Realty of coronavirus: Big developers to gain, small ones may go bust

Consolidation in real estate industry since 2012 is likely to strengthen after the pandemic ends, say analysts.

Bengaluru-based real estate developer Avinash Reddy was in talks with a landowner to seal the deal on one of the biggest projects of his life. But once the lockdown kicked in, Reddy’s much wished-for five-acre villa project near Bengaluru airport vanished into uncertainty.
 

“We wanted to fast-track the project as it is near the airport and we saw a lot of potential in it,” says Reddy, who has been in the real estate business for 13 years. Now he doesn’t know if it will happen at all. In fact, he has dropped all plans to launch projects in the near future.
 

 “We have opted for the moratorium which will help us survive the next couple of months. Also, development management contracts will be the smartest thing to do to stay afloat,” Reddy says. His real estate company, Vyapt, saw an 80 per cent drop in sales in the March quarter.
 

Reddy is not alone. The lockdown is threatening the survival of a host of small and mid-sized developers. With sales coming to a grinding halt and debt burdens mounting every passing month, they don’t see how they can grapple with the crisis and manage to remain in business. Many say that even after the lockdown is lifted, the situation is unlikely to improve for at least a year.
 

“I do not think people will come to buy in the next couple of months,” says a Mumbai-based mid-sized developer, who does not wish to be named. “The moratorium will help now, but we have to pay in the next quarter,” he says despairingly, adding that he would either have to go for a joint venture with a bigger developer or go bust.

Experts say that the lockdown and its aftermath will further quicken the consolidation in the real estate sector, which has been taking place since 2012, with more small players going out of the business and bigger, branded players dominating the market.

According to real estate data analytics firm PropEquity, over 50 per cent of the developers that existed in 2011-12 left the market by 2017-18. The exodus was spurred by events such as demonetisation, the Real Estate (Regulation and Development) Act (RERA), the GST regime and the NBFC crisis, all of which hit their businesses hard. PropEquity founder Sameer Jasuja believes that an additional 10-20 per cent of  developers will be affected by the lockdown and its after effects.
 

Thanks to the consolidation, the market share of the top 10 developers in the big cities grew from 41 per cent in 2015 to 53 per cent in 2019.
 

Real estate advisory firm Trespect believes the market share of the big players may balloon to 60-65 per cent by 2021. “Small and mid-sized developers will face more liquidity challenges as compared to big brands due to their limited ability to absorb costs without a corresponding inflow during this period of lockdown and the ensuing months,” says Sharad Mittal, director and CEO at Motilal Oswal Real Estate.
 

Vikas Oberoi, chairman and managing director of Oberoi Realty, adds: “Only developers who have been prudent and have shown fiscal discipline and customer centricity will survive.”

Niranjan Hiranandani, MD of Hiranandani Group, agrees, saying financially prudent companies will play a bigger role in the days ahead.  “Companies which have positive net worth will ascertain opportunities from those in challenged situations. In the post-lockdown scenario, the industry will most likely see new players in different segments and in different markets,” he says.

Bigger brands, such as Oberoi Realty, are already negotiating joint venture and joint development proposals. “These proposals are mainly from financial institutions which have invested in projects that are stuck due to financial mismanagement or have weaker brands that customers are weary of,” says Oberoi.
 

Vijay Wadhwa, chairman of the Mumbai-based Wadhwa Group, says: “We have received many proposals from other developers. We have told them to wait till the lockdown is lifted.”
 

The real estate sector was in the doldrums even before the lockdown was imposed. The March quarter of the current calendar year saw a nearly 30 per cent decline in the sale of residential properties in the top cities, according to property consultant JLL India.