Real Estate – Consolidation picking up pace

Real Estate – Consolidation picking up pace

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According to experts in the industry, various factors like financial distress, lack of execution capability, oversupply of inventory, GST implementation, demonetization, excessive land banking, lack of understanding of the demand supply dynamics, unjustified price appreciation and lack of social and physical infrastructure in certain locations have led to increased pace of developers leaving the industry

After touching the peak in FY2012, in terms of sales volume residential real estate has been on consistent slide since then. While slide has been substantial in some pockets, its moderate in other places but slide has been universal. In a way, FY2012 had been a landmark year for real estate industry as this year we saw one of the largest number of builders in the country.

Many have vanquished & vanished

Thus, builder churn out has been taking place much before the introduction of much acclaimed legislative piece, RERA. According to a study, more than 50% of the developers who existed in Calendar Year 2011 are no longer in the business. Consolidation is more pronounced in NCR region, especially in Gurugram, Noida and also in Chennai in the South where more than 70% of developers have shut down their business. Among the other regions, Bengaluru, Hyderabad and Kolkata have seen a reduction of over 60% in the number of developers with active projects.

Reasons aplenty

Various reasons have been attributed to this trend of diminishing number of developers in the industry. According to experts in the industry, various factors like financial distress, lack of execution capability, oversupply of inventory, GST implementation, demonetization, excessive land banking, lack of understanding of the demand supply dynamics, unjustified price appreciation and lack of social and physical infrastructure in certain locations have led to increased pace of developers leaving the industry.

RERA & GST impact

It’s also observed that some developers didn’t wait till the introduction of RERA and GST and study the impact of the new laws but preferred to call it quits much before the event assuming that things won’t be that smooth under the new regime. For some of the realtors, demonetisation was severe blow from which they could not recover at all.

Further, in the post RERA era, increased consumer activism and awareness and also liquidity crunch especially post NBFC crisis haven’t helped their cause either. A number of the smaller developers focusing on trying to complete their ongoing projects if possible. In the coming days its expected that the larger players with deeper pockets may gain further ground with smaller and marginal players partnering with larger developers to monetise their existing land parcels.

Rising unsold inventory

According to Liases Foras, a real estate research firm, while annual sales volumes in units have grown 1.3 times over CY09-18, existing unsold units have grown 3.3 times over the same period. In value terms, annual sales value has grown 1.6 times but value of unsold stock has risen 4.7 times. In other words, unsold inventory today stands at 41 months in volume terms and 45 months in value terms across India’s top eight tier-I cities.

According to experts, the bloated inventory levels can be brought down to reasonable level either by a sharp price correction or by steep reduction in new launches or by both. Experts feel instead of announcing new projects, developers should concentrate on completing the projects on hand and clear the unsold stocks as quickly as possible. Survey shows that 600msf of projects or 470,000 units at a pan-India level are stuck or facing significant construction delays. This accounts for 50% of unsold inventory in terms of units. It should be noted that nearly 70% of the stalled projects (in terms of value) are accounted for by the Mumbai Metropolitan Region (MMR) and National Capital Region (NCR). Southern cities and Pune have relatively lesser number of stuck up projects.

Completed projects preferred

Recent spate of funds diversion by the developers and consequent delayed/non execution of the projects have also affected the consumer preferences who are now more inclined towards buying completed projects. Interestingly, this trend had started even before the introduction of the Real Estate Regulator under RERA and GST implementation (12% additional GST in under construction projects vs. no GST in ready projects). Introduction of RERA and GST only accelerated the trend and made it widespread. According to industry estimates, ready/nearing completion unsold inventory accounts for 8-10% of the overall unsold inventory. According to Liases Foras, across India’s top eight tier-I cities, the percentage share of sales of ready properties has risen from 11% in CY14 to 27% in CY18.

Unlike earlier slowdowns this time price fall has been relatively less and spread over a longer period of time. Though this indicates the developers better holding capacity, it has also prolonged the slowdown and postponed subsequent recovery.

It has been observed that the price decline has been the sharpest in Gurugram at 20%-25% (in some locations even up to 35%-40%). Prices in Mumbai have declined to a lesser extent but have remained under pressure. Real estate professionals feel that slide is not yet complete and recovery may not happen soon. They expect price to fall by around another 20%-25% in Mumbai and by 20% in Bengaluru. It’s also felt that recent Budget announcements may not help to change the fortunes of the industry and recovery may take its own time to happen.

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