Hiranandani Gardens in Powai, Mumbai. Niranjan Hiranandani, Managing Director of the Hiranandani Group, says buyers have more confidence in larger players doing quality work. Photo by Neha Mitbavkar for Forbes India
IIn the months leading up to the pandemic, there was a shortage of residential property buyers. The deals were going very fast and prices hadn’t risen in years. Most of the big developers have had to deal with inventory clutter.
While conventional wisdom would have led to a deterioration in demand after the pandemic, the real estate market has instead split in half. The share of large organized developers increased, while smaller players with limited access to capital faced difficulties.
“There is definitely more trust and faith in the larger players who did quality work,” says Niranjan Hiranandani, Managing Director of the Hiranandani Group. An important reason for this was the access to finance that large developers have. In the past, residential properties relied on pre-sales to raise money to finance construction. Following the enactment of the Real Estate (Regulation and Development) Act, a key financing instrument for small developers was banned.
While this trend existed before the pandemic, it has intensified since then, Hiranandani said. As people search for larger homes and start searching for real estate online, better-known names with immediate brand recall will benefit.
As real estate sales slowed after 2013, most developers kept their prices. This led to a continuing decline in sales and a decline in small players with limited access to finance. “In a scenario where developers could not develop on time, there was a lack of trust,” says Sveta Jain, Managing Director of Housing Services at Savills India. “First-time buyers of housing, where there is demand, are not very interested in buying houses under construction.”
Finding financial stability
In the 2019 Forbes India Real Estate Special, Sobha Managing Director J.K.Sharma said, “We thought the recession that began in 2013 lasted two to three years.” But he also pointed out that he sees a prolonged period of slow selling and stagnating prices favorable for the larger players, as they have the financial ability to withstand them. The introduction of the goods and services tax, the Real Estate Regulation and Development Act and demonetization were also dealt a triple blow. Sobha increased its selling space 6 percent to 1.13 million square feet at a cost of Rs 888 crore, an increase of 22 percent. The company did not publish data for the 4th quarter of the 21st fiscal year.
Godrej Properties, which has scaled back operations over the past five years to focus on Delhi-NCR, Mumbai, Pune and Bangalore, posted the highest booking rate of Rs 6,725 crore in fiscal 21, with area sold up 23 percent to 10.8 million square feet. Brigade Enterprises also posted 8% sales growth in fiscal 21 to 4.6 million sq. Feet. The increase in sales “was due to improved balance sheets and also our ability to secure supply over the past few years,” says Mr. Jaishankar. , chairman and managing director of the Brigade Group.
This growth was driven in part by the fact that several developers left their land plots and sold them to their larger partners. There are also co-development agreements in which the developer is only responsible for the sale and construction and the land is owned by someone else. However, sales are carried out in the name of branded developers.
The fall or stagnation of stocks was another consequence of this trend. At DLF, the country’s most valuable developer, inventories fell from Rs 22,486 in March 2020 to Rs 21,832 in September 2020. At Sunteck, they fell from Rs 2,720 crores to Rs 2,642 crores over the same period. At Prestige Estates, this figure fell from Rs 11,375 in March 2020 to Rs 9,580 in March 2021.
Long-term trends for large developers look even more promising. At Prestige Estates, inventories have dropped 37 percent in the past two years. On the contrary, over the past decade they have grown by 571 percent. At DLF, inventories have remained flat for the past 18 months, but have risen 99 percent over the previous decade. And at Sunteck, they haven’t changed in the past 18 months either, but have grown 198 percent over the past decade.
Improving balance sheets is likely to lead to three key trends over the next five years. First, the fall in the value of funds. Large developers can now take out loans at rates that are much lower than in the informal sector. At Sobha, the value of funds was 9.17% in the third quarter of fiscal 21. Compare that to smaller players, who typically hold 15 to 18 percent, and the difference in interest expense is huge.
Third, better access to land deals. Landowners who have been burned by small developers are now willing to deal only with well-known names. For their part, developers can dictate terms that allow them to share income and profits only after the start of sales. There are also provisions for increasing costs: if raw material prices rise, then the losses are shared with the landowner.