Rise of Organized Developers- Decoding the Phenomenon

Organized real estate players are clearly benefiting in the latest industry resurge, while smaller players have either exited the market or are choosing consolidation measures for survival. What lies behind India’s overwhelming demand for organized real estate players? Here’s taking a look!

A Times of India report put it rather tellingly, when it stated how India’s leading listed real estate players mopped up record sales figures for 2021. The report clearly highlighted how the major listed or non-listed real estate developers saw handsome sales volumes due to factors like good governance and corporate management practices, customer trust, financial accountability, and brand value.

Leading developer Brigade Enterprise for example, witnessed 59% growth in sales bookings to a sizable Rs. 1,310 crore between April and September, 2021, as per the report. In the same period, Godrej Properties saw its sales bookings go up to Rs. 3,072 crore, indicating 18% growth overall. Prestige Group had sales bookings grow by 88% (year on year) for Q2 FY22 and Lodha Group sold Rs. 3,000 crore worth of units in this period.

The writing on the wall could not have been clearer- Indian customers clearly prefer organized and branded real estate developers over their unorganized, smaller and not-so-well-known peers. This has given birth to a new phenomenon that is visible in the market over the last few years- the rise of organized realty developers in terms of gaining maximum market share, real estate sales and new launches alike.

Current Market Trends

The present market is tilted heavily in favour of buyers according to a report in Fortune India. Meanwhile, industry bodies like CRISIL have also come out with several interesting revelations. Here are some key findings regarding present market trends and the industry at large:

• Mumbai, the biggest residential market in the country, posted highest monthly housing sales volumes for October, 2021.
• Pune, Hyderabad and Bangalore were also markets that did well in recent times.
• Experts anticipate price growth of roughly 5% in 2022 although a buyer’s market will make sure that 80% sales transactions are driven by end-users. Hence, developers will have limited room for passing on price increases.
• Stamp duty incentives, lower prices and interest rates, special discounts, and coronavirus are major demand drivers for the industry.
• The second wave played spoilsport but overall residential sales increased 92% of year on year growth to touch 64,010 units in Q3 2021 as per reports. This surpassed average quarterly sales figures in the pre-pandemic era by 4%.
• With raw material and labor costs on the upswing, developers will find it hard to keep offering discounts owing to increased pressure on margins according to experts like DLF CEO and whole-time director, Ashok Tyagi.
• Pirojsha Godrej, Managing Director at Godrej Properties, has already stated that prices may go up throughout the entire portfolio of projects.
• Nominal price hikes will not be a deterrent for most buyers since overall affordability remains on the stronger side.
• CRISIL anticipates 5-10% of growth in residential realty for FY2022-23 in India’s leading 6 cities. It also expects 30-35% of sales growth for the current financial year, outstripping sales volumes in the pre-COVID phase.
• Multiple smaller real estate players have inked JVs and development agreements with bigger and organized real estate players.

How Organized Developers Seized the Momentum

Cut to 2020- With COVID-19 and a slump in demand playing havoc with balance sheets and margins of most real estate developers, those organized companies or brands with stronger financials, ample liquidity and established market reputations clearly moved ahead. They were better placed to tackle the vagaries of the coronavirus pandemic as compared to smaller players who found it hard to keep going. Big players benefited chiefly from rapid consolidation in the residential realty category.

Homebuyers started tilting heavily towards those developers with well-established brands, good track records and a diversified portfolio of projects. Big and listed developers started reporting healthier sales volumes till the first 9 months of FY2020 in spite of all market challenges. COVID-19 did impact sales with volumes coming down (year on year) by 11% for Q4 FY2020. Yet, collections were stable for organized and bigger real estate developers who mopped up even higher market share, while switching onto digital channels for maintaining customer connect and sales generation. Timely delivery and trust are now two huge factors for homebuyers with regard to investing in real estate projects. Organized developers manage to soothe these insecurities with their track record of delivering multiple projects on time, better financial transparency, and RERA registration for all projects in tandem with their customer service and superior project quality and amenities.

Factors Worth Noting

• Experts have highlighted how smaller or weaker developers are either consolidating their operations with Grade-A or bigger real estate developers or exiting the market.
• They are finding it hard to raise funds for projects while bigger players have managed to refinance expensive loans while reducing costs alongside. They are thus in a better place to come up with new project launches.
• Reports highlight how unsold inventory is at its lowest threshold with buyers clearly choosing trusted and reputed developers. The contribution of the top 8 listed realty developers in the country went up to 22% for FY21 from 6% in FY17 with regard to total housing sales in this period.
• Unsold inventory levels are rapidly coming down for organized and reputed real estate developers. Many developers like Sriram Properties and Lodha Developers launched IPOs sometime back and more such IPOs are expected in 2022 as well. Cash flows and balance sheets are steadily gaining in strength for these players.
• This has opened the doors for several new project launches. India’s top 7 cities witnessed 21% growth in new housing launches and 32,863 units were launched in the third quarter of 2021 alone. Hyderabad had 31% of all launches for 2021 while Mumbai and Pune accounted for 18% and 17% respectively.
• Big developers are now scaling up their operations for launching new projects. Lodha brand owner Macrotech Developers has already inked 11 JVs with landowners with sales potential estimated at roughly INR 14,500 crore. The company’s sales bookings went up by 40% to touch Rs. 2,608 crore in the third quarter of the fiscal year. Collections in this period also went up to touch Rs. 2,127 crore, indicating 44% of growth.
• Customer sentiments are also clear in terms of their buying preferences. For example, even in a Tier-II city like Indore, 73% of customers clearly preferred branded and organized real estate developers in a survey conducted by SAA.

What Lies Ahead?

Going forward, industry experts anticipate a mop-up of even higher market share by organized players along with reduction in their unsold inventory, a slew of new launches and growing sales figures alongside. These players will steadily accelerate and expand their blueprints after the lean phase of the last few years. At the same time, the wave of consolidation in the industry will continue, with multiple JVs and acquisitions involving smaller players as per predictions.