The depressed real estate market is compelling all projects of small developers (grade C & D) to be put up for sale as development is stalled due to severe cash crunches. Simultaneously, the larger developers (grade A & B) are actively scouting for these projects as they are proving to be more profitable. This trend is more noticeable in tier II cities but is gradually extending to metros.
According to sources, short-term financing and private equity that were previously accessible are now narrowly focused on large developers with stronger balance sheets, given their ability to endure longer-term financial stress. Several smaller developers, hit hard by the current situation, are electing to sell their land parcels to larger developers. Cities experiencing these transactions include Amritsar, Chandigarh, Karnal, NCR, Indore, Mumbai, Pune, Bangalore, and Chennai.
Struggling under cash crunches, small developers feel that retaining projects will only lead to further financial damage, forcing them to sell to larger developers. Sandeep Singh, Director of the Capital Markets Group at Cushman & Wakefield India, emphasized, "Lack of liquidity is a significant problem for almost all developers today. The current environment is like a perfect storm for the developer community, as almost all sources of financing have dried up at a time when the real estate markets may also be moving southwards. Having said that, it is the smaller developers who are worst affected — so badly hit that they are choosing to sell their land parcels to larger developers."
A more significant impact of the liquidity crunch comes from the bank-debt side. Banks are being highly selective about whom they lend to and for what kind of project. While large developers are still able to secure bank loans, it is the smaller ones who are facing difficulties. Most developers expanded rapidly in the last three to five years, leaving them with no capacity to inject more personal equity into any given project.
Pawan Swamy, MD of Jones Lang Lasalle Meghraj, explained, "In this scenario, the smaller developer has an underperforming project that was not doing well to begin with. Regardless of the market's state, he would wish to sell it off to a larger developer since the project is not taking off in the first place. It is a straightforward transaction based on logic rather than the liquidity issue."