- Address
Swara House, 8/A, Jivan Smruti society, Opp. Kids World, Nr. Mira Ambika Cross road, Naranpura, Ahmedabad- 380013.
- Call+91 98246 72828
- Emailsales@swaragroup.inconnect@swaragroup.in
Mergers and acquisitions in real estate accounting refer to consolidating or combining real estate properties, companies, or assets. It entails one entity acquiring or uniting with another to enhance its real estate portfolio. This helps to increase their presence in the market and achieve other strategic objectives.
One of the oldest industries in the world, real estate has seen massive growth and success in comparison to any other industry. India experienced consistent growth in real estate after the 2008 financial crisis. Banks began lending developers and buyers more loans shortly after.
Some of the widely popular types, such as residential houses, office spaces, and shopping malls, have grown extensively. Other types, such as industrial properties and data centres, have gained in recent years. It talks about how real estate companies reorganize, especially through mergers and acquisitions, which contribute to further propelling the growth of the industry.
Contribution of Real Estate to the Indian Economy:
With the fast-paced, changing society, the traditional approach to generic growth and expansion has been relegated to a back seat. Generic growth strategy entails a time-consuming method, and attaining specialized skills in the field results in massive deployment of resources. Joint ventures, joint development, and M&A have been some of the alternatives considered by organizations for expansion.
Wherein 2 or more investors/ developers/ institutions come together to create a new entity to share resources in order to increase their presence in the market or for some other reason that can be strategic to business, it is a merger. Wherein one investor/ developer/ institution purchases another investor/ developer/ institution’s resources/ business/ idea etc. it is acquisition.
Generally, companies employ this strategy to enter new markets or expand in existing markets, to obtain new skills, improve competitiveness and increase profits. Some common types of mergers include conglomerates, horizontal/vertical mergers, and market and product extensions.
M&A activity in 2022 increased by 126% compared to that in 2021, and by industry accounts, the principal explanation provided for it has been a spurt in strong domestic demand and strong corporate finances. Moreover, low interest rates up to H1 2022 have been a stimulus to the situation.
Post pandemic, industries such as the IT industry have started expanding in tier 2 and tier 3 cities to decongest employee concentration in metro cities. However, the biggest challenge in aforesaid cities is that Grade A or fully compliant commercial spaces have limited supply. Above all, it’s because of a lack of construction experience and technical knowledge in the developer. Hence, a few of these major developers have joined hands with fund houses to supplement capital to develop in tier 2 and tier 3 locations.
High ticket-sized land parcels will have fewer target developers. Advance payment in case of a high land parcel will prompt some bargaining or disposition time would be longer. In such a case, a developer-landlord combination plays a very critical role. Landlord and developer come into a new entity in which land comes from the landlord as equity and the developer will provide funds for development. If the developer provides funds equivalent to land value then the new entity would have a holding ratio of 50:50 or else the holding ratio would be determined by funds provided in the new entity.
New age developments are also gaining prominence in areas such as data centers, cell towers, life science labs, financial/IT hubs, senior citizen homes, co-working/co-living, etc. The success of such developments relies upon prior experience, domain knowledge, initial fund investment, and most importantly, a network to attract end-users. Thus, in such a scenario, developers/institutions/PE partners with different domain knowledge unite to constitute a combined entity for new development.
Over the last decade, real estate in India has expanded steadily. Further, the Indian real estate industry has remained resilient in the wake of the pandemic crisis. Domestic demand in all types of assets has been strong and has been supported by government measures.
Expectancy and anticipation for real estate growth in Tier 2 and Tier 3 cities are key drivers for this business. Based on the factors discussed above, M&A activity remained strong in previous years, and the same would be expected in the coming years.
