In February, at a busy project site in Mumbai, I was in a conversation with a developer who had mixed feelings about the sector. He said, “While this stamp duty waiver has helped the industry, the complete ‘cleansing’ of the sector may have been stopped. Now I am noticing that several losers who shouldn’t remain at all in the business – feel encouraged about their prospects.”
His choice of words could have been more generous to the weaker players of the industry but his assessment was not wrong. While it is true that several weaker and poorer hands have left the business since 2016, there are more than enough players who are exploring newer opportunities.
Moreover, it will be premature to conclude that the ones who have left the business will never return back. Being a builder in Mumbai provides a high that is not easy to let go of.
The reason for mentioning this aspect is to explore a theme that has largely gone uncontested over the last few years – Consolidation in the Real Estate sector. The premise in favour of consolidation has broadly been this: As profitability levels drop amidst greater regulatory scrutiny and higher capital requirement – only key and serious players will survive in the business.
It’s a sound argument. But construction is a very different business and even within construction – the Mumbai market is unique. A recent HSBC report shows that the largest developer in the Mumbai Metropolitan Region, Lodha Group, had a mere 7% market share. In comparison the market share of M3M in Gurgaon was 20%, Casagrand in Chennai was 21% and Prestige in Bangalore was 11%.
To add to this – data from Liases Foras shows that market share of the top 50 players has declined over the last three years. From commanding a 54% market share in FY19 it has now fallen to 49%. Meanwhile the number of developers has risen from 2,598 to 2,728.
So – is the theme of major consolidation an exaggeration? In my view consolidation within the industry is not an exaggeration – but forecasts on its scale and pace are wildly exaggerated. There are four key reasons for this:
1) Nature of the market: Within MMR, the most expensive market is Mumbai. And given the land constraints, it is primarily a redevelopment-led market. Society redevelopment has small plot sizes which larger developers are likely to shun while slum rehabilitation redevelopment is too messy for key players to be enthusiastic over. Thus it is no surprise that over the last five years, the market share of the largest developer in Mumbai (not MMR) has ranged between a meagre 3% – 5%.
2) RERA: The Real Estate Regulatory Act has provided a much-needed boost for home buyer confidence. It has also had a positive impact from the perspective of lenders who have moderated their resistance to dealing only with a certain set of developers. Hence small and mid-level credible builders are witnessing an easier acceptance into the formal lending market. Pankaj Kapoor of Liases Foras point out that “Earlier many of these developers had no access to the formal lending market and 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 portfolio.”
3) Local players offer more value for money: When a market moves from being investor-driven to end-use 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 at preference to the larger names.
4) Deleveraging by industry: If there has been one major learning for all key developers in recent years it is that – one should not bite more than they can chew. Involved with numerous projects that often ensure a balance sheet is 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 means that market share gains will always be restricted – even if projects are undertaken in different frameworks.
At a personal level – I am glad to see the premise of consolidation being tested. As I have pointed out in earlier columns, many ‘branded developers’ are primarily ‘famous surnames’ who offer a product of similar quality to Tier 2/3 builders – but at a premium pricing.
The edge of these ‘branded developers’ is that they provide near-certainly of at least delivering a project. However as more projects by lesser-known developers start getting delivered on account of greater regulatory scrutiny and compliance – it is a reasonable assessment that the ‘edge’ of larger players will diminish in is value.
It may not be good news for Mumbai’s listed developers who are banking on big market share gains. But it is good news for home-buyers who will start getting a set of worthy choices to pick from.
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