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What future beckons real estate market?

Photo: M. Karunakaran

Trend in focus: Though small projects come up, they are identified with volume and value.

Banks are going slow on funding a real estate project, the prices of land, materials and labour have increased two fold and the apartment sales are dull. In short, property developers are in a cash-tight situation. Does this imply, in times to come, small and mid-size developers and their small projects would find it difficult to survive and only big developers with large budgets, brand names and mega projects would exist?

"Consolidation is inevitable." The market will have to be tightened. Cost is raising and the issue of non-availability of funds is a major factor , says Prakash Challa, President of Confederation of Real Estate Developers Association of India (CREDAI).

Mr. Challa is of the view that formats of developments have taken a complete change. Earlier small development projects were coming up, but now the project is identified with volume and value. Both these factors have skyrocketed in the last couple of years.

Actually consolidation has started in a small way in many cities such as Hyderabad, Bangalore and Chennai. The model of consolidation initially would be project specific. A group of relatively small developers would get together and form a large group, or two large developers would join to form a mega group. For example, DLF and Dubai-based Limitless Group have joined to set up a mega project in Bangalore. But eventually only big players can sustain in the market, says Mr. Challa.

Consolidation is part of growth cycle of any industry and real estate business is no different, says Chitty Babu, Akshaya Homes. Players who are not able to strategise their business in the current market scenario and who have less expertise in the development of real estate will surely feel the liquidity crunch, he thinks.

In the given situation, sustaining in the market is a difficult proposition. Earlier small and mid size developers would look at projects with a cost of Rs. 10 crore and would have three to four projects on hand. Whereas today a single project cost works out to Rs. 100 crore. That is the kind of money needed for a builder to sustain in the market, says Mr. Challa.

In order to mobilise large funds to take up mega projects, developers have taken different routes . Going for IPO (initial public offering) is not preferred now because of the existing market conditions.

For example, Emaar MGF has shelved the IPO and decided to take the private equity route such as venture funds.

Among recent private equity deals, Parsvnath Developers Ltd (sold a 30 per cent stake in a Mumbai project to Euronext-listed Yatra Capital and Saffron India Real Estate Fund for $46 million. The third option for funding mega projects is the Global hedge funds, which are on the lookout for multi-fold returns on their investments. According to industry estimates, about $1.6 billion private equity/hedge funds investments have been made in the real estate sector last year and is expected to cross $2 billion this year.

C. Chandran of Elegant Constructions, a mid-sized developer, contests all that is said about demise of small builders. He says that consolidation would happen in a small way, but that there is still room for the small and mid-sized players in the market.

The small players with small quantity of land will always have market. He feels that there is always demand for apartments with Rs. 20 to Rs. 30 lakh value and there were less in supply.

The big players, however, would not be in a position to give flats at such prices.

Mr.Chandran feels that buyer or consumer will have a variety to choose from and shall be offered host of amenities within each project.

The buyer will be more discerning and look at functionality of every project before making their choice.

For the mid segment players it will provide them with an opportunity to prove their credentials that they are at par with the big players in terms of deliverables.

In an industry where quality and delivery commands a premium the mid-segment players can actually use this opportunity to be recognised as serious contenders based on their performance.

Consolidation should be done on a level playing ground. If big players tie up with small players, the latter has minimum stake in the project. If two biggies join hands the price factors go up, says Sundaram, Builders’ Association of India.

When there is a consolidation, the high-end consumers are benefited, as they would provide better infrastructure and amenities. This will be possible only when the builders have large land.

However, Mr. Sundaram said he would not welcome the entry of FDI or private funds into the housing sector. According to him, this will unsettle the small players.

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