The real estate industry has pulled in the old fashioned barter system as cash-strapped developers offer unfinished apartments instead of cash payment to their construction contractors, as a prolonged sales and liquidity crunch hurts both parties. Mid- to small-size construction contractors are increasingly accepting such ‘cashless’ payments either to speed up a project or prevent it from stalling, according to several industry executives.
The barter system allows a developer to complete the project without paying the construction company and helps the latter secure business in an otherwise weak market.
In one instance, Paradigm Realty, a construction firm, has accepted payments in the form of 160 apartments out of the total 300 in the Zenith Residences project at Thane near Mumbai. More such deals are under negotiation, said Parth Mehta, managing director, Paradigm Realty.
Mehta said that the company takes certain stocks at a pre-determined rate. A lot of contractors have started opting for this route as they have not got their payment or for fear of non-payment.
Such deals are small in nature and worth Rs 30-40 crores, but it helps speed up the construction or take it to a level where sales would then take care of the project, according to Srinivasan Gopalan, chief executive officer (CEO) of Ozone Group, a property developer based in Bengaluru.
Earlier this month, the developer entered into a barter agreement with a construction firm to construct an entire 70,000 sq. ft commercial office project in exchange for some space in the building at a discounted rate. It has also done barter exchange worth around Rs 10 crores with contractors in Ozone Greens, its residential project in Chennai.
Gopalan said that given that finances are rare in today’s market, such barter deals will happen. The Ozone Group has tried it on a pilot basis and it is exploring the feasibility of doing more such deals across most of its projects.
According to Sayyed Imran Qadri, CEO, Stans Buildtech Group, a Mumbai-based construction firm such bartering has picked up in the last two years, after various regulatory reforms and the slowdown in the realty sector.
Qadri said that the Stans Buildtech Group has done such barter deals with regard to three projects in Mumbai recently. There are nine projects in the pipeline where it will provide end-to-end construction and in return take apartments in the building at a discounted rate.
Bartering has emerged as a win-win method for both developers and contractors given the slowdown in the industry, according to real estate experts.
Shobhit Agarwal, MD and CEO, Anarock Capital, part of real estate advisory firm Anarock Property Consultants Ltd said that the developers have found a way out through bartering to survive the liquidity crisis. This works for both the parties, especially small time construction firms as they also face a tough time finding contracts. They have to keep themselves busy to survive in the industry.