Reforms and new laws in the real estate secor in the recent past are leading to consolidation in the industry. A number of smaller realty developers can be seen monetizing their land parcels on outright basis or entering into joint development or development management agreements with others. The ground reality has changed much for the builders.
Demonetisation move by the government in the last Novermber created an unforeseen liquidity crunch that is made worse by banks that have been reluctant to lend money following a crackdown on NPAs by the Reserve Bank of India. This affected quick transformation in sector known to benefit from unaccounted cash transactions.
"Small and mid-sized developers are finding it tough now because of strict RERAguidelines and their lack of strong credibility to generate sales given the homebuyers' current preference for solid execution track record. Apart from this, absence of financial strength is also pushing them towards forming alliances with big developers," said Ankur Srivastava,chairman, GenReal Property Advisors.
"Business is changing and these are big changes. One will have to adapt to the new realities to move further. We have been making structural adjustments to align with the changed environment," said Dharmesh Jain, CMD, Nirmal, which has been forming alliances to monetise its land parcels to ease debt burden. Nirmal recently entered a partnership with Godrej Properties to build a residential project on a 14-acre land parcel in Thane.
Homebuyers feel that the changes in the real estate environment bodes well for them as only credible developers would now be able to remain in the business.
"With recent regulatory changes, it’s clear that not-so-serious operators will not be able to sustain for long. This would leave very limited scope for homebuyers getting cheated or misled," said Tarun Shah, a homebuyer of residential project Tanvi Eminence in Mira Road near Mumbai.
Prior to the reforms and legislative tightening, realtors would try and expand their footprint by picking up land parcels before completing existing projects. However, this is changing now.
A Ghaziabad-based realty developer that intended to expand its footprints to Maharashtra, had acquired a 20-acre land parcel in Badlapur near Mumbai in 2010. The builder has now sold it outright to a local developer. In the current scenario it decided to monetize the land to support completion of its Ghaziabad projects.
The newly implemented RERA requires builders to maintain 70% of funds collected from buyers in a escrow account in case of new projects to avoid fund diversion. Besides, no new project can be launched before securing approvals increasing the builders’ liquidity burden.
Monetization through a joint venture or development management agreement would put the large developer in driver’s seat as the control will also be passed on to the new entity with new entrant holding majority stake.
Smaller developers are also using these tie-ups with big players for additional funding through discounting of future receivables from the project for which they have partnered with a stronger entity.