Unstinted Investors Support Will Keep The Commercial Real Estate Going

With the second wave of COVID-19 hitting the country hard, small and medium sized developers are struggling for survival but big listed developers, especially the listed ones, seem to be growing in strength. Most larger, organised and branded players are leveraging the advantage of better cash flows, operational efficiency, dependence on IT and marketing prowess.

Over the last one year, many smaller and weak players have either been wiped out while others have come under the shadow of big developers. Will this trend of organised listed players exercising monopoly over smaller players continue going forward?

The pandemic has proved to be a blessing in disguise for big listed developers as in the current environment, boys have been separated from men.

Despite the challenging environment, the top listed companies performed very well on the sales front. According to rating agency ICRA, the top 10 listed companies in real estate witnessed 61 percent growth in the December quarter, though the overall market was 24 percent lower than the pre-COVID-19 level. The sales by top 10 listed players rose from 17.28 msf in FY17 to 28.07 msf in 9M FY21.The market share of sales of top 10 listed realty developers has almost doubled from 11 percent of sales in FY20 to 19 percent in FY21.

Sobha Group during FY21 achieved the highest ever sales value in the history of the company. It clocked sales volume of 4013381 sft valued at Rs 31.37 billion. The company gained 9 percent higher sales in value terms and 10 percent higher average price realisation as compared to FY20.

Godrej Properties notched up impressive sales in the March 21 quarter.It registered the best ever sales booking of Rs 2,630 crore, a 77 percent sequential improvement. Seven new launches during the quarter contributed to 58 percent of total bookings. Godrej Property’s FY21 sales bookings went up by 14 percent yoy.In volume terms, the bookings during March quarter rose 74 percent sequentially to around 4.2 msft. The company has lined up 19 new launches in FY22. With the increase in scale of operations, the company expects the booking value to top Rs 10,000 crore.

Tata Realty and Infrastructure Limited notched up 120 percent of its FY21 sales target in the residential segment. The revenue for residential real estate grew by Rs 200 crore plus, up 15 percent from last year.

What is also benefiting big listed players is the consumers’ preference. According to CII- Anarock Consumer Survey of February 2022, as against 52 percent homebuyers preferring branded players in the pre-Covid times, 61 percent home buyers are going in for them post- Covid too. As many as 86 percent NRIs want to buy from branded players. On the other hand, the share of unbranded developers has dropped from 48-39 percent.

The current liquidity crisis in the system has a lot to do with weaker developers going from bad to worse. RERA regulation has added to their financial woes with both the bank and the non-bank funding being skewed in favour of the big players.

Under RERA, it is mandatory for developers to set aside 70 percent of customer collections in an escrow account. Pre-launches, a major source of funding for developers, is no longer possible. In terms of financial closure of projects, 70 percent finance comes from customer advances. But, now with marketing schemes like 20:80 and 10:90, customer collections are received only at the end of the project.

While small and weaker players are finding it difficult to receive funding listed developers are getting bank funding at 8-9 percent. Despite the pandemic, big listed players are also able to raise money through IPOs. Lodha Developers have successfully raised Rs 740 crore in pre-IPO placement from a dozen foreign portfolio investors. For most smaller players, bank funding is not available. Few of those who are able to secure it, get it at an interest rate of 13 percent or more. Funds from NBFCs, earlier a major source for developers, have dried up.

As such lending rates by private equity companies have gone up, especially for smaller, unbranded developers whose balance sheets are over leveraged. On the other hand, all this is helping bigger players to financially grow stronger.

As homebuyers increasingly lean towards big, branded and listed players, smaller builders are joining hands with them in order to cash in on their brand equity in terms of operational efficiency, execution and marketing prowess. Weak developers with land parcels or land owners are entering into joint development agreements with leading listed or non- listed entities.

The big developers are also joining hands with private equity firms to launch Alternate Investment Funds (AIFs) for completing stalled projects of smaller stressed developers. Big developers are also opting for the ‘asset light’ model.

The big question going forward is whether big and strong developers will establish their supremacy? This seems unlikely, as real estate is a region-specific play. There have been quite a few small and medium players who have made their mark over the years and established themselves in their respective regions. There have also been instances wherein bigger players, who ventured out of their dominant markets, having burnt their fingers.

This decade will witness big, listed or unlisted companies with strong balance sheets, having a good run. Many weak and smaller players may vanish or come under the umbrella of bigger players. With consolidation paving for the emergence of financially disciplined developers (both big and small), the message is very clear – shape up or ship out.

(Source: Moneycontrol)