Mar 2020

How have consolidation methods changed over time in India?

By Adil Engineer, Jt. Managing Partner, Credberg

Current trends in capital deployment:

According to one Credberg white paper: “Apart from the office sector where large capital is still looking at opportunities, cash is moving towards fresh projects [as opposed to not stuck projects], especially in the residential sector.” Pawan and Adil, said “Most capital in the residential segment is being invested in greenfield projects. This could be attributed to a couple of factors, such as the lack of enforceability of the senior-junior structure in the capital stack of a project (in case the situation goes to NCLT), or the lack of clarity on the third-party rights that may have been created in the project. In regard to residential, refinancing especially on stuck projects has been at a standstill in the last few months." 

Consolidation: Winner takes all?

There is now a new wave of consolidation happening across certain sectors in real estate and the economy. As of this month, the number of public sector banks has fallen by about half, from 21 to 12. When asked if people should be worried, Pawan and Adil said “In most downturns/slowdowns, consolidation plays out and it’s no different in the Indian real estate space. This has begun in the form of stalled projects and approved land banks being taken over by larger and more reputed developers, backed by healthy equity infusion from them, and a strong private equity partner. We will soon see entities also being taken over and this will play out to clearly differentiate top developers across the country.”

Offices are currently sporting record-breaking net absorption rates - how can the residential sector catch up?

The Indian office market is booming at the moment, recording historic highs in net absorption and project launches over the last 12 months. The same cannot be said for the residential asset class. Contributing close to 80% of the overall real estate market, the inherent demand of housing assets is being significantly strained. The ongoing credit crisis, the bad track record for execution by developers, and the drop in buyer confidence due to the slowdown is leading to a lack of supply. But what can be done to fix this? According to Pawan and Adil, “developers need to evolve to understand the kind of capital needed for a project and build out the right products needed by end users. This combination will make the residential sector more appealing to all the stakeholders and is the long term solution going ahead.” 

What’ll have the biggest effect on the upcoming year?

“The one thing that is playing out in the real estate market quicker than it looks is the emergence of the alternatives. Be it data centres, student housing, co-living, co-working, or education, the market is gaining momentum. Clearly, the way the credit situation plays out and the overall economic situation will have a heavy impact on the direction that Indian real estate will move in 2020”, Pawan and Adil said. 

About Author

Adil Engineer Jt. Managing Partner, Credberg
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Updated: 23 Mar 2020
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