As a typical ‘black swan’ event, COVID-19 has taken the world by surprise. Although the Indian economy is once again opening up for business, the impact of the pandemic will have a lingering effect on the real estate sector as there have been big changes in the way a client buys, its increased demands, its affordability. reduced and doubt about the project. completion deadlines, especially those under construction. By acting today and managing their cash flow, real estate leaders can better serve end users and ensure their own viability.
The real estate boom of the last decade
A new home is the dream of every middle class person. Between the periods 2004 – 2012, the real estate boom appeared in India and a lot of money was invested in this market. The economy was booming, with increased employment in Tier 1 and Tier 2 cities, resulting in an affordable price. The developers easily found investors and were able to self-finance projects. The startup of software, IT and other multinational enterprises required rapid construction and commercial real estate development. With each passing year, these developments translated into higher prices. As a result, unsold properties (under construction) attracted a higher price and deferred sales became the norm. With funding readily available from investors and unorganized sources, cash flow was not an issue.
Price correction and regulation
As of 2013, ever-increasing prices meant a lack of affordability for customers. Sales slowed down and consequently new launches. As projects started to be delayed – firstly due to lack of approvals (real estate projects in India take a long time to complete due to a complicated regulatory mechanism and this resulted in a lack of consumer confidence ) and secondly due to the decrease in investor funding (as customers found it unaffordable to buy a home), cash flow issues came to the fore. This was exacerbated by the introduction of the RERA law in 2016 with the flight to quality. The segment faced regulations that made financing more difficult. The stock of unsold real estate assets started to increase and therefore suffered price corrections, creating a vicious cycle.
The importance of cash flow after the pandemic
It is not uncommon for real estate developers to find themselves in a cash flow crisis. However, India’s real estate sector, which was already experiencing a prolonged downturn, hit a new low last year due to the pandemic, causing project launches and sales to halt temporarily.
To ensure recovery, cash flow management for real estate projects is very crucial. To ensure good cash flow management, developers should work on the following parameters when planning their project:
1. A project management plan highlighting the project scope, timelines and associated costs for each phase for effective cash flow management should be prepared. Most of the projects are commercially viable. However, as the deadlines get out of hand, escalating project costs and liquidity begin to affect profitability.
2. A sound financial plan with both equity investments from outside investors and debt financing is essential. Historically, unorganized financing and sales to clients have been the main sources of capital. To ensure proper execution, equity and debt capital have become important.
3. Properties must be valued correctly for their target consumer. In order to make the project attractive to the client, the developer can either sell at a low price to generate volumes or add good features and equipment (relevant to the target segment) to create a good value proposition. You have to create value for the customer. In addition, it is important to build trust with the consumer through effective communication.
4. Make sure the right experience is delivered through the distribution channels. Use reliable real estate advice to support sales. Right-priced sales can help developers comfortably manage their cash flow needs instead of relying solely on debt financing without adequate sales.
For real estate developers, the COVID-19 outbreak has created challenges and pressures alongside the economic downturn, but it also brings opportunities and changes. If managed properly and with foresight, a balanced cash flow can help recovery and bring stability to the industry. The real estate industry is emerging from a long period of slow growth and falling prices. For gamers who will focus on cash flow management, customer experience, and trust, only the sky will be the limit.
(By Harish Sharma, Founder and CEO, Plinthstone)