With big developers eyeing land buyouts and projects of smaller builders, the real estate sector in the country will witness consolidation in six to eight months. A key driver would be attractive valuations of such properties.
The Reserve Bank of India's latest move to curb inflation has resulted in a double whammy for builders: Fading consumer interest on account of more expensive home loans and banks' lending rates to developers increasing up to 1 percentage point. Curbs on external commercial borrowings by real estate companies may also be imposed shortly.
Omaxe Limited Chief Executive Officer Arvind Parakh said, "There will now be opportunities for taking over projects of smaller developers at sensible valuations. The next six months will see a weeding out process of fly-by-night operators and small builders."
"A new era is before us. Small developers will become strategic partners and land traders for bigger ones. As small regional developers are very intelligent in picking up land and catering to locals, it will be a win-win situation for both parties," said Cushman & Wakefield India deputy managing director Sanjay Dutt.
This is already being put to practice. For instance, DLF Ltd is entering the complex Mumbai market in a joint venture with city-based Akruti Nirman for retail and commercial projects.
Typically, smaller developers' preferred choice for raising money is through banks. These small companies, found in abundance in smaller cities and even in peripheral suburbs, are usually unable to attract private equity and are thus under financial pressure.
Interest rates to builders have already gone up to 12-14 per cent from 9-11 per cent three months ago. Another hike is on the cards, making project development unviable for small developers. Adding to the developers' woes is the banks move to increase collateral security by 1.5 times, thus making it difficult for the builders to raise money.
Under financial pressure, developers are trying to sell existing unsold housing stock even at cheaper prices. But they seem to be stuck in a vicious cycle as potential home buyers are willing to wait on account of an imminent price correction.
"We are stuck. Prices have fallen by almost 15 per cent in Gurgaon, Faridabad, Noida, Kundli, Mohali and Sonepat. People are not buying and we need to sell to fulfil our commitments," a Delhi-based developer said.
Real estate analysts said property prices will head south by at least 20-25 per cent in tier-II and tier-III towns such as Jaipur, Mohali and Ludhiana. Peripheral suburbs such as Kundli in Gurgaon and north of Thane in Mumbai are expected to see a correction of 10 per cent. Sensing troubled times ahead, smaller real estate developers have stopped acquiring land.
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