Real Estate sector to see large scale consolidation of Tier II & III developers
The Indian real estate sector, emerging from a prolonged slowdown following the landmark policy initiatives - RERA, GST & Demonetization – is likely to see a large scale consolidation of the tier II and tier III developers in 2018, edging out small developers stressed with unsold inventories and unpaid debt. Year 2017, saw demonetization, RERA and GST create panic among many of the smaller players. For example RERAD Act 2016 (Real Estate Regulatory and Development Act) alone enforces financial discipline, transparency, accountability, customer centricity and compliance in the sector, earlier unheard of among the unorganised, smaller and dubious developers. Similarly, demonetization hit hard on the trend of black money, especially cash transactions in the sector. Experts believe only a handful of players in the Indian real estate industry will be able to ride the tide in the post-RERA and GST Era leading to large-scale exits and consolidation. More:
Anuj Puri, chairman, Anarock Property Consultants says, there are smaller developers who while not necessarily national players are still very strong in their own local markets. However, most of the smaller players are fringe operators who do not have the financial muscle to update their systems and abide by all the new norms. “Most of these players will either look at exiting the business altogether or tag along with large, organized developers,” Puri said.
There is a notable change in the methods of doing real estate business post implementation of RERA and GST. Developers will now require increased documentation work and investments to upgrade billing systems, customer relationship management (CRM), and training of vendors, contractors and other stakeholders to ensure 100% compliance.
Developers will also have to mandatorily park 70% of the funds received from buyers into any particular project in a separate escrow account, to be used only for construction expenses involving that particular project. “The eradication of the entire mechanism of ‘rolling’ funds has utterly shaken up the hitherto existing status quo on the Indian real estate market,” Puri added.
The other good effect of crackdown on black money is a gag on all illegal sources of raising funds. Even the Private Equity players who were gung-ho on investments in real estate projects are conducting extremely scrupulous due diligence and investing only in ‘clean’ projects. It is a nigh-impossible market environment for the under-equipped players to raise fresh funds.
According to ratings agency ICRA, the Real Estate Regulation and Development Act has underpinned a wave of consolidation in the market. Strict compliance and transparency regime, adherence to quality and project timelines will force many unorganised developers to shut shop or transfer the businesses to developers with sustained credentials.
“Action by the courts and the government against builders like Unitech, Jaypee Infratech and Amrapali is an indication as to how business environment is changing. It will accelerate the pace of consolidation and the sector will witness a class of organised or branded developers emerging strongly across project categories. Many incomplete, long-hauled projects stuck due to legal or financial intricacies may see handovers to organised developers. We foresee many buy-outs, mainly by top league developers, in the year 2018,” Shubham Jain, VP and Sector Head, Corporate Ratings, ICRA said.
In the pre-RERA regime, there was no particular law to ensure that the developers complete projects as per commitments. They had more than sufficient scope for endlessly deferring completion by stating reasons such as approval delays, change in norms, etc. In reality, capital collected from their customers was 'rolled' to purchase new land or construct other projects. As a result of such dubious processes and false promises, many home buyers were duped and as per estimates, there are around 57,000 units in 170 stalled projects across the top 7 cities of India. The estimates on total unsold inventories peg the number in excess of 7 lakh units.
It is believed that with strict compliance norms under RERA, the task of completing the stalled projects is going to be exceptionally difficult for many tier II and tier III developers who have very little financial muscle. "These projects will inevitably be sold on an ‘as-is’ basis to large developers and or converted into other assets such as plotted developments. In any case, large-scale consolidation of assets is on the cards," Puri of Anarock said.
- TradeBriefs Bureau -