Why is cash flow crucial in the real estate sector post COVID-19?

To ensure recovery, cash flow management for realty projects is very crucial.

As a typical ‘black swan’ event, COVID-19 took the world by complete surprise. Although the Indian economy is once again opening for business, the impact of the pandemic will have a lingering effect on the real estate industry as there have been big changes in the way a customer purchases, her enhanced requirements, reduced affordability and still doubt about project completion timeframes, especially the ones under construction. By acting today and managing their cash flow, real estate leaders can best serve end users and ensure their own viability.

The Real Estate boom of the last decade

A new house is every middle-class person’s dream. Between the periods of 2004 – 2012, the real estate boom appeared in India and lot of money was invested in this market. The economy was booming, with increasing employment in Tier 1 & 2 cities, resulting in affordability. Developers readily got investors and were able to self-finance projects. The start of Software, IT and other Multi-national firms’ required rapid construction and commercial real estate development. Every passing year these developments resulted in higher prices. As a result, Unsold (under construction) properties attracted a higher price, and deferred sales became a norm. With readily available financing from investors and unorganised sources, cashflow was not a problem.

Price correction and regulation

2013 onwards, the ever-increasing prices showed up in lack of affordability for customers. Sales slowed and consequently new launches. As projects started getting delayed – first 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 lack of trust from the consumer) and second due to dwindling investor financing (as customers found it unaffordable to purchase homes), cashflow challenges came to the fore. This was exacerbated by the introduction of the RERA Act in 2016 with flight to quality. The segment faced regulations that made financing more challenging. The inventory of unsold real estate assets started growing and hence underwent price corrections, creating a vicious cycle.

The importance of cash flow post pandemic

For real estate developers to end up in a cash flow crisis is not unheard of. However, India’s real estate sector, which was already undergoing a prolonged slowdown, hit a new low last year due to the pandemic, leading to a temporary halt in project launches and sales.

To ensure recovery, cash flow management for realty projects is very crucial. To ensure smooth cash flow management, developers should work on the following parameters while planning their project:

1. A project management plan highlighting the scope of the project, timelines and associated costs for each phase for effective cash flow management should be prepared. Most projects are commercially viable. However, as timelines go out of control, the cost escalations and liquidity in the project start affecting the profitability.

2. A robust financial plan with both equity investments from outside investors and debt financing is essential. Historically, unorganised financing and customer sales have been the primary sources of capital. To ensure smooth execution, both equity and debt capital have become important.

3. The properties need to be priced correctly for their targeted consumer. In order to make the project attractive to the customer, the developer can either sell at cheap prices to generate volumes or add good features & amenities (relevant to the target segment) to create a good value proposition. There is need to create value for the customer. Additionally, it is important to build trust with the consumer with effective communication.

4. Ensure the right experience is delivered across the distribution channels. Using a reliable real estate advisory to support sales. Sales at the right price can help developers manage their cashflow requirements comfortably instead of resorting only to debt financing without adequate sales.
For property developers, the COVID-19 epidemic has provoked challenges and pressure along with 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 in the sector. The real estate sector is coming out of a long period of slow growth and lower prices. For players that will bring focus in cashflow management, customer experience and trust – only the sky will be the limit.

(By Harish Sharma, Founder & CEO, Plinthstone)