. Firstly, the internal reasons, namely, familiarity to real estate know-how, financial strength, development goal, and risk appetite. Secondly, external environment, availability of partners, attractiveness of the land for development and profitability.
Key Situations when DM Model in Real Estate (if aligned to Owner’s goal) can be best suited:
1. Luxury & Premium Residential Developments.
Land parcels suitable for apartments, row houses, or villas that command high sale price is suitable for DM partnerships. If one has a land parcel located in city locations with expected sale price to be over INR 9,000 per sqft, DM model will be profitable by at least 15% more as compared to JDA/JV models.
2. Residential Plotted Developments
Development cost of a plotted development is least as compared to other residential product types. This aspect mitigates many risks including cost & time. If a land is in the growth corridor of a city and average sale price is over INR 3,000 per sqft, this model is more attractive from the profitability perspective. Realization under Development Management model can be upwards of 20% in comparison to JDAs for landowners.
3. Commercial & Warehousing Developments
Landowners prefer to keep ownership for commercial & warehousing developments (rent yielding assets) for multiple reasons – regular cashflow, avoidance of Capital Gains Tax, leverage possibilities to name a few. In this scenario, DM provides an excellent opportunity for landowners to retain ownership of the entire developed property. If the land is in prime locations and rents are high, one should consider DM model. This model will be more profitable & less risky.
In addition to the above DM can also be considered as a partnership structure for a leveraged land parcel, [for any of the product types] on which JDA is not possible as the incoming partner cannot avail the construction loan for development through mortgage of his share of land of the project.
DM partner usually charges a fixed DM fee (% of construction cost) and marketing/leasing fee for their services. A few select DM partners are willing to evaluate investments are thereby own minor stake in the project.
Landowners need to evaluate multiple parameters – internal & external for deciding if DM is suitable for their development or not. In DM, availability of a good partner is critical. In most cases, it is only in matured (Tier 1) city and micro-markets for the said type of the development, a good and credible partner would be available. Similarly, DM partner also has certain checklist for agreeing to this type of development including market status, land location and profile of the landowner.
Therefore, landowners are advised to do an overall analysis before selecting the development models for their real estate projects.
Meraqi has assisted many property owners for land monetization transaction across different asset classes. We provide market research, partner search, financial analysis, bid management and analysis, negotiation, transaction document review and asset management services.
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