Will 2018 mark the con­sol­i­da­tion for smaller de­vel­op­ers?

Mas­sive con­sol­i­da­tion can be a one­time clean­up to en­sure the health­ier growth of realty

Hindustan Times (Chandigarh) - Estates - - ESTATES - The au­thor is chair­man – ANAROCK Prop­erty Con­sul­tants Anuj Puri ht­es­tates@hin­dus­tan­times.com n

Con­sol­i­da­tion is the process of com­bin­ing a num­ber of sep­a­rate parts into as­in­gle, more­ef­fec­tive or co­her­ent one. When­ever there is con­sol­i­da­tion in any sec­tor, the gen­eral per­cep­tion is that ev­ery­thing is go­ing down the drain. How­ever, the re­al­ity is that this process usu­ally hap­pens at the fag end of an in­dus­try down­turn and ac­tu­ally helps in cat­alyz­ing a much stronger come-back.

The real es­tate sec­tor is a clear case in point. It is emerg­ing from a pro­longed slow­down cou­pled with land­mark pol­icy in­puts which have be­gun to edge out the ‘small fry’ - essen­tially cre­at­ing an en­vi­ron­ment of large-scale con­sol­i­da­tion of tier II and III de­vel­op­ers. This dy­namic alone will de­fine 2018 as a year of mas­sive pos­i­tive change for In­dian real es­tate. In 2017, the over­all In­dian econ­omy and the real es­tate sec­tor, in par­tic­u­lar, were well and truly shaken up by a se­ries of un­prece­dented re­forms and struc­tural changes. With­out a doubt, de­mon­e­ti­za­tion, RERA and GST will go down in the an­nals of In­dian real es­tate his­tory as the ‘tr­ishul’ that struck at the very heart of un­reg­u­lated real es­tate play­ers and prac­tices.

Un­der­stand­ably, they re­sulted in panic among many of the smaller play­ers. If we take just the case of RE RA, it be­comes ev­i­dent why this was the case. R ERA en­forces fi­nan­cial dis­ci­pline, trans­parency, ac­count­abil­ity, cus­tomer cent rici ty and com­pli­ance, and th­ese were ei­ther com­pletely alien con­cepts or at least com­pletely avoid­able philoso­phies for the smaller (and of­ten du­bi­ous) de­vel­op­ers ac­tive on the mar­ket then. While De Mon blew the lid off the top of the cauldron of black money in the sec­tor, only a hand­ful of the play­ers in the In­dian real es­tate in­dus­try will be able to ride the tide in the postRERA/GST Era - for the fol­low­ing rea­sons:


R ERA and G ST ne­ces­si­tate a rad­i­cal change in the meth­ods of do­ing real es­tate busi­ness. There is a mas­sive fo­cus on com­pli­ance, doc­u­men­ta­tion, pro­cesses, etc. which will in­crease the costs and com­plex­ity of busi­ness op­er­a­tions. In ad­di­tion, de­vel­op­ers will have to in­vest sig­nif­i­cantly in up­grad­ing their billing sys­tems, C RM, etc. as well as train­ing their ven­dors, con­trac­tors and other stake­hold­ers to en­sure 100% com­pli­ance to R ERA and G ST norms.

There are, of course, 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.


Un­der the RERA regime, prelaunches have come to a com­plete halt. In ad­di­tion, de­vel­op­ers 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 on­the In­dian real es­tate mar­ket.

Si­mul­ta­ne­ously, the crack­down on black money has closed all il­le­gal means of rais­ing funds, even as PE play­ers in­ter­ested in In­dian hous­ing plays are now do­ing ex­tremely scrupu­lous due dili­gence and in­vest­ing only in ‘clean’ projects. It is a nigh-i mpos­si­ble mar­ket en­vi­ron­ment for the un­der-equipped player to raise fresh funds.

Smaller de­vel­op­ers, es­pe­cially tier II andtier III de­vel­op­ers, will face the brunt of th­ese norms, re­sult­ing in a liq­uid­ity cri­sis which will ne­ces­si­tate their exit from the busi­ness.


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 home­buy­ers were duped and as per es­ti­mates, there are around 57,000 units in 170 stalled projects across the top 7 cities of In­dia.

With the ex­cep­tion­ally strict com­pli­ance norms un­der RE RA, the task of com­plet­ing their stalled projects is go­ing to be ex­cep­tion­ally daunt­ing for many tier II andtier III de­vel­op­ers who have very lit­tle in­her­ent 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.


With sub­dued real es­tate de­mand for the past few years, many de­vel­op­ers have lever­aged their bal­ance sheets to an ex­tent that has made it im­pos­si­ble for them to man­age their debt re­pay­ment sched­ules. With some de­vel­op­ers al­ready declar­ing bankruptcy, banks and FIs are also keep­ing a close watch on the re­pay­ments and are com­pletely un­will­ing to take any ad­ven­tur­ous risks. With mas­sive pres­sure to re­pay their ex­ist­ing debt, many tier I I and tier III de­vel­op­ers are likely to de­clare bankruptcy in the near fu­ture - again, push­ing the cause of large-scale con­sol­i­da­tion.

Mas­sive con­sol­i­da­tion, tan­ta­mount to a one-time clean-up be­fore the sec­tor em­barks on a journey of health­ier growth, is very much on the agenda over the next cou­ple of years.


RERA and GST ne­ces­si­tate a rad­i­cal change in the meth­ods of do­ing real es­tate busi­ness

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