Consolidation in the Real Estate sector post RERA

The introduction of RERA after the Demonetization drive will result in institutionalizing and consolidating the Real Estate Sector in India. Both, smaller developers/landowners& cash-starved developers will be forced to partner with larger developers or raise equity from institutional investors to survive post RERA. To sustain themselves going forward, Developers will not only need to be sufficiently funded, but they will also need to have adequate machinery to meet compliance related formalities that RERA demands. Further, unscrupulous developers, both small & large, will find it hard to operate at the margins that they historically operated at because of the transparency that RERA brings with it. Consolidation is bound to take place in one of the following ways – 1. Distress sale of Land Parcels & struggling on-going projects by developers that are cash strapped 2. Joint Developments or Joint Ventures between small developers/landowners & large developers/institutional development platforms because smaller developers will need to access to the financing, marketing & compliance related strengths of the larger players. The Development Management model will also be used as a strategy to structure partnerships going forward 3. The acquisition of either a portfolio of projects or smaller development companies by larger developers or development platforms Equity investments in Indian Real Estate projects dried up post 2007-08. The lack of confidence in the regulatory environment coupled with the inability of developers to execute projects on-time affected returns. Most funds resorted investing only via structured debt to curb risks. However, with the increased transparency post-RERA, foreign & domestic institutional investors will begin playing a more active role, both at the project level & at the entity level. Further, we will see the emergence of Development Platforms that are backed or owned by Institutional Investors. These platforms will have the execution & marketing/sales expertise that will be used to develop projects that the Institutional Entity invests in. We believe that the speed of consolidation will be determined by the quantum of equity available for investment into real estate by domestic & foreign funds; and the level of success achieved by the newly formed Development Platforms. Overall, the sector is expected to get more institutionalized. The market will be dominated by large developers or institutionally backed development platforms in 3-5 years from today. The number of small developers & landowners trying to foray into developing one-off projects without a strong partner will reduce over time.