Will 2018mark­the­con­sol­i­da­tion for smaller de­vel­op­ers?

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

HT Estates - - FRONT PAGE - Anuj Puri ht­es­tates@hin­dus­tan­times.com The au­thor is chair­man – ANAROCK Prop­erty Con­sul­tants

Con­sol­i­da­tion is the process of com­bin­ing anum­ber of sep­a­rate parts into as­in­gle, more­ef­fec­tive or­co­her­en­tone. When­ev­er­there is con­sol­i­da­tion in any­sec­tor, 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 an­dac­tu­al­ly­helpsin­cat­alyzinga much stronger come-back.

The­re­alestate sec­tor is aclear case in point. It is emerg­ing from a pro­longed slow­down cou­pled with land­mark pol­icy in­puts which­have­be­gun­toed­ge­out­the ‘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 and­struc­tural 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 thev­ery­hearto­fun­reg­u­lat­e­dreal es­tate play­ers and prac­tices.

Un­der­stand­ably, theyre­sulted in panic among many of the smaller play­ers. If we take just the case of RERA, it be­come­sev­i­den­twhythiswasthe­case. RERA en­forces fi­nan­cial dis­ci­pline, trans­parency, ac­count­abil­ity, cus­tomer cen­tric­ity and com­pli­ance, andthese wereei­ther com­pletely alien con­cepts or at least com­pletely avoid­able philoso­phies for the smaller (and of­ten du­bi­ous) de­vel­op­er­s­ac­tiveon­the mar­ket­then. WhileDeMon­blew the lid off the top of the caul­dron of black­moneyinthe­sec­tor, only a hand­ful of the play­ers in the In­di­an­realestatein­dus­try­willbe able to ride the tide in the postRERA/GST Era - for the fol­low­ing rea­sons:


RERAandGSTne­ces­si­tatear­ad­i­cal change in the meth­ods of do­in­greal es­tate busi­ness. There is amas­sive­fo­cu­son­com­pli­ance, doc­u­men­ta­tion, pro­cesses, etc. which­will­increase the costs and com­plex­ity of busi­ness op­er­a­tions. Inad­di­tion, de­vel­op­ers will have to in­vest sig­nif­i­cantly in up­grad­ing their billing sys­tems, CRM, etc. aswellas­train­ingth­eir ven­dors, con­trac­tors and other stake­hold­er­stoen­sure100% com­pli­ance to RERAandGSTnorms.

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 whodonothavethe­fi­nan­cial 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, prelaunche­shave­come­toa­com­plete halt. Inad­di­tion, de­vel­op­er­shave 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 mech­a­nis­mof‘rolling’ funds has ut­terly shaken up the hith­erto ex­ist­ing sta­tus quoon­the In­dian real es­tate mar­ket.

Si­mul­ta­ne­ously, the crack­down on black money has closed all il­le­gal mean­sofrais­ing 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-im­pos­si­ble mar­keten­vi­ron­ment­for the un­der-equipped player to raise fresh funds.

Smallerde­vel­op­ers, 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 thede­vel­op­er­scom­pletepro­jects 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 com­pli­an­cenorm­sun­derRERA, the task of com­plet­ing their stalled projects is go­ing to be ex­cep­tion­ally daunt­ing­for­many tier II andtier III de­vel­op­ers who havev­erylit­tlein­her­ent­fi­nan­cial mus­cle. Th­e­se­pro­jectswill­inevitably 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.


With­sub­due­drealestat­ede­mand 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. With­somede­vel­op­ers al­ready declar­ing bank­ruptcy, banks and FIs are also keep­ing a close watch on the re­pay­ments and are com­pletely un­will­ing to takeanyad­ven­tur­ous­risks. With mas­sive pres­sure to re­pay their ex­ist­ing debt, manytierIIandtier III de­vel­op­ers are likely to de­clare bank­ruptcy in the near fu­ture - again, push­ing the cause of large-scale con­sol­i­da­tion.

Mas­sive­con­sol­i­da­tion, tan­ta­mount to a one-time clean-up be­fore the sec­tor em­barks on a jour­ney of health­ier growth, is very­mu­chontheagen­daover­the next cou­ple of years.


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

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