Reforms Drive Consolidation In Real Estate Sector
October 2017

image

The real estate sector in India is witnessing more than its fair share of changes, thanks to the new reforms, policies and legislations brought in force by the Central government. Although, in the long term, these reforms are expected to benefit the sector in a positive way, yet at the moment, the sector is going through some initial hiccups. Realtors today are devising innovative strategies like “Consolidation” to navigate through the changed business environment, brought upon by these new reforms.

Demonetization

Real estate had always been known to benefit tremendously from unaccounted cash transactions. In a surprise move, demonetization of high-value notes was made effective from November last year. This led to an unforeseen crunch of liquidity in the sector. The situation was compounded by the reluctance of banks to lend money to developers, following a crackdown on Non- Performing Assets (NPAs) by the Reserve Bank of India.

Real Estate Regulation and Development Act

In May this year, Real Estate Regulation and Development Act (RERA) came into effect, which has brought transparency and efficiency in the sector. The builders have realized that buyers, lenders, investors and other stakeholders have strengthened owing to the act’s strict guidelines and the business environment too is no longer what it had been for years. This has led the developers to make structural adjustments in order to better align with the changed realities of the real estate market.

Moving Towards Consolidation

One of the direct impacts of these new reforms and legislations is the developers moving towards consolidation. Many developers are today monetizing their land parcels on outright basis or entering into joint development or development management agreements. Consolidation has helped several developers against liquidity crunch and now they will be able to complete their existing projects on time, as has been made mandatory by RERA.

Earlier, realtors picked up land parcels to expand their geographic reach, utilizing the funds from their existing projects even before completing the latter. However, the newly implemented RERA has made it compulsory for builders to maintain 70% of funds collected from buyers in a separate bank account in case of new projects and these funds can’t be diverted to other projects. Several developers are now even selling their land parcels to fund their ongoing projects as they don’t want to get penalized on account of late completion under RERA.

Consolidation Benefits All Stakeholders

Consolidation and monetization through a joint venture amongst developers has proved to be a boon to the small and medium developers as now they have access to enough funds to complete their ongoing projects or start new ones. For the bigger developers, a joint venture is beneficial too as it puts them in the driver’s seat and in control of the newly formed entity, owing to a majority stake in the same.

Moves like Consolidation by developers showcase that now developers are making changes to work better in the environment created by these new reforms and legislations. And as can be seen, it is proving to be financially feasible for both smaller and larger developers. For the buyers and investors, new legislations and reforms are good news as only credible developers will remain in the business. Not-so- serious operators who mislead or cheated customers have no other option but to shut shop or ensure compliance. This has certainly lend credibility to the entire sector and sales are expected to pick up soon in the future.