This is an important note for the developer or aspiring to be a developer .
Like all industries, real estate is no different from others where heavy or big capital is required to set up the business and then drive growth.
Capital in India is available at a high cost and that too only for construction and home finance and not for land purchase which makes business unviable.
25 years into the depth of this industry my takebacks are not new or different then what we had read in science in school
“SURVIVAL OF THE FITTEST“
Only how you get into the category of being labeled as FITTEST is what we need to learn
In the last 2 decades we saw a big lot of small contractors become big contractors and the more ambitious ones grew to become developers and then big developers.
Early years of 2000s were bountiful years for the industry and the developers made huge fortune. Home loan was introduced by the banks and the white collared employees from IT Industry, Banking & Finance, FMCG could easily leverage there salary slips and buy homes. 15 % is just what you had to pay and the remaining was funded by the bank. The supply was low and the demand was high leading to big time appreciation in prices which turned real estate into an investment product let alone fulfillment of basic need.
Not only the end user and investor saw this as an opportunity but entrepreneurs saw real estate as an money spinner. People who did not have any experience of construction also entered in by virtue of using there surplus for buying land. Some traded in land and others started construction to make extra money by value addition.
There was prosperity for all stake holders viz Developers, Investors, End Users and also for the financers
Strong cash flows allowed the developers to tie up new land parcels for growth.
The EXCEL sheets presented a super rosy picture and the industry steered like a brakeless vehicle
This environment was great but it brought with itself many folies. The true picture of financial health of the company was never known for the reason that real estate is work in process and mostly the assumptions are made hypothetically
“FSI cost + Construction cost + Finance cost = Total production cost “.
Selling price – total production cost = profit
This is how calculations were done. No contingencies were ever accounted for. There was no cash flow management mechanism. Establishment costs and operational cost went out of control. Cost escalation was not provisioned.
The real estate business was largely run in conventional mode. Since the sale velocity was high for reasons listed above the collection was far more than what was required for construction and operational management hence everything looked just fine
The developers who were able to market and sell aggressively had surplus to take out money from one project and buy land for another. And then came doomsday.
Recession happened and sales velocity reduced. This impacted cash flows badly The financial institutions also tightened there grip and hence the developers faced a double whamy – slow sales and tight liquidity
The projects started getting delayed and the consumer started getting nervous. The consumer also faced the heat as on one side he was not getting possession and on the other side he was paying rent and EMI
Developers started defaulting especially the ones who had high debt at a high cost
The confidence of the customer was shattered.
Local – Regional developers faced a tough time trying to manage there customers and there brand value
And then, the National Industrial developers took this as a responsibility and also as an opportunity to expand their footprint and enhance there market share
TATAs, GODREJ, DLF, PRESTIGE, and others took advantage of the opportunity and expanded there inventory across the country. The brands built over tens of decades with loyal customer base found traction and customer willingly paid premium in purchasing branded real estate rather than buying it from local or regional developers
Moreover these companies easily raised capital from banks, NBFCs, AIF and through FDI at a very cheap rates compared to regional local players. This made the local players business unviable and fund raising difficult and expensive.
Why is it so? Why do the funds do discrimination when lending to one versus the other? Want this create a monopolistic industry?
Developer must understand the way the funds operate and on what parameters the funds deploy capital
The funds primarily look for at least the following:
1. Delivery record of a developer
2. Size of the organization and the quantum of work in hand and delivered
3. If leveraged then the size of the debt and the planning of paying it off
4. Brand value and capability of execution
5. Sales team which can produce the required velocity of sale for much-required cash flow for execution and operation
6. Corporate governance and adherence to compliances
7. Land records
8. Consultants on board
9. Transparency in the system
The National developers clearly pass all the above and hence are able to raise funds from domestic financial institutions as well as international funds at cheap rates making them competitive with visibility of sizeable profit
Regional Local players even with good track records find it a little tough to raise funds and that too at a high cost which eats the core idea of doing business
My recommendation is very simple for all those who are here for a long haul and wish to do this business in a way that is motivating enough:
1. Please create a listed parent or holding company in which the business will be done
2. Be compliant and also make sure that you have a process-driven system which will ensure timely (quarterly) posting of results in public domain for the funds – govt – public to evaluate your performance and have confidence to invest in your company
3. Please create a skilled manpower pool. Organization is nothing but the people who work there. Create a solid organization structure
4. Be transparent
The future of the industry is bright for all those who believe in process-driven organizations rather than owner-driven company.