Real estate goliaths conquer pandemic economy

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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.

The data supports this claim. According to Anarock research, real estate service company, The market share of the top listed real estate developers increased from 6 percent in fiscal 2017 to 22 percent in fiscal 21. Names in this category include Prestige, Sobha, Puravankara, Kolte-Patil, Sunteck, DLF, and Godrej Properties, among others. Leading Unlisted Companies –Piramal Real Estate, ATS, Wadhwa, Runwal – their share increased from 11% to 18% over the same period. Unbranded developers, who accounted for 83% in 2017, are now down to 60%.
According to Anarock, of the 93,140 units sold in the first three quarters of fiscal 21, listed players accounted for 21.23 million square feet, or 2 percent more than in the same period in fiscal 20. “While working on this survey, we spoke with about 8000 clients, and received feedback that although they were willing to buy properties under construction from a larger developer, they did not want to do it from a smaller player even at a discount,” says Prashant Thakur , Director and Head of Research at Anarock.
As a result of these buyer’s preferences the property A market that has consolidated over the past five years is likely to move into a stage where there will be about half a dozen developers active in each city. Some will be in different cities, but it’s clear that the days of national developers are over. Companies like DLF and Godrej Properties, which had national ambitions, have returned to their home markets. It also matters for their profitability and balance sheets – both are likely to improve in the coming years.

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.

The increase in sales is reflected in other major developers as well. Take Macrotech Developersalso known as Lodha. Its selling space increased 116 percent to 1.8 million square feet in the fourth quarter of fiscal 21, although full-year sales fell 10 percent to 5.1 million square feet. Collections rose 10 percent in the fourth quarter to Rs 2,089 crore.

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.

Second, lower debt ratios. All of the surveyed developers on the list have shown a decrease or unchanged debt indicators over the past year, although they have risen sharply over the past decade. Lower debt ratios, coupled with higher sales, could result in them reporting significant operating leverage over the next five years. They all have inventory for at least a year of sales. Taking into account land costs, these sales will have a disproportionate impact on bottom line.

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.

As the market continues to consolidate, expect the sector to generate predictable revenue and cash flow flows. Also expect to shrink balance sheets as predictability in sales will reduce the need for excess cash. Return on equity and the return on equity will increase. Finally, price earnings multiples, which have begun to account for increased earnings over the past two years, may continue to rise.

Click here to see Forbes India’s comprehensive review of the Covid-19 situation and its impact on life, business and the economy.

(This story appears in the July 2, 2021 issue of Forbes India. You can buy our tablet version at Magzter.com… To visit our archive, Click here.)

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