Is Consolidation the Way Ahead for the Languishing Realty Sector
The industry today is heading towards a reasonably evident conclusion of consolidation.
Over the past few years the general trend for the real estate industry was to do horizontal development which made buying home expensive. However, since there was a demand and supply gap, the units built were getting sold very fast. With the advent of multi-storied buildings and townships in early 2000, real estate players were able to bridge the demand and supply gap.
According to Arya Sumant, Managing Director, Eden Realty Group, this provided very good returns on investment in land and the fast selling of flats further providing the desired cash flow for construction. “This led us to believe in this model of housing and egged us to construct more such housing even if it was at the expense of much higher investment on land by way of borrowing at higher interest rate with too much reliance on fast selling of units,” he admitted.
The real estate sector was probably biting more than what it could chew. Most of the players were building for Upper MIG and HIG segment ignoring the lower and lower-medium income groups, where there was still a huge gap in the supply. As a result, there was oversupply of Upper-MIG and HIG flats. With changing market conditions, demonetisation and introduction of GST, the sale of Upper-MIG and HIG took a dip.
Equity and approach of developers to play significant roles
With the fast decline in sales in the real estate sector along with financial imprudence of some of the players, the industry today is heading towards a reasonably evident conclusion of consolidation. The overloaded realty estate sector is expected to get leaner through joint developments and joint ventures between landowners and small developers with established players. Projects by small developers are expected to be acquired by bigger players and struggling developers will be selling their land banks to players with strong finances and hunger for expansion.
However, it is the amount of equity that gets into the industry by the larger PE investors will determine the future of this presently languishing sector. The approach of the global and national developers will also play a significant role.
The industry thus went through a learning cycle and is now experiencing consolidation. Initiatives from the Government like introduction of CLSS benefit for end users have propelled the demand for MIG and LIG flats. As gated communities with high-rise towers slowly getting acceptance, per sq. ft cost has also come down to a certain extent. The developers are now left with less option but to focus at building homes for LIG and MIG segments.
As there is and will always be need for homes, Sumant expects consolidation in real estate industry will prove to be beneficial for the industry as a whole. “Once the Developers offer products to cater to the real need, actual buyers will flock in thousands to lap them up. The trying times seem to be getting over and the industry is poised for better days at the end of this phase,” he declared cheerfully.
RERA, GST and Demonetization created volatility
Real estate was a fundamentally sound business for several decades. It is a sound business today and it will continue to remain a sound business for several decades into the future. According to the experts of this industry, though there is some amount of uncertainty in the sector, it is not because of sales on financial imprudence. The sector has been hit by three major events – RERA, GST and Demonetization - these major tectonic movements, that too on a national scale, has created this temporary volatility in the sector.
Rishi Jain, Executive Director, Jain Group, feels it’s not just real estate, infrastructure, textile, export, software, are also struggling in the post GST, post demonetization era. “The problem is, both implementations as well as rules clarification need a lot of dedicated focus, which bankers and statutory authorities are unwilling to do. Knee jerk reactions and sensualisation has become the ‘Trending’ topics for today,” lamented Rishi.
He cites an example to establish the fact that strong developers have nothing to worry about. In USA, an average consumer is perennially in debt for credit card and personal loan penetration is the maximum. What this mean, is that, an average American spends the money today, which he is supposed to get at the end of the month. On contrast, a consumer from Japan refuses to spend his monthly pay check even though his social security and welfare benefits have him covered till old age. Today the time is to adopt the Japanese way and not become an American.
“Developers have to refrain from borrowing heavily and prudence is required where future profits from projects are not discounted on the present day value. Debt by definition is leverage, a performance enhancer, too much of performance enhancer drugs, too much of steroids makes it poisonous for the body. It is true for any entrepreneur irrespective of the stage of their business and regardless of scale. I don’t foresee any consolidation, but we do welcome it, for, it clears away non serious players of the market,” he proclaimed.
Consolidation not an option for affordable housing sector
Sanjay Jain, Managing Director, Siddha Group, is optimistic of the market opportunities and believes that there is no need to panic. “The market, as we desire, may not be supportive as of now but things are getting better post demonetization and GST implications. For players like us, we are well-equipped to handle the hard times. Hence, consolidation is not an option to be considered,” he asserted.
The demand for affordable and budget housing has been showing an upward trend, and Siddha Group has been catering to this segment as it is a decidedly affordable-housing company. Hence, Sanjay is pretty confident in the future growth of his organization and also about the future of the companies which are affiliated to consumer demands and expectations.