The K-Shaped recovery for the Indian real estate means while a handful of developers with strong track record could gain more market share while a crash landing is inevitable for the large universe of the players.
The economists and the real estate analysts are unanimous over the inevitability of the real estate recovery in India. What is nevertheless being debated is when will the sector revive to its normal course of business. What is even more important is to assess what would be the shape of the recovery. In classical economic definition, three of the commonly used recovery shapes are V, U & L shapes. V-Shaped is a strong recovery after the debacle, U-Shaped is a slower and long-drawn recovery, while an L-Shaped aftermath is where the previous peak is not recovered.
The market dynamics nevertheless points to the arrival of a new contender that could define the real estate recovery – it is K-Shaped. What it actually means is that the bigger, stronger, organised and listed players would recover fast and more than expected while the weaker developers could see the bottom end of the road that leads to exit point.
The argument has its own share of merit. After all, the market slowdown, slow sales velocity of under construction projects and the liquidity crunch had already stressed the weaker players quite a bit even before the Coronavirus pandemic proved to be an enabler of doom. The analysts are hence forecasting the Halo and Horn Effect over the business. Halo and Horn Effect is a cognitive bias that causes to allow one trait, either Good (Halo) or Bad (Horn) to overshadow other traits, behaviours, actions or beliefs.
Recovery delayed but not denied
Real estate to be witness to Halo & Horn Effect
A K-Shaped Recovery on the cards that would help the organised and financially sound developers
Weaker or inefficient developers with poor or delayed track record of delivery would find hard to survive
Reputed brands managing to sell even in the peak of Coronavirus lockdown
Amit Modi, Director of ABA Corp seems to agree with the assumption that the future is a game of stronger players when he says that sales are weak but strong players are selling; may be not 20 units in a month but 7-8 units post the unlock. Revenue is coming from the projects that are in the advanced stages of construction.
“Even if we are meeting 40% of our target post Coronavirus pandemic we should not be that pessimistic. What will accelerate the pace of recovery would be trust factor with the developer as well as the ready to move inventory. Location and product is the key and the buyer today is also very conscious of the fund position of the developers,” says Modi.
JC Sharma, VC & MD of Sobha Limited sounds more optimist about post Covid-19 recovery when he says that June itself was a month of revival. But since the Covid cases are going up significantly the fear factor might again have an adverse impact. Till you come back to the normalcy you will have the challenges, Once the normalcy returns to the Indian economy, not just in terms of the stock market movements, but actual visibility of the on-ground activities. When there is no lockdown; when the workers start coming back; there are no restrictions over free movement, the steps that we have taken during this period will help us grow faster than the overall market growth.
“Of course, there are opportunistic buying because the prices are at the rock bottom. There are attractive opportunities in the market. We have about 20 million sq feet of approved ongoing projects; about 40 million sq feet of projects in the pipeline; then some projects at the design stage. So, we are constantly creating a lot of opportunities during this phase too. We are also having opportunities now without investing, through a hybrid model and we do believe that we have to be open to the emerging market opportunities,” says Sharma.
Deepak Goradia, Vice Chairman and Managing Director of Dosti Realty says that based on the duration and depth of the pandemic, realty prices may or may not witness a downward movement as the holding cost of the developers will go up while the pressure to liquidate unsold inventory will increase. Considering the current scenario, the housing sector hopefully should see a gradual increase in the next quarter as consumer’s utmost priority presently is health and preservation of income.
“The sector will start to revive in times to come with an increase in the housing sales owing to the initiatives taken by the government, for example extending the project completion date by six months beyond the lockdown period, interest rate cuts, easing in credit conditions by banks and financial institutions. These effective steps will help put the Indian economy back on track and the realty segment is anticipating some positivity in the industry,” says Goradia.
The actual property sales data from across the markets after every given crisis clearly shows how some of the better-run companies consistently grow faster than the overall industry. The more reputed players also end up earning market share from their smaller, weaker or inefficient counterparts. Some of the key enablers supporting this trend are – brand equity, execution track record, economies of scale, and fiscal depth.
For instance, when demonetization happened in 2016 and GST got rolled out in 2017, the “unorganised to organised” became the predominant market reality and many smaller developers had to exit the market, while helping the organised and listed developers to grow their market size. The top listed and/or organised real estate companies could not only adapt to the “New Normal” pretty soon but also have been witness to more market share.
Similarly, the regulations like RERA and the disruptions like NBFC crisis leading to risk aversion in lending by banks further dented the confidence of the smaller developers with access to capital for smaller and inefficient players becoming a challenge. Now the Black Swan like Covid-19 has further restricted the ability of weaker developers to compete effectively with large & listed companies that continue to have access to capital at competitive terms or have enough internal accruals to fund their growing Capex and working capital needs. A K-Shaped recovery is hence forecasted as a logical conclusion.
Ravi Sinha
@ravitrack2media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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