Stringent norms, extended lull seen weighing on realty sector

Bengaluru: Stringent norms in the new regulatory regime and an extended lull in the real estate sector are likely to make it tougher for many developers to keep their heads above water going forward, with no revival in sight.

Signals of distress across property markets are stronger than ever, with the fall of many realty firms in the courts of law and unorganized developers and mid-sized firms gradually handing over the reins to so-called branded, credible firms.

Mumbai’s Godrej Properties Ltd has built a portfolio of projects by collaborating with smaller firms, mostly where the latter has been unable to develop the project themselves. “Smaller developers want to partner with us for multiple projects in one go, but we prefer taking up one by one. Active discussions are on with existing developer partners also for new projects. These developers have fundamentally realised that project development is not for them,” said Mohit Malhotra, managing director and chief executive officer.

“Many landowner-turned-developers are now focusing on their core business of land, and specialized firms with strong brand and management teams will continue developing projects,” he said.

Transactions of distressed assets are happening in various avatars. There are developers who want to get out of the business and are engaging in distress asset sales. Then there are joint development, joint ventures and development management models where a larger developer steps in and takes over the marketing, sales and construction of a project from the existing firm, in return for a share in revenue or profit or a management fee.

Anuj Puri, chairman of Anarock Property Consultants, said the number of developers in the market is shrinking, with smaller firms resorting to different means of staying afloat.

“RERA (Real Estate Regulatory Authority) compliance norms, coupled with steadily declining housing demand, has led to the exit of many small and financially weaker players, including builders, landowners and brokers. Additionally, the extending debt pressure, inability to execute projects and other financial challenges led to bankruptcy and insolvency of many developers,” Puri said.

To be sure, the distress-led consolidation is going to be a gradual process. “The ones with low leverage, whether small or big, will survive. Higher leveraged builders will be forced to sell off. But the key takeaway is that the traditional way of doing real estate is fast disappearing and the ones who will succeed will build their business models around the right product, pricing and marketing strategy. It’s not a land-banking business anymore,” said a mid-sized Pune developer, who didn’t want to be named.

The data is worrying. A January report by Knight Frank India said home sales volume hit a seven-year low in 2017, seeing a 38% decline from the peak of 2011. Home launches, too, saw a sharp fall of 78% last year to 103,570 housing units from 480,424 in 2010.

Orbit Corp. Ltd’s prime property Baug-E-Sara in south Mumbai’s Nepean Sea Road, which it had bought for Rs80 crore, has been acquired by Sunteck Realty Ltd for around Rs34.20 crore, said a Mint report in February.

Orbit has faced attachment of properties as lenders laid claim, with Vardhman Developers Ltd approaching the Bombay high court to recover around Rs118 crore from the company.

Pujit Agarwal, Orbit’s managing director, said he is focusing on trying to bring stalled projects back on track.

Even as uncertainty looms with the State Bank of India (SBI) filing insolvency proceedings in the National Company Law Tribunal (NCLT) last year, Agarwal is hopeful he will be able to turn around the company.

“Real estate development is cyclical and one must have the patience and bear the downturn,” he said.

Another Mumbai firm, Nirmal, faced with debt issues, last year set up a separate vertical Nirmal Ventures to form partnerships with other developers to jointly develop its land. It has inked deals with Godrej Properties, L&T Realty and, most recently, Shapoorji Pallonji Real Estate. “…We are still evaluating other projects for further tie-ups. We will do couple of more tie-ups this calendar year,” said chairman and managing director Dharmesh Jain. It will “follow the dual route of developing projects of its own and in partnership as well.”

In Mulund alone, Nirmal owns land with development potential of around 15 million sq.ft. “Clearly, we needed more energy in terms of partners to hasten the development process for Nirmal,” he said.

Anarock’s Puri said many builders who are in trouble or want to exit real estate development have good land parcels.

“…There is still demand for land. So the way to come out of the situation is to consolidate with large corporate firms and use the money to deliver earlier commitments. The trouble would have been if there was no demand for land,” he said.

It hasn’t helped that banks have continued to be wary of lending to the sector, and there is a lot of capital chasing a few good developers.

Ramashrya Yadav, chief executive-real estate practice, Edelweiss Group, said they have been cautious about lending to small developers. “Smaller developers would increasingly find it difficult to survive without the backing of large sales platforms or development partners. The cost of sales would be unsustainable for smaller developers driving them out of business. We will see a large consolidation as result of RERA, ushering growth of more institutional players. I won’t be surprised if 30-40% of developers are forced to consolidate with stronger firms,” he said.

As Khushru Jijina, managing director, Piramal Finance Ltd, one of the most aggressive lenders to real estate, said, “Real estate development will no longer be a minimum capital-high return-low governance model. The more established players in the market will grow from strength to strength, edging out smaller developers in the process.”livemint