Being a frequent business traveler in Pune, I walk past a project under construction; this project was developed at a snail’s pace before. But over the past year, everything suddenly changed and the project was completed at an extremely rapid pace. When I looked closer, I saw the name of a top enterprise developer on the co-branded palisade!
I learned from the site in charge that the previous developer was unable to build on schedule due to lack of funds coupled with almost zero sales and the same project showed tremendous speed after acquisition . And, there are many such projects with similar stories in most cities.
So what exactly has changed in the last 6-7 years in Indian real estate? Is serious consolidation taking place in the RE space or is it just a passing fad?
Let’s analyze the story of 2015
Prior to 2015, there were no barriers to entry into real estate, liquidity was readily available, and sales were easy to make. Anyone who owned a piece of land would go into development given the high margins it offered. There was nothing called compliance, customer focus or business discipline. The biggest loser in this chaos was the end customer!
From 2016, through various policy measures such as GST reforms, Benami property law, housing for all and RERA compliances, the government has taken positive medium-term steps to bring about structural change in the area.
While demonetization and RERA drastically reduced the “cash” portion of real estate transactions, the Benami Property Law ensured that landholdings are well defined and the involvement of the underground economy and illegal sources is reduced.
While these measures were good on paper in the short term, in the medium term they have become major deterrents for entry into India’s property ecosystem.
The tightening of the renewable energy ecosystem due to the reforms has ensured the following –
1. Customers have become more informed about developers and the status of specific projects
2. Institutional lenders began to do more due diligence when lending, cutting short the flow of funds to unruly developers
3. Land prices have stabilized in all geographic areas. Arbitrage in land development has declined, as have overall price movements in house prices
After the ILFS fiasco and defaults from other top lenders like Indiabulls, Altico Capital and DHFL, the lending space in real estate has suddenly tightened. Paradigm
The loan change came about 6 months before Covid19 when financial indiscipline and slow sales led to developers failing to repay.
Lenders have begun to tighten the noose, strengthen legal agreements and increase due diligence. It has become increasingly difficult for small developers (i.e. landowners) to raise capital.
The Covid19 pandemic has caused further problems for frivolous developers, as construction and sales have come to a complete halt and the cost of debt has reached unprecedented levels. As established developers rethink their upcoming projects and financial models while seeking help from existing lenders, smaller ones have had to look for another recourse.
The second wave was the final nail in the ecosystem’s coffin. Despite government measures on GST, stamp duty and interest rates, many have not been able to recover. There has been a constant consolidation of the ecosystem on all fronts.
In the developer community, “weaker” developers seek to monetize their assets either by selling the land or projects entirely to more capable developers or by entering into a joint venture with them. There have been many cases of such acquisitions across the country. Apart from bailing out the existing developer, these M&A deals also unlock the financing potential of the project. The new developer, with its good credit history, is able to seek debt/project financing on much better terms from institutional lenders.
Additionally, the stronger developer is able to streamline costs through better management of suppliers and raw materials at more competitive prices.
When blocked projects are larger, corporate developers step in, in various forms. Either they buy up large tracts of land, as they did in the suburbs of Thane from MMR (Tata, Oberoi, Godrej, Mahindra, Raymond, L&T Realty, etc.), or they enter into joint development agreements with the existing promoters. In some cases where the incumbent has construction strength but no sales and marketing prowess, these companies enter into a specific agreement where the entire sales of the project is handled by them.
While few big players will continue to cross borders and have footprints in different cities (Prestige, Adani, Tata), the local micro-market flavor will continue to hold with a number of good players operating in a specific market.
On the side of institutional lenders too, considerable consolidation has taken place in which few players have bought the outstanding loan book of a few lending institutions in industry-wide securitization transactions.
Real estate support services are not immune to these dynamic changes either. Whether in real estate brokerage, or in project management, in material supply companies, or in investment banking, the bottom of the economic cycle has left all of the weaker players stranded and forced to close their doors.
As global equity and technology permeate India’s renewable energy ecosystem, all these consolidations are not short-term fads but long-term permanent shifts. Many aspects of the RE business have gone digital, from sales (digital prospecting) to home loan disbursements. From design to construction technology, everything is in line with the rationalization of resources and the implementation of green technologies. In all of these initiatives, the system has created a barrier to entry and costs of exit – which will deter the frivolous.
This consolidation is surely a fact that will remain for a long time in the Indian RE space!
The opinions expressed above are those of the author.
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