Number of real estate developers in top 9 cities halved after note ban

Demonetisation, RERA and GST have helped consolidation in the sector

The demonetisation of high value currency notes in November 2016 has had several positive outcomes for the real estate sector, especially for home buyers. While it put a check on the skyrocketing prices of real estate properties, the measure, along with reforms like the Real Estate Regulation and Development Act 2016 (RERA) and the Goods and Services Tax (GST), have forced the developers to consolidate.

According to a recent report by real estate sector market research firm PropEquity, the total number of developers in the top 9 Indian cities shrunk by over 50 per cent by 2017-18. While Gurugram witnessed a decline of 76.8 per cent in the number of developers – from 82 in 2011-12 to 19 in 2017-18 — Noida, another major city in the National Capital Region, registered a plunge of 73.2 per cent – from 41 to 11.

All major cities with significant potential for real estate development – Mumbai, Pune, Thane, Kolkata, Bengaluru and Hyderabad – saw a decline in the number of developers. While in Kolkata the number of players dropped by 64.7 per cent, in Mumbai it went down by 31.9 per cent. Thane, which had the most number of developers (680) among Indian cities, saw a dip of 47.8 per cent to 355 by March 2018. However, it was Chennai which witnessed the steepest fall in the number of developers – by 77.3 per cent.

Analysts say that a large number of fly-by-night developers were forced to leave the market post-demonetisation. “Financial distress of small developers, lack of execution capability, over-supply of inventory and GST also played a key role in the process,” PropEquity noted. The process was further accelerated by excessive land banking, lack of understanding of the demand-supply dynamics, unjustified price appreciation and lack of social and physical infrastructure in emerging markets, it added.

According to Shobhit Agarwal, managing director and chief executive of Anarock Capital, the recent mergers, acquisitions and joint developments among larger players have also consolidated the market. “The Indian residential sector saw a series of disruptions in the last two to three years, with revolutionary reforms like demonetisation, RERA and GST altering the way the real estate business is conducted. A natural by-product of this upheaval was consolidation, with fly-by-night developers completely vanishing and small players merging with big ones,” Agarwal said.

For example, the debt-stressed Nirmal Group has forged an alliance with developers Shapoorji Pallonji and Omkar Realtors & Developers has signed an MoU with Godrej Properties and also inked a development agreement with Piramal Realty. The Bengaluru-based Ozone Group, too, has signed several development management deals to develop land under its own name.

According to data from Anarock, 5.6 lakh units worth Rs 450,000 crore of projects are stuck or delayed across the top 7 cities. Dearth of funds and lack of management capabilities are the key reasons for the delay. And developers now realise that by joining forces with stronger peers and leveraging mutual strengths, they may be able to tide over the crisis.

Experts point out that although policy initiatives like the note ban, RERA and GST may have accelerated the consolidation of the real estate sector, the process actually began in the early years of the decade. The launch of massive realty projects between 2010 and 2013 sent supply way higher than demand while new developers continued to join the sector, riding on the illusion of high demand. Anarock says the current consolidation process is not over yet. It feels that the credit squeeze by banks, followed by the NBFC crisis, have the potential to once again unsettle businesses in the sector.

“With previously available financial channels freezing funds to developers, even big players were impacted, and the marketplace was left littered with delayed or stalled projects across cities. This triggered a new wave of consolidation and diversification, though this time restricted to the level of projects rather than players,” said Agarwal.