Realty sector in consolidation mode even as it awaits stable recovery

About five years ago, the managing director of a leading property firm in south India had said at a realty sector convention outside the country that future meetings of developers would take place in boardrooms, and not in ballrooms. He made the remarks after sensing the government’s mood and view about the realty sector at that point in time. His prediction of a lesser number of players in the sector appears to have come true. The real estate industry in the country is seeing a consolidation now. Three major reforms &ndash demonetisation, GST and Real Estate (Regulation and Development) Act, 2016 (RERA) &ndash have had a significant impact on the realty sector, leading to the exit of numerous small players. GST and the stringent regulatory regime RERA marked a paradigm shift for real estate developers. With transparency and accountability becoming new watch-words, there are no short cuts anymore. The realty sector has been forced to follow rules and norms. The bigger and smarter players managed to tweak their business to adjust to new rules, while smaller and unorganised players struggled to formalise their business, and faced huge challenges. M Murali, Chairman & Managing Director, Shriram Properties, agrees that the realty sector has been going through a consolidation mode. “We estimate not more than 50-60 real estate developers in the country going forward. These will take care of 95 per cent of the market. There will be another 1,000 players serving the remaining 5 per cent of the market. This is what we see now. Every city may have 10-15 big players serving most of the demand,” he added. Ramesh Nair, CEO and Country Head, JLL India, also points out that the number of developers operating in the Indian market had been reduced by nearly 50 per cent in the past four to five years. Reputed developers with healthy balance sheets sailed through 2019, while the smaller ones faced extreme financial constraints. This has driven non-serious players out of the market while other smaller players joined hands with larger developers, he added. However, Niranjan Hiranandani, National President, National Real Estate Development Council (NAREDCO), felt that it would be difficult to term the ‘churn’ of developers to contractors and vice versa as ‘consolidation’. “Traditionally, we have seen contractors try and scale up their work and to become developers. Similarly, developers with spare capacity tend to take up contracting work for others. So, those who are over-leveraged would, in any case, have to merge with or be taken over by fiscally-sound companies RERA has probably speeded up the process,” he stated. In addition to key major reforms, the liquidity crunch caused by the IL&FS crisis also adversely affected most of the developers, resulting in the rationalisation of business operations. On the other hand, housing demand was impacted by the prolonged economic slowdown that led to muted consumer sentiments with slower growth in residential sales. While regulations have been a major factor in triggering consolidation in the realty space, changing buyer needs have also played a vital role. Hence, realty players who couldn’t keep ‘in sync’ with buyer requirements and couldn’t adapt to the new customer requirements had to leave the market, pointed out Hiranandani. Homebuyers have become more informed and cautious while making their home purchase decisions. They now prefer buying in projects by developers with established track record in terms of transparency, quality and timely execution, said Nair. Amid all this, the realty sector appears to be seeing a revival in demand. Though it is not even, many markets have seen a spike in housing sales, and unsold inventory is getting reduced. In 2019, housing sales witnessed a 6 per cent growth year-on-year. New housing project launches grew 25 per cent in the top eight cities in the mid- and low-ticket size category during the December 2019 quarter. Even as the industry awaits some sops in the upcoming Budget to drive housing demand, the industry believes that the new mantra is ‘perform or perish’. RERA lays down the framework under which one has to perform. Those who adapt to the new system will remain in business, it is that simple. Source: The Hindu Business Line