1. COLLABORATIVE PARTNERSHIPS
Let us first – one and all – accept that “Real Estate Industry Is in Serious Trouble”
Also, let us accept the fact that we are the ones who have to find a solution to our problems.
The more we delay, the more we drown.
Banks -financial institutions-authorities-regulators-govt will keep doing their part to the extent they can beyond which measures can lead to bigger catastrophe for a common man and hence they will shirk risking the damage to the consumer. I am not saying that we should not appeal to all concerned – of course, we should but we should also sit together and identify an alternate strategy to overcome the problems which have engulfed most of us if not all.
I have dwelled over the current crisis and would like to put some initial thoughts which may be considered by the industry people to help them in some form
1. Collaborative Partnerships: The need of the hour is to do partnerships with all stakeholders: a govt-authority-regulator-financial institution(banks NBFCs all) in the first place and vendor-customer-broker-media-strategy consultant in second place.
a) Different real estate developer bodies like CREDAI, NAREDCO, MCHI, etc. are already on the front foot in presenting the shape of the industry to the Govt- Regulator-RBI and we are seeing relief coming from all ends whether it is the extension of the completion date of construction by RERA, moratorium and liquidity ease from RBI and Interest rationalization and simplification of the approval process by Govt and authorities.
b) Banks need to step up the effort of supporting the real estate industry as of now. There surely is a liquidity issue and the Banks need to look at the supply side by the ease of sanctioning and disbursing home loans to the customer and not putting in stringent conditions. The banks can also do a top-up construction funding to the extent of 20 % at least to developers whose project is nearing completion.
c) NBFCs have a tough task at hand since their exposure to developers is big for they funded the land purchase. Most of the developers who are stuck are stuck because their equity in the project is very small – they funded 25 % of the land purchase from a private investor and the remaining 75 % from the NBFC. In an environment of the low volume of sales and high interest (which NBFCs charge) the cash flow management has become awry. NBFCs will now have to take control since big money is at stake. NBFCs will have to collaborate with the developer to whom they have lent and found them smaller developers with SALES & EXECUTION CAPABILITY – break the big project into small phases – and get them completed from small developers who have NO or LOW debt but have fantastic Sales and Execution capability
d) Developers will have to collaborate with Vendors by putting their SALES & COLLECTION plan in front of them and aligning their SUPPLY &PAYMENTfrom collection.
e) Developers will have to collaborate with institutional brokers who can manage a larger group of brokers and then make an effort to run the institutional broker office by paying an amount monthly so that the salary and establishment expenses can be met. The developer will have to treat them as an extended team of the organization and pay them monthly as the employee is paid.
f) Developers will have to collaborate with customers and convince them to pay ahead of the scheduled payment date assuring them that all money collected will be spent on construction so delivery gets expedited. A flexible approach needs to be adopted where the customer needs additional time to pay or change in the payment plan.
g) Developers will have to collaborate with media to write on the positive side of the industry in general and the economy at large. Media has to stop broadcasting bad news whether it is related to corona or job loss.
COLLABORATION which will be an outcome of – COUNSELLING, CONNECTING, CREATIVELY THINKING is the way forward.
1. Establishment Cost & Employee Cost: Fancy big offices, large employee base and lavish infrastructure leads to a high establishment cost. Over and above the hiring of the right employee at various levels in different departments and the training them-retaining them and motivating them enough to perform is a continuous long drawn process
When the times are good it is easy to manage huge establishment costs and also ignore the complacency of some of the staff but in financially tough times it is difficult to manage the establishment expenses as well as the employee cost
2. Responsibility & Accountability: In a small set up it is easy to assign responsibility and ascertain accountability and manage the task efficiently and cost-effectively. But when the organization grows large the systems and processes can only help manage output, however, in real estate industry it is tough to set systems and processes and we see that even in today’s market the best of the corporates who are doing extremely well in other industry segments are not yet able to encompass the real estate business together.
3. Liaoning & Legal: the top management is mostly involved in sourcing land from a farmers-authority-govt agency and then into the approval process. Most of the time there are legal issues that need attention and hence the precious time of the top management is lost running from office to office or for that matter courts. The core competence is underutilized which hampers the business of the organization
The answer to all of this is that the real estate entrepreneur should look at OUTSOURCING all activities where he doesn’t have a specialized skill set and there is an agency available which can do the task more efficiently in a cost-effective manner
Marketing: The developer mostly outsourced this activity .However a team that does the facilitation work is also placed in the developer office. There is absolutely no need. The marketing agency must take responsibility for the design and execution work even if they need to charge a little extra.
Sales: The developers usually outsource sales to the BROKER COMMUNITY. But besides, also keep a big SALES team. The need of the hour is to give mandates to big corporate brokers and keep a thin employee team which facilitates the paperwork. The developer does not get the desired results because the broker does not get complete confidence that his sale will not be diverted to DIRECT SALEby the developer employee. All Sales will have to be mandated to the corporate broker. Each & Every Sale
CRM: This is the brand-building department and the developer should keep the best talent which can handle the emotion of the customer and also manage the need of the organization
On the civil side –
Architecture, Structure, LandScaping, MEP is generally outsourced to outside agencies and this practice should be followed in the same manner.
The developer need not make large in house teams for these activities
CONSTRUCTION is something where there is always a debate whether to outsource to a contractor or create an in house team . My views are simple: if you have a brand value where you can command a premium price from the customer then all said and done you should outsource construction to top class companies like L&T, Ahluwalia, and others. This will ensure quality and timely delivery. However, if you are doing small projects in terms of size and value then you may want to outsource to contractors. In the second case do not forget to keep a quality check person on your rolls
Legal should be completely outsourced
Finance – Human Resource – Business Development is the major departments which need to be well established within the organization
The Developer must keep his recurring establishment cost – employee cost low and hire – outsource activities to specialized agencies that can deliver desired results in an efficient and cost-effective manner.
You read my thoughts on Collaborative Partnerships and Outsourcing in the earlier blogs to find solutions to the current crisis in the real estate industry.
I went into a dormant stage for some time as I saw a bloodbath in the industry every day. The sector, which is the second-largest contributor to the Indian GDP, and second-largest employment generator, is struggling to remain afloat. Instead of employing people, it is laying off staff left-right-center. The industry that gives business to more than 250+ MSMEs, which is the lifeline of the economy, is in a dire state with no visible resolution.
What is the way forward?
Elaborating my thoughts on “CONSOLIDATION” in this write-up –
When the road is smooth, we tend to accelerate our vehicle; likewise, when the business grows, we tend to expand and fuel our ambition. It is a normal phenomenon, and I would not blame the developer community for making those extra bets and taking risks for growing their businesses. The financial institutions too partnered with the developers as they projected massive incomes on every rupee they invested. Everybody was in the queue to make a killing. Even when the road is smooth, accelerating speed may cause accidents; we forget that even a small pit on the way crashes the vehicle and leads to fatality. Likewise, the ambitious investment to make that significant financial gain without considering the underlying demand and supply matrix has saddened the developer with unproductive land parcels funded by financial institutions, which has now put the entire echo system into big trouble.
But this is a known fact. How do we get out of it?
We need to CONSOLIDATE, YES, we need to CONSOLIDATE.
We need to consolidate every bit of our business.
1. CONSOLIDATION OF LAND HOLDINGS: Our primary raw material is Land, and that is where most of our money is blocked today. We have substantial debt on land parcels, which we are not able to monetize. We need to consolidate our landholdings. At places where the Land is provided by authority on a staggered payment plan like in Noida, we need to sit with authority and either get an extended moratorium to repay principal payment or surrender the Land back to get away from the liability. There will be other stakeholders who participated in buying the Land; they will have to be simultaneously dealt with. It is quite possible if the Land is in greenfield state, and no civil work has been initiated, and no third-party interest has been created.
In places, where Land was outrightly purchased, however, no third-party interest is created, and the developer, due to his massive liabilities, cannot monetize the Land, he better dilutes the landholding even if it amounts to taking a loss on the balance sheet. Some may argue that there is nobody in the market to buy Land at this moment I would say if the price is lucrative, you surely will find a buyer as the corporate developers who are well funded with FDI or by virtue of diluting their equity or by cash on their balance sheet because they can sell their inventories are looking for lucrative deals.
There is another case where sales and work creating third-party interest was initiated. In such places, the developer needs to consolidate the design of the project in a manner where he can reduce the total area to be developed and create basic promised infrastructure so that he can deliver. The balance area can be negotiated with authority, financial institution, or another developer to monetize. Easier to write but challenging to execute – AGREED, but this is what comes to my mind.
2. CONSOLIDATION OF DEBT: This is an extension of the above – With the Consolidation of Landholding, the developer will have to consolidate his debt. I am presuming that in this process, the developer might have to dilute his personal equity – his brand value to an extent, but then he can build these again with time. In today’s scenario, there is no point carrying the liabilities further as there is no reprieve in the forceful future. I am sure the financial institutions, private lenders, and the government will be ready to accept haircuts on the size of their outstanding loan and bail out the developer. Likewise, the big and small investors to the funds will have to cut on their investments.
3. CONSOLIDATION OF LEGAL LIABILITIES: This is another crucial step that all stakeholders will have to settle. The financial institutions, the vendors, the consumers are standing at the courts’ door for getting resolution from the default of commitment from the developers. The courts act very pro-active in giving judgments that are acting as a savior to the bottom of the pyramid viz consumer to the top where a fund is sitting. In all decisions, we are finding practical solutions, but there are some litigations far from getting over.
The developer has to try and make an OUT OF COURT SETTLEMENT to remove his liability and, in this process, will have to suggest practically possible solutions which perhaps would come from the judiciary but in a long waiting time.
With every liability that is reduced, there is less stress and an entrepreneur; the developer has the freedom to restructure his business and make it productive.
Collaborative Partnerships, Outsourcing, and finally, Consolidation can be the first steps that one can consider as resolution tools. One can use any or all of them or take a cue and chart his own path.