DeMo, RERA and GST struck at the very heart of the previously unregulated practices prevalent in the Indian real estate. RERA, in particular, has been responsible for smaller and often unscrupulous developers taking a major hit not only in terms of existing business but future business viability.
This is largely because of the radical change RERA has enforced in terms of the ways in which real estate business must now be conducted. From the need for verified documentation to the increased complexity of business operations and the compulsion to upgrade their billing systems, most smaller players were initially clueless about how to proceed.
Not surprisingly, Indian real estate post-RERA has witnessed major consolidation. Lower sales coupled with financial incapability also prompted several small-size developers to either exit or consider consolidation via mergers, acquisitions, and joint developments with organised bigger players.
Factors Prompting Collaboration or exit post-RERA
The elimination of pre-launches and the associated ‘rolling’ of funds collected from customers from one project to the other have come to an almost complete halt under RERA. This has exacerbated the liquidity crunch of smaller developers.
In fact, rising non-performing assets (NPAs), lower profits in the real estate sector and RBI labelling the sector as a high-risk business have made banks cautious about lending to developers. Bank lending went down from 68% in 2013 to a mere 17% in 2016, and other sources of funding such as private equity, financial institutions, and pension funds gained prominence.
However, private equity players are now conducting thorough due diligence and investing only in ‘clean’ and viable projects by established developers with strong track records for compliance and completion. Under-equipped players, on the other hand, are finding it increasingly difficult to raise funds.
The strict penalty-clause for project delays under RERA is also daunting for many tier II and tier III developers. In fact, the stalled projects of some of these players will inevitably have to be sold on an ‘as-is’ basis to large developers.
To cut to the chase, large-scale consolidation of real estate assets and players is afoot, and very much on the cards in the foreseeable future as well. This trend will eventually benefit consumers, as unscrupulous and financially undisciplined developers will be wiped out and buyers will get better products without the hitherto notorious delays, and with vastly reduced risks on their investments.
Consolidation in Commercial Real Estate
Major consolidation is not limited to the residential sector, though it has seen the lion’s share of consolidation moves. Commercial real estate is also likely to follow suit. Increasing demand for Grade A office space, which is already seeing lowest vacancy levels across the top cities, is the prime reason for consolidation within this space.
Another emerging trend is the increasing demand of institutional investors, including private equity, sovereign wealth and pension funds for matured yield-producing assets in India, particularly in the commercial space. Most of these matured and ready projects have established rentals and occupiers, for which the global entities are willing to write hefty cheques.
Besides bringing in much-needed governance into the commercial space, this new trend will make it more structured and transparent. Invariably, only the big developers will be able to survive this change.
The rising prominence of institutional investors in the Indian commercial space will also bring a change in the ownership pattern. Unlike earlier, this segment will no longer be driven by the whims and fancies of single owners.
With increasing demand for Grade A office space, rents will most likely see a steady rise and the contractual terms will become more structured. Besides, for developers who currently incur huge expenditure in commercial real estate – be it on land, construction or interior fit-outs – REITs can be a safe bet to exit the property and focus on their core area of developing.
Consolidation in IT Companies
Meanwhile, IT companies are shutting down small centres and consolidating their workforce in bigger cities. Several corporates including IT companies are reviewing their real estate strategies and monetising assets wherever possible. Additionally, companies across sectors are firming up their relocation and consolidation plans and tenants are locking in large office spaces at favourable lease terms.
Notably, it is not just the IT sector that is seeing consolidation – it is equally evident in the BFSI and telecom sectors, as well.
Despite the churn it causes, consolidation in real estate is inherently positive as it results in a more streamlined and customer-friendly landscape and also helps players to become more efficient and effective in conducting their business. While the consolidation trend has been an ongoing phenomenon for quite a while, the recent policy upheavals have put this trend front and centre.
It is certainly an interesting trend which benefits the real estate industry as a whole by opening up multiple opportunities for companies, developers and real estate consultancies. However, the fact that consolidation also involved the rather brutal elimination of few smaller players can, of course, not be ignored either. Like most change, this one involves a considerable amount of pain for the stakeholders involved.
Aradhya Homes Phase-3 set for possession
Gururgam, February 7, 2023: Gurugram based real estate player, 4S Developers, is all set to give possession of its premium...
Growth oriented Budget, needed more thrust to real estate to spur demand: NAREDCO Maharashtra
Mumbai, February 6, 2023: NAREDCO Maharashtra has called the Budget presented by the Finance Minister well balanced and growth oriented, but...
CRC Gp pledges over Rs 800 cr investment
New Delhi, February 6, 2023: CRC Group through its SPV IT Infrastructure Park Pvt. Ltd. would invest in constructing an international...
Delhi-NCR to witness 11 million sq ft office space leasing in 2023: Savills India report
6 February, 2023: The office market in Delhi-NCR has grown significantly in recent years, driven by the region’s strong economic...
Industrial & Logistics space take-up at 31.6 mn sq.ft in 2022, second highest after 2019
February 06, 2023: CBRE South Asia Pvt. Ltd., on Monday announced the findings of its report, ‘Industrial & Logistics Figures...
MaxVIL 9M FY23 Revenue, EBIDTA up 18%
February 3, 2023, New Delhi: Max Ventures & Industries Limited (MaxVIL), announced its Q3 & 9M FY23 results on Saturday. ...
Guest Column4 weeks ago
Vertex launches its largest project, VIRAAT
Guest Column4 weeks ago
TARC Tripundra achieves Rs 350 cr sales
Report3 weeks ago
After 2018, 2019, highest number of project registrations in 2022 in U.P. RERA
Guest Column4 weeks ago
The Office Pass (TOP) to open a 26000 sq ft
project4 weeks ago
2.2 million square feet Mega Project of 4S Developers to cost more than 2500 cr
New Launches3 weeks ago
NAREDCO urges Government to launch SWAMIH-2 with widened scope
Guest Column3 weeks ago
SKA Orion to be completed a year before schedule, set to hike prices due to rising input prices says Director Sharma
Guest Column3 weeks ago
SUSHMA Capital to have 1st COCO store of SUBWAY in Punjab