Real estate goliaths win the pandemic economy
Hiranandani Gardens, in Powai, Mumbai. Niranjan Hiranandani, Managing Director of the Hiranandani Group, says buyers have more confidence in big players who do quality work. Photo by Neha Mithbawkar for Forbes India
IIn the months leading up to the pandemic, buyers had run out of residential real estate. The offers continued and the prices had not increased for years. Most of the big developers have had to deal with a stack of inventory.
While conventional wisdom would have argued for worsening demand after the pandemic, the real estate market has instead split in two. Large, organized developers have seen their share of the pie increase, while smaller players with less access to capital have struggled.
“There is certainly more confidence in the big players who have done quality work,” said Niranjan Hiranandani, Managing Director of the Hiranandani Group. An important reason for this has been the access to financing available to large developers. In the past, residential real estate relied on pre-sales to raise funds to finance construction. After the implementation of the Real Estate Law (Regulation and Development), a key financing tool for small developers was rejected.
While this was a trend that existed even before the pandemic, it has accelerated since then, says Hiranandani. As people search for larger residences and begin their property search online, it is the more well-known names, with immediate brand recall, that have benefited.
While real estate sales slowed after 2013, most developers held down prices. This has resulted in the continued slowdown in sales and the compression of smaller players with less access to finance. “In a scenario where developers could not develop in time, there was a trust deficit,” says Shveta Jain, general manager, residential services, Savills India. “First-time homebuyers, where the demand is, weren’t inclined to buy homes under construction.”
Gain financial strength
In the Forbes India Real Estate Special 2019, JC Sharma, Managing Director of Sobha, said: “We thought the downturn that started in 2013 was a two to three year phenomenon. But he also stressed that he saw this long period of slow sales and stagnant prices to be a good thing for the big players, as they had the financial strength to overcome them. There was also the triple whammy of the implementation of the goods and services tax, the law on real estate regulation and development and demonetization. Sobha saw its sales area increase by 6% to 1.13 million square feet, for a value of Rs 888 crore, up 22%. The company has not released figures for T4FY21.
Godrej Properties, which over the past five years has scaled back its operations to focus on Delhi-NCR, Mumbai, Pune and Bengaluru, recorded its highest bookings on record at Rs 6,725 crore in FY21, with sales area up 23% to 10.8 million square feet Brigade Enterprises also saw sales increase 8% in fiscal 21 to 4.6 million square feet. The increase in sales “is due to better balance sheets and also to our ability to deliver over the past few years,” said MR Jaishankar. , President and CEO of the Brigade Group.
This increase was in part fueled by the fact that several developers left their plots of land and sold them to their larger counterparts. There are also joint development agreements where the developer is only responsible for selling and building while the land is owned by someone else. Sales are however recorded in the name of the brand developers.
Another consequence of this trend has been a decline or stagnation in inventories. At DLF, the country’s most valuable developer, stocks went from Rs 22,486 crore in March 2020 to Rs 21,832 crore in September 2020. At Sunteck, they went from Rs 2,720 crore to Rs 2,642 crore during from the same period. At Prestige Estates, the number increased from Rs 11,375 crore in March 2020 to Rs 9,580 crore in March 2021.
Longer-term trends for large developers look even more promising. At Prestige Estates, inventory has fallen 37% over the past two years. In contrast, over the past decade, they have increased by 571%. At DLF, while stocks have held steady over the past 18 months, they have increased 99% over the past decade. And at Sunteck, too, they have been stable over the past 18 months, but have increased 198% over the past decade.
The improvement in balance sheets is expected to result in three key trends over the next five years. First, a decrease in the cost of funds. Large developers can now borrow at rates much lower than those in the unorganized sector. At Sobha, the cost of funds is 9.17% as of Q3FY21. Compare that to the smaller players who regularly borrow between 15 and 18%, and the difference in interest charges is glaring.
Third, better access to land transactions. Landowners, having burned their fingers with small developers, are now only willing to deal with well-known names. Developers, on the other hand, can dictate terms that allow them to share income and profits only after sales have started. There are also cost escalation clauses: if commodity prices rise, the blow is shared with the landowner.
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(This story appears in the July 02, 2021 issue of Forbes India. You can purchase our tablet version at Magzter.com. To visit our archives, click here.)