The standard narrative of most talk shows, media articles and investor presentations suggests consolidation in the real estate market. The general perception is that the demonetisation and introduction of the Real Estate Regulatory Authority Act (RERA) and goods and service tax (GST) compliances have made real estate a business of deep pockets. Smaller developers have been, or are being, acquired by the large developers. Thus, there is massive consolidation happening in the market. However, the data from Liases Foras shows an entirely different story.
In a research note, Pankaj Kapoor, founder and managing director (MD) of Liases Foras, says, “Rather than consolidation, the landscape of housing is expanding and will continue growing. Smaller developers of tier 2 and tier 3 cities will play a significant role in broadening housing and housing finance in India.”
Liases Foras, an independent, non-broking real estate research and analytics company, analysed the consolidation theory from three angles. Is the real estate market witnessing a reduction in the number of developers? Is the contribution of revenue and sales skewed towards the top-50, 100 and 200 developers and are supply-side consolidation, joint ventures and takeovers increasing the supply magnitude of large developers? And has this increased their revenue?
Most of the interventions were introduced post-2015-- demonetisation in 2016. RERA, and GST came into force in 2017. Liases Foras says it decided to look at the data trends from 2015 with the above three questions in mind.
As of December 2020, there were 11,620 developers with 17,022 active projects. The definition of marketable supply is that the developers should have unsold inventory for those projects they are offering them for sale in the market. Thus, this consists of only primary supply and does not include re-sales or proposed supply.
Liases Foras says far from consolidation; the supplier ecosystem is broadening.
* CY: calendar year
“Data shows a steady increase in developers’ number from 7,876 developers in 2015, growing over 50% to 12,249 by 2019. The number of builders has been increasing every year, except during the calendar year (CY) 2020, which has reduced the number of developers with active supply mainly because of the COVID-19 impact. Instead of consolidation, the trend suggests that the real estate market has been broad basing all these years,” Liases Foras says.
According to the analysis, while total sales in value have increased, top builders’ share in value terms fell. The value of the stock sold also shows similar trends.
The annual value of sales contributed by all the builders shows an upward trend, Liases Foras says, adding, “In contrast, the percentage share of top builders witnessed a decrease, especially from CY2018, which offers a broad-based market when smaller developers increase market share.”
From 2015 to 2019, the sales value increased by 20%, except during 2020 when the sales dropped by 31% due to the COVID-19 impact. The share of the top-50 builders (in aggregated revenues) oscillated between 27% and 24% from 2015 till 2019 and then dropped to 23% during the COVID times in 2020. Similarly, top builders up to 1,000 lost their market share by at least 4% since CY2018.
Growth in numbers of smaller developers was maximum except during the pandemic.
Liases Foras says, “The third perspective also stands true; the data show growth in super large and large developers. The total number of developers has shown a growth of 48% since 2015. Smaller developers constitute approximately 80% of the total number of active developers in these cities. Interesting to see that despite higher numbers, smaller developers grew 45% since 2015.”
The increase in the number of super-large and large developers during pandemic times suggests amalgamation and joint ventures. Mr Kapoor says this reflects growth on the supply side, which does not infer demand or market consolidation.
During CY2020, the number of super-large and large developers has increased. The number of medium and small developers has decreased during CY2020, while the total number of builders also decreased.
Mr Kapoor says, “The question that raises confusion is that when there are amalgamations, why is the number of developers not decreasing?”
According to Liases Foras analysis, joint ventures or amalgamations are happening at the project-level and not developer-level. For example, it says Nirmal group, a Mumbai-based developer, who had nine marketable projects, gave three of its projects for development and sales to three different developers, L&T Realty, Shapoorji Pallonji and Godrej Properties.
“These projects have shifted from the books of Nirmal to these three developers’ books, while all four developers existed despite the amalgamation. The Nirmal group is still managing six of its projects. Most of the amalgamations are such,” it pointed out.
The analysis also shows an increase in sales in value terms for small developers. Liases Foras says, when CY2018 and CY2019 are compared, the reduction in the value of sales within the super large developers and increase for smaller developers indicates that the dominance of super large developers in the market share is getting distributed to smaller developers.
The average business done by a super large builder has seen the maximum decline of 39% during COVID times, although the decrease of revenue of smaller developers was the lowest, at just 19%, it added.
According to Liases Foras , RERA has acted as an enabler and helped the market become broad-based. “It has enabled smaller performing developers to access credit facilities from the financial institution. Our experience working with lenders also suggests similar trends.”
The incentives to boost affordable housing under Pradhan Mantri Awas Yojana (PMAY) have also helped smaller developers. “While large developers launched mega townships, mostly far away in the peripheral locations, smaller developers offered affordable housing in interactive and end usable areas. Their pricing, product mix, and location cater to local needs more efficiently,” it added.
India’s real estate landscape has been expanding and broad-basing, Liases Foras says, adding, “The housing production in tier 2 and tier 3 cities are growing much faster than in tier 1 cities. The smaller cities’ contribution to the Indian real estate landscape has been steadily increasing over the year.”
As per the data, sales in tier-1 cities grew 22% between 2015 and 2019; during the same period, sales in tier 2 cities grew 73%, from 59,390 in 2015 to 76,466 units in 2020.
According to Liases Foras, while COVID-19 has impacted the demand for tier 1 cities, it has benefited the smaller towns. “Work from home or hometown has triggered the phenomenon of spatial diffusion of jobs. The high cost of living, densities, and experience of remote working abilities coupled with cost benefits suggest that the jobs move to places where people live.”
“Tier 2 cities are slated to grow faster with the government’s boost for the manufacturing sector. The finance minister committed an infusion of Rs1.97 lakh crore for the manufacturing industry.
“With the land cost and labour cost being cheaper in tier 2 cities, the manufacturing units are more likely to operate from smaller towns, driving smaller towns’ economic growth. The economic growth in the smaller towns will further boost housing production and credit growth to the broader region of the Indian economy,” Liases Foras concluded.