Consolidation in the sector has traditionally been a key driver of M&A. The commercial and residential real estate market was subdued during the second wave pandemic lockdown. The spread of working from home, large-scale layoffs and general pay cuts meant less demand for new homes. Even large companies deferred plans to buy or lease office space. As a result, ongoing projects stopped, pressuring already stressed developers. This drove M&A in the real estate sector in 2021, with larger, more established players taking over smaller cash-strapped ones or their incomplete projects.

Real estate M&A may be at entity or project levels. In entity level transactions, the securities, assets and liabilities of real estate companies are taken over. An example was the Embassy Group’s acquisition of Indiabulls’ real estate arm. Project level M&A is where a single commercial, industrial or residential asset is taken over during its project cycle. Often the asset or project is held in a special purpose vehicle, making the M&A process easier.

Institutional investors and developers are key drivers in real estate M&A. With the national land monetisation programme, the government may emerge as a major player. Real estate M&A was boosted by the Insolvency and Bankruptcy Code, 2016. Several projects are being acquired through the bankruptcy resolution process.

Consolidation alone does not drive real estate M&A. Institutional investors prefer M&As in order to build portfolios without taking development and execution risks and to receive attractive returns on capital.

Real estate M&A help companies expand their geographical reach and enter markets in which they lack presence and expertise. They acquire knowledge, skill and proficiency, adopting best practices from their targets. This leads to value creation and business expansion. Usually, a target’s assets are recorded at depreciated historical costs that do not reflect present market values. M&A of an asset rich company is an opportunity to sell non-core assets, using the proceeds to fund new projects, deleverage balance sheets or return capital to investors and shareholders. Optimisation of portfolios through M&A appears to be a device to improve creditworthiness and ratings of developers.

Real estate M&A has its challenges, requiring the investor to follow a rigorous process. Full due diligence is vital for success, including land title investigation; technical diligence such as structural building audits to comply with development control regulations and environmental diligence to follow environment and pollution regulations.

Acquirers, especially institutions, prefer ESG compliant assets for M&A, encouraging developers to implement carbon neutral solutions and adopt green building standards.

The Indian real estate sector has a remarkable tendency to reinvent itself. If key players in the real estate sector continue to adapt to changing market dynamics, it will attract M&A and private equity deals, despite recurring temporary blips.

This article was originally published in Indian Business Law Journal on 26 April 2023 Written by: Ashoo Gupta, Partner. Click here for original article

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