Indian real estate sector has been witnessing liquidity crisis for quite a while now. While all the segments have been adversely affected by a lack of liquidity; the residential segment has been the most visible one. Lukewarm buyers’ interest, reduced availability of finance and increased requirement of capital have all contributed to the crisis. As a result, most lenders have raised the bar significantly higher for the borrowers.
In the current environment, only leading developers with a strong track record of product delivery can possibly aspire to get funding support from institutions. Even for them, the funding will be available only for the projects which have superior locations, which are in the advanced stage of the construction cycle and which have minimal approval/demand risks. Most of the developers will have to reassess their current status and will be required to re-strategize on the following lines:
1. 1. Reduce-prices-reduce-sizes:
A An improvement in operating cash flows is essentially driven by a product that is rightly priced and rightly sized. Developers will have to both reduce prices and make dwellings more efficient with smart concept designs which enable better utilization of the floor area.
2. Don’t be an asset bank:
The most precious resource is time and it is futile to hold land banks/blocks of inventory for future gains. It may have been a rewarding strategy in the past but is certainly not a good strategy in the current environment. It could be better for developers to monetize available surplus assets, even if it seems to be at less than fair valuation.
3. Find a helping hand, before it’s too late:
Ifthe future value continues to lure you, it may be rewarding to partner with a more capable and credible developer to monetize the potential value of an asset. A delayed realization of value may not be a prudent strategy anymore.
4 4. Raise equity:
For those who have it all, i.e., a credible track record, a superior project location as well as promising demand-supply dynamics but who lack capital, a partnership with an institutional equity investor could be a way forward. The equity infusion will not only help the developer in raising debt but will also provide more headroom if the project were to be delayed for any reason. And, no, the equity is not costlier than debt; it’s a different form of risk and reward participation.
While some relief measures have already been initiated by the government and regulatory authorities such as capital allocation for stress asset funds, reduction in premiums in select markets, deferment schemes amongst other and more could be in offing; it would be important for one to rather quickly acknowledge and adapt to the changed reality of the Real Estate Sector. Landowners, construction companies, development companies, financiers and other stakeholders will have to necessarily collaborate, innovate and align their respective interests to find a way out of this prolonged liquidity crisis.
- By Parvesh Gupta, Senior Director, Capital Markets