Being a frequent business traveler to Pune, I pass an under-construction project enroute; this projectwas being developed at a snail’s pace earlier. But in last one year, suddenly everything changed, and the project got completed at an extremely quick pace.When I took a closer look, Isaw the name of a prominent corporate developer on the co-branded hoarding!
I came to know from the site in charge that the previous developer was unable to construct within timelines due to lack of funds coupled with nearly zero sales and the same project showed tremendous velocity post acquisition. And, there are many such projects having similar stories in most of cities.
So, what exactly has changed in last 6-7 years in Indian Real Estate? Is serious consolidation taking place in RE space or is it just a passing fad?
Let us analyze the story from 2015
Prior to 2015, there were no entry barriers in real estate, liquidity was easily available, and sales were easy to come. Everyone with a land parcel was getting into development considering the high margins it offered. There was nothing called compliances, customer centricity or business discipline.The biggest loser in this chaos was the end customer!
2016 onwards, through the various policy measures like GST reforms, Benami Property act, Housing for all and RERA compliances, the government has taken positive medium-term steps to bring about a structural shift in the sector.
While demonetization and RERA reduced substantially the ‘cash’ portion in real estate transactions, Benami property act ensured that the land ownerships are well defined, and the involvement of black economy and illegal sources are reduced.
While these measures were good on paper in the short-term, in the medium term they have become major deterrents for entry into the real estate ecosystem of India.
The tightening of RE ecosystem due to reforms ensured the following –
1. The customers became more informed about the developers and thestatus of specific projects
2. The institutional lenders started doing deeper due diligence while lending, cutting short the supply of funds to undisciplined developers
3. Land prices stabilized across geographies. The arbitrage in land development came down and so did the overall price movements in property prices
Post the ILFS fiasco, and further the delinquencies of other prominent lenders like Indiabulls, Altico Capital and DHFL, the lending space in real estate suddenly tightened. The paradigm
shiftin lending came about around 6 months before Covid19 when financial indiscipline and slow sales led to developers defaulting on repayments.
Lenders started tightening the noose, legally strengthened the deals and increased the due diligence. It became increasingly hard for the smaller developers (read landowners) to raise capital.
The Covid19 pandemic further brought trouble for the frivolous developers as the construction and sales stopped completely and cost of debt rose to unprecedented levels. While the established developers rejigged their upcoming projects and financial models while seeking help from existing lenders, the smaller ones had to look for some other recourse.
The second wave was the final nail in the coffin for the ecosystem. Despite the government sops in GST, Stamp duty and interest rates, many were not able to recover. There has been a steady consolidation in the ecosystem on all fronts.
In the developer community, the ‘weaker’ developers are seeking to monetize their assets either by selling off the land or projects entirely to more capable developers or by entering into a joint venture with them. There have been a lot of cases of such acquisitions across the country. Apart from the bail out to the existing developer, these M&A deals also unlock the financing potential in the project. The new developer, with their good credit history is able to seek debt / project finance at much better terms from institutional lenders.
Also, the stronger developer is able to rationalize costs through better vendor and raw materials management at more competitive pricing.
When the stuck projects are of larger size, the corporate developers come in, in various forms. Either they buy out large tracts of land, the way they have done in Thane suburb of MMR (Tata, Oberoi, Godrej, Mahindra, Raymond, L&T Realty etc.) or they get into joint development agreements with the existing promoters. In some cases where the incumbent has construction strength but no sales and marketing prowess, these corporates get into specific arrangement where the entire sales of the project is managed by them.
While few large players will continue to cross boundaries and have footprints in different cities (Prestige, Adani, Tata), the local micro market flavor will continue to hold with a count of good players operating in a specific market.
On the institutional lenders’ end also, a considerable consolidation has taken place where few players have bought the outstanding loan portfolio of few lending institutions in industry wide securitization deals.
The support services in real estate are also not left untouched by these dynamic shifts.Whether in property broking space, or in project management, in material supplies companies or in investment banking, the trough in the business cycle has left all the weaker players stranded and forced them out of business.
As global equity and technology enters the Indian RE ecosystem, all these consolidations are not short-term fads but long-term permanent changes. Many of the aspects of RE business have turned digital – right from sales (digital prospecting) to home loans disbursements. Design to construction technology, everything is moving towards rationalization of resources and implementation of green technology. In all these initiatives, the system has created an entry barrier and exit costs – something which will deter the frivolous ones.
This consolidation is surely a fact that will stay in Indian RE space for long!
Views expressed above are the author’s own.
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