The Indian real estate sector saw a wave of reforms over the last 12 months, starting with demonetisation, which was a huge blow for a sector that historically transacted partially in cash. Mid-2017 saw the introduction of the Real Estate Regulatory Act (Rera), which will help bring about much needed transparency, and GST to streamline the tax regime in real estate.
These reforms hit a sector, which was already in pain in most micro markets. Barring commercial real estate, 2015 and 2016 weren’t great years for any of the asset classes within real estate. So 2017 was obviously a forgettable year for most stakeholders in the real estate industry.
n Separation of the men from the boys: Each year one hopes that the next will be better and that market forces will eventually turn and shine on the sector. However, 2018 in our opinion (unfortunately) will not be very different to 2017. The developers and projects that suffered in 2017 will probably suffer more in 2018 as the market is gravitating towards consolidating, with a few Grade A developers in each city.
The Grade A developers have already weathered the storm better than most in the last couple years, and now will distance the gap over the next few years.
n Capital providers turn into project managers: Another theme that we see playing out in 2018 is that real estate funds, who have lent to small, and mid-sized developers will be in serious recovery mode. Many of them will have to roll up their sleeves, and get fully involved in the projects, execution and sales, to ensure they protect their investments. We believe that NPA’s reported by the real estate NBFCs will increase in 2018, and that funds will drive smaller developers to consolidate with the reputed players.
What funds may also realise from this cycle is that Indian real estate needs more patient capital, and that aggressive, expensive, debt structures may not work in the long run.
n Buyer and investor confidence: There are some green shoots, and we will see buyer confidence slowly improve over 2018/2019. Rera helps give clarity on new launches and buyers have protections in place. However, on projects that are currently stuck, there is ambiguity in some areas, but I am sure the Rera authorities will streamline this too.
We are also starting to see long, patient capital starting to position themselves for large bets in Indian real estate; Rera implementation has given the investor community confidence. Capital deployment will not take place in a tearing hurry but definitely on the horizon.
n Opportunity for a new breed of
developer’s: In every turbulent cycle, there is always an opportunity to learn from the mistakes of peers and build a business that is in a position to face the new norm. This is an opportunity for new developers to enter the market, without any baggage, armed with learning, new ideas and maybe even with the introduction of new technologies to improve efficiency (much needed) in the real estate sector.
In conclusion –the developers who are were struggling in 2016/2017 and borrowing at high costs to make ends meet, will probably not survive 2018. With the long gestation period of their projects and compounding costs, their equity in the projects has probably already eroded. This year will be their breaking point! The reputed, Grade A developers in each micro market, will use the downturn to consolidate their position and dominate when the market turns, which in our opinion is in the next 12-18 months.
(The writers is founder and managing director, SILA)