Mumbai Real Estate Hits a Roadblock
The waiver of stamp duty by the government to mitigate the woes of the real estate sector might have somewhat helped the industry but it has somehow also given a sense of boost to the weaker players in the ruthless market. Competition works as a “cleansing” tool, which rids itself of the weaker younglings, but with the government’s support that cleansing might somewhat have stopped. Since 2016, several weaker and poorer hands have left the business but there are more than enough players who are exploring newer opportunities.
The aforementioned circumstances show an uncontested option that has never been viewed closely enough over the last few years – Consolidation in the Real Estate sector. The premise in favor of consolidation states that competition, profitability levels amidst greater regulatory scrutiny, and higher capital requirements weed out the weaker players in the market, thus, riding the sector of its unproductive thorns.
Due to the consolidation mechanism, only key and serious players survive in the business and hence the efficiency of the system is maintained. However, the pandemic exacerbated the woes of builders leading to a real estate consolidation roadblock.
Is the theme of major consolidation an exaggeration?
The data released by Liases Foras emphatically shows that the market share of the top 50 players in real estate has declined over the last three years. From commanding a significant 54% market share in the financial year 2019, it has now fallen to 49%. Meanwhile, on the other hand, the number of developers has risen from 2,598 to 2,728.
So this begs a pertinent question that is the theme of major consolidation an exaggeration? It would be a gross misjudgment to state that the consolidation within the industry is not wholly an exaggeration. But it is to be noted that forecasts on its scale and pace are wildly exaggerated. There could be various key reasons for this. First and foremost is the nature of the market.
Real estate in India is dominated by the markets in Delhi, NCR, and Mumbai. NCR and Mumbai Metropolitan Region (MMR) contribute 60% to Indian real estate. Within MMR, the most expensive and affluent market in Mumbai. Given its poshness and lavish lifestyle, demand for it is immensely high. But it is to be noted that due to the land constraints, it is primarily a redevelopment-led market.
Thus, society redevelopment has small plot sizes which larger developers are likely to shun. While on the other hand slum rehabilitation redevelopment is too messy for key players to be enthusiastic over. Thus, it may come as a surprise to no one that over the last five years, the market share of the largest developer in Mumbai has ranged between a meager 3% – and 5%.
Secondly, talking about the affordability of houses, the Real Estate Regulatory Act has provided a much-needed boost for home buyer confidence. It has also emphatically led many lenders who have moderated their resistance to dealing only with a certain set of developers. Thus, an advantage to the home buyers is, small and mid-level credible builders are witnessing an easier acceptance into the formal lending market.
Thus many of these developers are getting access to the formal lending market, which earlier was denied to them as they were primarily dependent on only customer advances. With the adoption of RERA, the better players are seeing interest from lenders who have anyway been keen on diversifying their lending portfolios.
Another phenomenon that works here is that local players are offering more value for money. When a market moves from being investor-driven to end-user-driven, then all real estate is local. And players who know the intricacies of that market better are able to offer products at prices that are often a preference to the larger names.
Last but not the least, many developers throughout their years in business have learned one prominent lesson, that one should not bite more than they can chew. With taking on more than what one could fathom and being involved in numerous projects that often ensure a balance sheet saddled with high debt, most players in the last year have opted to deleverage and go slow on new projects.
This is a trend that will not end in a hurry. It also emphatically means that the market share gains will always be restricted, even if projects are undertaken in different frameworks.
As it is known that many ‘branded developers’ are primarily ‘famous surnames’ who offer a product of posh, similar quality to Tier 2 and Tier 3 builders, but it is usually done at a premium pricing. The only edge that these ‘branded developers’ hold over non-branded ones is that they provide near-certainty of at least delivering a project in the future that cannot be ensured by a non-branded developer.
But as more projects by lesser-known developers start getting delivered on account of greater regulatory scrutiny and compliance, it would be right to state that the ‘edge’ of larger players will diminish in value. While the market dynamics seem unfavorable for Mumbai’s listed developers who are banking on big market share gains, it certainly spells good news for home-buyers who will have a plethora of options to choose from.
Tags: real estate sector, real estate developers in mumbai, mumbai real estate, mumbai real estate market, bandra mumbai real estate, consolidation story in mumbai real estate