Reforms like RERA and GST are prompting smaller developers to opt for consolidation in order to share costs, risks and attract foreign investment
AFTER FDI NORMS WERE RELAXED, DEVELOPERS ARE CONSOLIDATING AS A MEANS OF ATTRACTING FUNDS FROM OVERSEAS
Consolidation could be the by word for the realestate segment in 2018. Amid a series of policy changes and a relaxation of foreign direct investment norms, smaller developers are looking to join forces with others in order to comply and compete.
“There is a massive focus on compliance, documentation and processes, which has increased the costs and complexity of business operations ,” says Anuj Puri, chairman of realty advisory Anarock.
“In addition, developers have to invest significantly in upgrading billing systems, customer relationship management software as well as training vendors, contractors and other stakeholders to ensure 100% compliance with the Real Estate Regulatory Authority and Goods and Services Tax( G ST) norms. This is creating an environment of largescale consolidation among Tier -2 and Tier-3 developers.”
Take Nirvana Realty, which focuses on building weekend homes. They recently entered into a joint venture with a land- owner developer for a project in Dahanu. “The land is theirs, everything else is ours— development, construction techniques and brand name,” says Nirvana CEO Punit Agarwal. “It isawi nwin because we got land near the city and they get a share in sales. Partnerships also help divide the risk in case of not being able to complete projects on time.”
Concerns over non- compliance penalties area major factor driving new partnerships in realestate.
“The fees that defaulting developers have to pay is pretty hefty,” says Pravin Ladkat, founder of real-estate consultancy PropRera. “Smaller developers are worried and want to associate with the more- organised ones to be able to finish projects on time too .”
The crackdown on black money post-demonetisation has also worse ned the cash flow problem. “Itis nigh-impossible for the under-equipped player to raise fresh funds in such a market environment ,” says Puri.
“Projects facing a lack of funds will hence be sold to large developers and / or converted into other assets such as plotted developments. In either case, largescale consolidation of assets is on the cards.”
Developers are also using consolidation asa means to attract funds from overseas, especially after the recent relaxation in norms for foreign direct investment in real-estate .“A developer, for instance, has land but no money to construct houses ,” says Shankar Arumugham, chief operating officer for strategic consulting, India and Sri Lanka, at real-estate advisory JLL. “He can partner with a well-off foreign developer and build a project on the land. We are also seeing partnerships between developers from different cities.”
This is good news for buyers because it could mean that stalled projects are revived and new launches give them better options to choose from, Arumugham adds. “Projects also stand to become more reliable and transparent with more stakeholders involved.”