Realty's K-shaped recovery: woe or wow?

- Indian real estate is set to attract billions of dollars in investment.

Real estate firms are making such assertions based on the fact that the sales volume of the large and listed companies is high, the top-line is the best ever, their stock prices have skyrocketed, debt is down, and inventory is running low. Are these signs of a booming market? Yes. But numbers only tell so much, often concealing more than they reveal.

Post the COVID-19 pandemic, Indian real estate has seen a K-shaped recovery. Listed players have grown disproportionately, while the larger universe of lesser developers is struggling for survival.

A report by ICICI Securities claims that the residential market share of the top listed developers will grow from 25 percent in FY21 to 29 percent in FY24. Bear in mind that we are talking of only a handful of listed players in a universe of some 12,000 developers. Thus, it is evident that as the market consolidates, larger players are growing at the cost of smaller ones.

Some of the reasons why Goliaths are taking over the real estate space are:

- They have a pool of investors and underwriters they can tap.

- They command a premium.

- Can afford to hold on to inventory even when sales are slow.

- Build-and-sell, or 20:80 schemes (where the builder pays for the home loan interest till possession) is something that only larger developers can afford.

- Larger developers can afford higher marketing budgets as well.

- They have a large portfolio of high-margin luxury projects.

In contrast, look at the Noida and Greater Noida markets where many a fly-by-night developer flourished due to the deferred land payment policy.

The erstwhile policy was meant to incentivise small developers with modest balance sheets, by allowing them to pay only 10 percent of the cost of land upfront, and the rest in 10 years or on project completion, whichever was earlier. But builders siphoned buyers’ money from one project and used it in others, which led to the metastasis of delayed projects and defaults, contaminating the entire ecosystem.

Nonetheless, can about 20 large players serve a country the size of India? Most big brands are present in just 10-12 cities. Even in those markets, they are present in select upscale micro-markets in the premium segment only.

Then there is the question of the sustainability of this boom. Today’s K-shaped recovery is also driven by deep-pocketed investors helping the larger players laugh their way to the bank, while those in the affordable and low-cost space are struggling for business.

In neighbouring China, large corporations like Evergrande and China Properties Group suffered from over-leverage. Their massive expansion and market dominance ultimately proved to be their nemesis, when they simply could not sustain their gargantuan operations.

In India, players like Unitech, Jaypee, and Amrapali are case studies in how large developers over-extend and maim the market.

The questions that remain are: to what extent can a handful of large developers drive the market? How easy will it be for them to raise funds once their inventory is sold? While euphoria around the K-shape may spread some cheer, the lopsided growth has to be factored in for a fuller picture.

This K-shape recovery of Indian housing is as much a bane, as it is a boon. No one would deny the need to weed out unscrupulous actors. But large developers alone will not serve India.