July 2, 2018

Gaurav Kumar

The Indian Real Estate Industry experienced more regulatory change over the last two years than it did over the last two decades. The collective impact of RERA, Demonetization, Insolvency & Bankruptcy laws and GST is so radical that it almost seems unfair to expect the current generation of real estate entrepreneurs to deal with it overnight. Yet, it will separate the boys from men. These initiatives will finally lead to increased transparency, enhanced consumer confidence and significant interest from institutional investors and large Indian corporates. The latter has already started happening.

India stands as one of the most vibrant global economies in the world today, backed by strong economic growth and market fundamentals. Industry Reform and consistent easing of FDI norms has brought blue chip investors back in the market. CPPIB, ADIA, Hines, Blackstone, Brookfield, APG, GIC and Ivanhoe Cambridge are some large foreign investors who are demonstrating high levels of equity commitment. However, majority are focused on low-risk ‘core assets’ (rent-yielding office buildings). One would hope that as time goes by, the Indian environment would give them reason to increase their commitment to greenfield development. This would be a function of improved corporate governance, investment returns, ease of business (regulatory) and market dynamics.

In the meantime, ‘Consolidation’ will be the key. Most small, medium and large development firms are saddled with large amounts of debt or inventory or both. While interest rates corrected over the last two years (may rise again), the sheer proportion of debt to owner’s equity is so high that monetization of assets has become the main focus. Well-capitalized developers, especially corporate players are benefiting most as land owners (and smaller developers) enter into joint development agreements with them. Land and asset sales are other tools being widely adopted.

Compared with earlier years (2014-16) where debt remained the dominant flavor, there has been a selective but incremental appetite for development equity. Various equity/platform deals have been witnessed in the real estate sector. Since strong track record and corporate governance play a critical role in gaining investor trust and funding, Tier I and Corporate Developers have again been the beneficiaries of this equity wave, reinforcing the Consolidation theme.

For other players, the local debt market has been the main avenue of funding. ‘Structured debt’, in many cases refinancing, has been the only recourse for firms looking to tide over the current crisis while they reinvent their business models to address the ‘new normal’.

In other trends, we have seen large corporates monetizing their land assets especially in markets like Mumbai where market conditions have not dampened developer interest in prime land parcels.

We hope that HNIs and family offices will seek to re-enter the market at some point – encouraged by greater transparency and corporate governance. While office leasing has remained evergreen over the last decade, the fate of residential markets will depend on end-user demand and pick-up in home prices – the classic chicken and egg saga that will decide the future of development firms across the country.

Even as several ‘legacy’ businesses fight for growth, it could prove to be a magical time for new (and young) entrepreneurs who want to take advantage of the new paradigm and exciting possibilities thrown by tech, co-working, student housing and senior living. ‘Elephant in the room’ remains the critical role (in the approval and entitlement process) played by local bodies such as Development Authorities and Municipal Corporations, many of whom are oblivious to the world that’s changing around them. Some shining examples such as MMRDA offer great hope for the future.