Careful, men at work: Any slip-up in execution by developers could prove fatal

As domestic real estate developers, listed and unlisted, subject themselves to the discipline desired by their investors, their plans and delivery schedules are going to come under harsh scrutiny. And, why not? They are ramping up like never before. "Over the next two years, many of them will have to deliver what they have not done cumulatively over the past 10 years. Many of them are banking on steep rates of land acquisition and its conversion to developments going forward," says Kishore Gotety, Director, Real Estate Investments, ICICI Ventures.

Any serious slip-up can derail the shining real estate story. Chances of slip-ups are many. Over the past two boom years, nationwide, the size and scale of real estate projects has gone up substantially. Rapid ramp-up is putting severe strain on the resources available to the sector. "Availability of raw materials and quality of manpower is a challenge across the industry," says Pranav Ansal of Ansal Properties and Infrastructure, adding that the smaller players in the industry are getting affected more than the larger ones, who have economies of scale.

Perhaps one of the most difficult impediments to overcome is the shortage of human resources. There is a painful dearth of trained architects, designers, planners, project managers, engineers, contractors, skilled and semi-skilled labour in the industry currently. "And it is a shortage that is likely to continue for another few years," says Dhiraj Singh, Country Head, Laing O'Rourke (LOR). Such is the grim shortage in the industry that UK-based LOR is planning to set up a training institute in Delhi for assured supply of quality manpower. Earlier this year, LOR had formed a joint venture to execute DLF's new projects. With this JV, which has nearly 1,000 people on its rolls, DLF has tried to ensure a reliable delivery partner for its ambitious plans. Other developers such as Unitech outsource their construction. Here again, the smaller developers are hit worse.

Another crucial factor will be the availability of capital. RBI regulations like stricter provisioning and increased risk weightage norms on commercial real estate, has increased the cost of property financing. "Interest cost for developer funding has gone up by 300-400 basis points over the last one year," says Mumbai-based Akruti Nirman's Vimal Shah. More importantly, RBI has also come down heavily on funding land acquisition, arresting the self-feeding capital cycle. And not many developers have ready cash to fund more acquisitions, or even their present commitments if customer confidence in the builder declines. Says Unitech's MD, Sanjay Chandra: "Many developers do not realise what it takes to deliver. Every one of them has sold, but how many of them have put a brick to the land? It is shocking. That is the scary part about the market. Today, everyone wants to be a developer."

The flip side: Small players are more likely to be affected by labour crunch

Well, it won't be for long. In this over-arching environment of scarcity, execution will not only be the key risk, but it will also be the main differentiator, separating the men from the boys ruthlessly. Going forward, developers would need to become specialised and systematic as quality gets a premium. "As land prices escalate and margins decline, developers will have to provide value addition," says Shah of Akruti, which is building a mechanised car park in its new residential building.

The smarter developers are already planning to raise equity to finance future growth. But the absence of a clear professionally-run corporate structure could sharpen capital constraints. At present, most of them are single-city or regional builders, typically family-owned businesses run by one person, with single-asset types of development. It will be difficult to transition from that level. Some developers may well sell out to bigger developers. That process has already begun. "We have already received some offers from developers who have not been able to deliver," says Ansal. "They had problems with costing, accounting, were not able to accumulate land and did not get the right kind of people-architects and contractors. Another year or two down the line, more such cases will crop up," he believes.

This kind of consolidation may well decide the industry structure a few years hence-some 8-10 dominant large, pan-Indian developers and a second tier of numerous developers could still continue to thrive. Given the local nature of the business, the one-project developers will continue to thrive. "Larger projects will allow the large developers to grow faster than the industry," says an optimistic Chandra. So, pick your builder with care.