When it comes to Real Estate the recency of the memory, generally takes us to the Euphoria of 2005-08, which was mostly driven by the valuation of land. Overnight, the decades of inefficiency found a way to value the Future Cash Flows, which could never make their way from Excel Sheets to the bank. Not just individuals, Real Estate Developers, but also the businesses, irrespective of industry quickly invested in land in excess to their requirement, considering the exponential growth in multiples which almost looked like unstoppable, when rates would increase in weeks, if not in days. And may be, rightly so, after all economy expanded and rose manifold led by increasing household income, affordability led by growth in IT and IT Enabled Services, Banking and Financial Services and Retail . Be it Information Technology giants, Services, new age E-Commerce businesses, global players setting up their shops in India to seize some part of opportunity and slice of the phenomenal growth story.
The dream run, however met with its first roadblock with the Lehman crises in year 2008. While, we in India, fretted about it and considered a dooms day scenario, it did not take long for the growth to return back. Real Estate struggled for sometime, but with continued supply of liquidity, it found its lost shine back. But, what changed forever was the Euphoria. The weeks of growth in wealth found its righteous place, possibly in annual and linear growth. It is important to note, this time the exponential growth was not just limited to the projections, but came on ground in terms of number of new launches, new deliveries and aided as well as participated in the economic growth. The focus went from counting land as asset to building businesses with capabilities to deliver and execute.
The liquidity crises of year 2013, tinkered down the expectations of growth, but the story of real estate stayed strong on foundation of execution capability and real demand. This was also the period when the focus shifted from land holding and as commonly known as Land Banking to built inventory. Story, however changed for Real Estate since the IL&FS crises in middle of year 2018 shook the confidence of Investors who believed of low to non existence of risk historically in rated debt papers in comparison to Equity. The impact of the default caught the fire in forest impairing capabilities of NBFCs (Non banking financial Companies) who had found greater part of growth and expansion of their lending businesses to Real Estate. Thanks to demonetization in year 2016, the excessive liquidity found its way through mutual funds and corporate players to the NBFC's who expanded their long term lending through short term liquidity.
By the time the Industry would have taken the shock of broken confidence and lack of long term liquidity, the world was hit by COVID crises. Never seen, never imagined and no case study parallel to this crises to take a leaf of comfort. The question now in front of the financial institutions and industry players now is two fold, when would be the end of this crises and what would be the fate of Industry which was already facing the biggest slowdown both in terms of liquidity as well as demand. Right now, as the world heals from the current pandemic, its Individual safety and health which has taken the center-stage. The fear certainly has subsided and we are off the mode of Paranoia. We fortunately also have the lowest fatality and awareness has only increased across the length and breadth of the country. The globe is healing and so are we. But, the future still remains unpredictable for the Developers, who are caught in quagmire of Debt to service and fear of falling Real Estate prices. The unpredictability is at its highest in decades and the analysts find it comfortable to predict the dooms day.
There is no denial, the industry will have to go through the pains of large NPA (Non Performing Assets) cycle, readjusting the impaired asset values and low profitability due to double whammy of slow down and Covid crises. The ability and timing of attracting funds in such special situation would largely depend on how quickly the acceptance of new world reality is taken in account by the current participants. Developers, in terms of accepting, they have low to no equity left, financiers to accept, they will have to take some losses and move ahead and buyers to accept, there is little room for costs to dramatically come down to already corrected prices of real estate to decade low.
Apart from the structured approach to re-engineer the financial closure for the projects, the players will have to brace for many changes right from their attitude, design and organization. If the first wave of Real Estate growth was because of the foreign investors vying for participation, this wave in my view, certainly is going to be driven by two vectors, the users with demand for differentiated new age design of Real Estate needs and credible executors with capabilities and respect for managing and paying the cost of the risks by themselves. For long, Real Estate industry has transferred the risk and cost of uncertainty to buyers, its time, the players build organizations, models and attitude of owning up the risks and deliver the certainty to the customers.