Economy

Real estate market will see a major consolidation

Pratim Ranjan Bose | Updated on May 17, 2020 Published on May 17, 2020

Affordable housing holds the key. Biggers players may look to acquire smaller, leveraged firms

Kolkata, May 17 Chennai-based real estate major Shriram Properties is currently building 15,000 dwelling units/flats in different parts of the country. In October-December, the company plans to launch fresh projects of 3,000-4,000 units – all in the affordable segment.

Interestingly enough, all the projects may not be planned from a scratch by Shriram. “We are looking at acquisition of projects from other (stressed) developers,” M Murali, Chairman and Managing Director, , told BusinessLine.

Having remained in the doldrums for quite some time now, the real estate sector may be headed for a major consolidation, coupled with wide-ranging changes in business practices, strategies, product designing and consumer behaviour.

Shakeout imminent

Covid-19 and the ensuing lockdown broke the back of the over-leveraged developers who were in duress for quite some time now. Smaller players, without strong corporate brand value, will find the going tough. Roughly 30 per cent of realty firms may look for an exit route.

Their loss is gain for cash rich companies such as Shriram Properties. As the leveraged players will be desperate to liquidate assets and square-off debt, big brands will look for acquisition opportunities at discounted price.

“Consolidation was happening for the last two years. It will now be faster,” said Harsh Vardhan Patodia, Chairman and Managing Director of Kolkata based Unimark Group, and President-elect of the Confederation of Real Estate Developers’ Association of India (CREDAI) - the apex body of developers.

The gains for bigger players are not limited to acquisition opportunity. The shakeout and the related supply side impact, may help keep prices steady in the face of any uncertainty in consumer demand in the medium term.

Demand is back

There is no consensus among developers on demand. Patodia expects consumer interests to be subdued for the next few months, due to income uncertainties. But, Murali says demand is already back in the affordable segment and will soon be higher than the pre-Covid period.

According to him, except in the National Capital Region and some micro-market distortions, the affordable and mid-market segment was buoyant and the “inventory” build-up problem was largely limited to the luxury residential segment.

There is no immediate prospect of recovery in the luxury segment. But, according to Murali, demand for affordable housing will witness a spike. “Demand for affordable housing was higher than supply. It will now be even higher,” he said.

There are two reasons behind his prediction. First the relief package, announced by the Modi government, has put greater emphasis on affordable housing. Second, Murali expects people to move into real estate from mutual funds and equity, thanks to choppy markets.

Shriram sold 200 flats in April when the country was under lockdown. “Contrary to common practice of multiple site visits, consumers finalised deals through virtual tours of the property,” Murali said. Unimark too confirms sales during lockdown.

Change in market strategy

“Covid will bring about a complete change in industry practices, product planning and customer behaviour,” Patodia said.

For example, with work-from-home becoming the new normal, projects from now will focus creating facilities to enable that, like provision for high-speed internet. This will also spur mobile phone companies to ensure quality service.

There will also be a big change in the way real estate is sold. Developers will start making use of digital tools in a big way to do away with site visits.

Commercial rentals

There is not much clarity on how things will pan out in the commercial segment.

Despite the hype over work-from-home, lack of quality data connectivity, especially in Tier I and Tier II towns, concerns over data security, and high back-end investments are some of the challenges ahead.

Patodia feels social distancing norms, which are here to stay, will require larger office space. Murali is counting on India’s aggressive bid to grab a slice of the global value chain and relocation of companies from China to India. “Whoever relocates to India, will need office space,” he says.

But views are divergent on commercial rentals. Patodia doesn’t see softening of rentals. But Murali says India might witness a unique scenario where rentals for commercial properties may go down despite firm demand.

The difference, he said, will be made by stressed developers, who might be in a hurry to strike deals.

Labour – a concern

Overall Murali is confident about the prospect of his business. But if workers do not return early, his ongoing affordable housing projects will suffer delay. Affordable housing being a low-margin, high-volume game; cost escalations are particularly painful.

Developers in South are particularly worried over labour problems as they rely on workers from three States -- Bihar, Jharkhand and West Bengal -- a big percentage of whom have returned home.

Patodia’s business being West Bengal-centric, he is relatively free from such concerns. His contractors have assured him on the availability of labour. But, he has a word of caution for the rest of India: “The cost of migrant labour may increase.”

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Published on May 17, 2020
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