India’s Stressed Real Estate Market Is A Study In Contrasts
A common refrain in India's housing market is that bigger, better-funded developers are gobbling up stressed smaller peers. Yet, two sets of data throw up conflicting trends.
An analysis of the real estate market in 60 cities by property consultant Liases Foras found that the number of developers has jumped since the year of demonetisation, the first in a series of setbacks for the sector. That suggests the market has broadened.
Another survey by ICRA Ltd., however, estimates that the share of top 10 developers has nearly tripled since then. The results imply bigger players are gaining ground.
While contradictory, both the trends are true. It’s no secret that fund-starved builders are looking for bigger peers to bail out stuck projects. Even the Modi administration set up a rescue fund to revive stalled projects. But the market is offering new opportunities for more players to jump in. The trend accelerated during the pandemic.
There has been a shift in the operating model of the real estate sector in 2020, giving rise to new asset classes such as affordable housing, rental housing, co-living and co-working spaces, senior citizen living, warehousing or student housing, according to Niranjan Hiranandani, national president at developers’ lobby Naredco. “This has paved the way for the new entrants to enter into the market, making it competitive.”
India’s cash-driven real estate sector was worst hit after Prime Minister Narendra Modi outlawed nearly 86% of the currency in circulation overnight in November 2016. Stricter housing law and a credit crunch following defaults of IL&FS group worsened the stress, causing an inventory pile-up. As developers banked on a revival led by affordable projects, Covid-19 struck—sales tumbled 19% in 2020 in top eight cities. Builders, however, are expected to keep chasing newer segments to drive demand.
Liases Foras’ study captures this shift. Its analysis of top builders in 60 cities shows that the number of developers rose steadily from 2016 to 2020 to more than 12,400, according to the property consultant.
The data show the sector is becoming broad-based and it’s not a builder’s market but a price and consumer market, said Pankaj Kapoor, founder and managing director, Liases Foras. “Whosoever is offering a cheaper discount, you are buying from them. Today, the market is like Amazon sales. You are picking the best offer available rather than going only to a branded developer project.”
The share of top developers in the number of units sold and the value of sales also fell in 2020, according to the study.
Demonetisation and Real Estate Regulation Act have enabled developers, said Kapoor. The credit, according to Kapoor, has expanded to small developers and that is now reflecting in data.
“Earlier the lender won’t give money and credit to small developers because they did not know him and there was no benchmark under which he could be monitored,” he said. “After RERA, they have confidence, they have the data available, they know that he has to follow the regulations laid down.”
That’s not to say that there is no consolidation. According to ICRA, the sales market share of the 10 largest listed realty companies rose from 6% in the 2016-17 fiscal to nearly 16% in the aftermath of Covid-19. Their share in launches rose to a five-year high of 19%.
The survey of 14 large established developers with 296 projects launched for sale confirmed that bigger developers are benefitting from consolidation in demand and availability of credit, the agency. Most expect operations to normalise in FY2022.
One reason this consolidation may not have been captured yet is because incoming developers are managing projects while taking a share in revenue instead of outright purchases, according to Amit Goenka, managing director & chief executive officer at real estate-focused investor Nisus Finance.
“Which means that on the face of it you may seem that the developer is there or continues to grow, but the fact remains that these projects have gone to the larger boys to complete, develop and exit,” he said. “We ourselves have invested in smaller developers provided there was a larger partner who stepped in with a guarantee.”
The biggest stumbling block for smaller developers is lack of capital, making them consider partnering with bigger peers, Goenka said. “Banks are not active lenders, NBFCs have gone away and there are very few funds like us. Money is only available to the larger credible players.”
Yet, the shift towards bigger players has been slow.
Pandemic Will Shape The Market
BloombergQuint reported in October 2019 that though consolidation a few large real estate players, it has not driven sales as much as expected. Then the pandemic struck, disrupting demand for everyone.
The virus, however, is likely to accelerate the shift of demand towards stronger developers.
For the broader market, Covid-19 triggered one of the worst demand crashes in recorded history with housing sales volumes tumbling 35% over a year earlier in the nine months ended December in the top eight cities, said Mahi Agarwal, assistant vice president and associate head, ICRA. Larger players fared better with ICRA’s survey respondents indicating that 62% of the projects being developed by them saw less than 20% decline.
Better demand, strong balance sheets and adequate liquidity have enabled larger developers to weather the storm better.
“The acute liquidity crisis, migrant labour issues and disruption in supply of raw materials stalled projects,” Hiranandani said. “The weak and stressed players who couldn’t withstand the tsunami, started to opt for divesting their assets by consolidation method.”
Established developers with strong financial discipline and brand equity, he said, will gain higher market share after Covid as housing emerged as a winning asset class either for self-consumption or a lucrative investment option.
According to ICRA’s Agarwal, operating cash flows for most developers are expected to moderate in the ongoing fiscal, increasing reliance on available cash and refinancing. Bigger, organised players with liquidity buffers and lower debt will benefit, aiding consolidation, she said, adding that range-bound prices and low home loan rates will help.