A shot in the arm for financially strong developers.
The ongoing NBFC crisis that has dried up liquidity for the real estate sector has come as a shot in the arm for financially strong developers, who believe the situation will bring down irrational land prices and usher in consolidation in the sector.
“This is great news for us as we will have less competition in buying land and only genuine developers who can build and deliver the project will raise hand to buy a property. We are at an interesting intersection and this is good news for companies like ours,” Vikas Oberoi, Chairman and MD, Oberoi Realty said in a post-results conference call.
“We were seeing it coming for a long time and were not able to stack up how developers without brand recognition were going out and buying land parcels just because people were willing to fund them,” he added. This had pushed up land prices dramatically in the last few years, increasing the overall costs of houses.
Pankaj Kapoor, MD at realty consultancy Liases Foras said land prices have gone up nine times in the last 12 years. “Prices had increased because of availability of easy finance options. They were bound to undergo correction. The NBFC crisis will speed up the process,” he told BusinessLine.
The crisis, which began with IL&FS failing to repay its commercial dues, has caused a liquidity crisis for the entire NBFC sector. The cost of borrowing for NBFCs has gone up, following which they have increased commercial lending rates by up to 200 basis points or two per cent. “The industry is in a consolidation phase right now and will continue for at least some quarters,” said Amit Goenka, MD and CEO at Nisus Finance Services.
Niranjan Hiranandani, co-founder and MD of Hiranandani Group and President of Naredco, said developers who have been cautious about their debt, will survive the cycle. “It’s not about being a big or a small developer. There are some big developers who have got into excessive debt and they will find it difficult to borrow any more money from banks or NBFCs,” he said.
As a result, there will be a lot more consolidation, leading to a fewer number of players in the market. “Because you don’t need only debt but also additional capital to run the business,” he added.
Moreover, under RERA, 70 per cent of a project’s fund requirements are now put in an escrow account. “This means a developer cannot divert funds from one project to another. The liquidity situation is only getting tighter. Consolidation is inevitable now,” said Hiranandani.