Reviving Real Estate: How Can Developers Survive The Pandemic
Developers need to focus on timely execution and increase the sales volume once the situation improves.
Publishing Date : June 14, 2020
Author: Sonit Singh
Indian real estate has been facing multiple headwinds in the recent past. At the start of the year, it seemed like the industry had come to terms with the overall slowdown in the residential segment which had been the case over the past few years, and had adjusted to the new industry order of RERA and GST, with the balance in terms of supply and demand in the residential segment had been somewhat achieved along with industry consolidation, the current crisis has literally thrown the balance out.
COVID-19 and the resultant lock-down has likely proven to be the most unsettling factor, be it on the operational side wherein disruptions are being faced due to supply-side constraints, limited movement, labour shortage, etc or on the business side with reduced sales, delayed collections, and deferred project launches, it has severely impacted the working capital cycle of the developers.
As it is likely said, the difference between liquidity and solvency is the time factor, therefore, this year will be all about conservation and being afloat. It is advisable to keep the fixed costs at a maintenance level and contingency planning needs to be done over the short term to factor in disruptions continuing at least over the next two quarters. Limiting non-essential spending and optimizing the cost structure is the key to revival in the near term.
In terms of financial planning, companies may have opted-in for a moratorium as per RBI Guidelines, however, this leads to a temporary cash-flow mismatch. There should be a continual discussion with the financial lenders to understand the cash flow impact and work out on a medium-term solution to take care of the enforced working capital gap. Further, focus on product completion, prioritizing, and sequencing projects based on changing market scenarios and pushing out expansion plans such as the land acquisition or deploying funds towards new projects should also be looked upon. Additionally, for projects which are facing severe liquidity issues, the sale of assets, or bringing in a financially sound partner should also be explored.
On supply-side constraints, it is important to analyze alternatives. Contractors and builders should really have an in-depth look at the contractual obligations arising out of the agreements entered before the COVID-19 crisis. Developers should first prioritize the operations on site, which need to be kick-started at the earliest. The overall success of this process will largely depend upon identifying what should be the method of supply chain and logistics management.
The coronavirus pandemic has brought the spotlight on exploring the benefits of digital platforms and has enabled the real estate industry to leverage different technologies to build an enriching experience for the customers. With the changing environment, customers keen on buying an apartment are more likely to go online to seek information, interact, and even close the deal. Today, the prospective buyer of an apartment can go through a virtual tour and see every part of the residence like a floor plan, the structure of the accommodation, view from the apartment, etc. The digital route has acted as a saviour to the industry and has helped to tide over the liquidity challenge by ensuring new sales collections.
Over the next few quarters, the situation will continue to remain challenging and dynamic. Developers need to focus on timely execution and increase the sales volume once the situation improves. Preservation times call for optimization of the balance sheet, even if it is at the cost of profitability.