Evolution pains

Evolution pains

India Inc. property expert reviews the recent trends in the Indian realty sector to highlight that it would be wise to go along with the current phase of transformation rather than resist change. There was a drought in property sales that was carried forward from 2015 into the early half of the year. When sales just started picking up, came the liquidity squeeze which was a corollary to the government scheme that offered amnesty to tax dodgers. If that was not enough, the Real Estate Regulation Act gave teeth to the helpless buyers who had a track record of suffering at the hands of developers for delays way beyond committed deadlines. While the Act is yet to be implemented, it became the basis of harrowed buyers coming together as groups and dragging developers, many large ones too like Unitech, Supertech, Paravsnath, to the courts. Given the background of the Act, the courts have all ruled in favour of the home buyers. Not just ruled, but pre-fixed and suffixed scathing words on developers and their morals. This is despite developers pleading helplessness and lack of funds to repay booking amounts or penal costs. One thing that this has done is triggered the launch of new projects at lower prices, with an eye on quick sales and therefore cashflow. That said, developers are unfortunately still stuck with the establishment that has no sense of responsibility to timelines. Plan sanctions are coming at their own pace and in Bengaluru almost all developers are affected due to either the revised National Green Tribunal rules affecting lakes, Transferable Development Right (TDR) rules or open spaces rules. The squeeze continues on the developers. Given the circumstances, sales have picked up across cities, with Hyderabad leading the rate of growth and NCR [National Capital Region] bringing up the rear. The buyers being end-users, are selecting projects with plan sanctions and targeting developers who have a track record of being execution oriented. The scores of smaller developers who offer discounts of up to 20 per cent compared to larger developers are quietly being bypassed. The difference is now the price for compliance that the end-user is willing to pay and automatically creating an entry barrier for new/younger/non-compliant entrants. While even big developers like Lodha, DLF, Hiranandani are keeping a low profile in these testing times, Bengaluru-based Embassy Developers has been on an acquisition spree launching a 300 acre smart city project in north Bengaluru, picking up an iconic hotel opposite the golf course for $100 million. This marked a hostile takeover of a manufacturing entity that has a prime parcel of land and contracted to sell to another developer besides picking up other properties of significant value. Backed by Blackstone, we are possibly looking at the emergence of one of the nation's largest developer from the fastest growing city. And as of last week, Karnataka was the first state to release RERA guidelines for implementation in the state. These guidelines are on consultation with various groups before implementation. Given the state of flux, investors over the year have cleared preferred investing through Alternate Investment Funds (AIFs) with quite a few funds being on fundraise mode last quarter. HDFC having raised over a billion dollars of 14 year money from offshore investors for equity investments in real estate and the others typically raising $100 million each towards debt. IIFL, Motilal Oswal, Reliance AMC, Indiabulls AMC having almost completed or fully completed their current requirement. Essel and Aditya Birla are continuing with the fundraising activity. All signs point towards consolidation/ reorganisation of debt or project takeover by financially stronger developers from developers who have run into liquidity issues. The exit of Essar from some completed commercial projects and some under development residential projects and Adarsh Developers, Bengaluru, exit from an incomplete hotel project seems to be the sign of more to come across all segments of developers. Bankers and investors must be prepared to go with the transformation rather than resist change. The developers anyway have no choice but to let go when the time comes. Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalorebased, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.

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