Why Most Builders Go Bankrupt? - Real Estate Insider

“Everybody thinks builders make money. The margins are very low if you’re building high quality.”

The CEO of RMZ Office and RMZ NXT was explaining why so many Indian real estate developers go bankrupt, despite the sector’s reputation as a path to easy money. The myth of easy money in real estate, he said, applies only to operators who cut corners. The operators who build high quality work on margins that look thin from the outside, and the slightest financial mistake takes them down.

“You cut corners, you can make margins anyway. But if you’re building high quality, great locations, good spaces, your margins are what it is.”

Let me walk you through what else he said.

The Discipline Argument

The first principle, in Thirumal’s framework, is financial discipline.

“Financial discipline is very important. You shouldn’t be over-leveraged. 65 percent leverage for construction is the line.”

The 65 percent number is the practical benchmark every real estate operator should anchor on. Construction financing above this level moves the business from disciplined leverage to speculative leverage. The 35 percent equity cushion is what allows the business to absorb a market downturn without forced sales of incomplete projects.

The reason this matters is that real estate cycles are unpredictable. Operators who have stretched their leverage to maximise project IRRs during good times find themselves unable to service debt during bad times.

The 65 percent rule is the protection against this dynamic. It accepts lower returns during good times in exchange for survival during bad times.

The Customer Lifecycle Pivot

The second principle is the shift from transaction to relationship.

“Today, a customer wants a life cycle. He wants to be your customer for life. Today it’s not about giving them the project and running away. Those days are gone.”

This is the most important strategic shift in Indian commercial real estate over the last decade. The earlier model was project-based. The RMZ model, in Thirumal’s telling, treats each tenant as a long-term partnership that should compound across multiple buildings and multiple cities.

“Today, corporates know that if they’re in an RMZ building, they’re never going to find any issue. If there’s an issue, we are here to solve it. And they know that they can grow with RMZ wherever they are.”

The result is a 70 percent client retention rate.

“Today, 70 percent of our clients grow with us.”

The 70 percent number is significant because it changes the economics of the business. A real estate firm with 70 percent client retention does not need to win new tenants for most of its growth. The growth comes from existing tenants taking more space across more cities.

The Geographic Expansion Logic

The geographic expansion of RMZ followed the same logic.

“Why did we go out of Bangalore? Clients moved out of Bangalore, so we went to Hyderabad. We went to Mumbai. We went to Chennai. We went to Gurgaon.”

This is the explanation almost no Indian real estate firm gives publicly. The geographic expansion is not opportunistic. It is client-led. The firm follows its tenants to the new locations they require.

“You see the value creation is happening because of, you know, the larger the footprint, the better it’s gonna be for overall growth.”

The Brookfield COVID Deal

The signature deal in Thirumal’s account is the Brookfield transaction during COVID.

“If you look at during COVID, we had a great portfolio. During COVID, we didn’t lose any clients. We didn’t lose any rental. Everybody paid on time.”

This is the operating result that made the deal possible. The portfolio of tenants RMZ had built was, in his framing, the highest-quality tenant portfolio in the Indian commercial real estate market.

“If you didn’t take the right client with the right balance sheet, you suffered. People suffered because clients stopped paying, because they didn’t have the balance sheet. Our quality of tenants was so good, nobody stopped paying.”

This is the difference between firms that selected for short-term rent maximisation and firms that selected for tenant balance sheet quality. The difference was invisible during normal times. During COVID, it became the difference between business continuity and crisis.

“At that time, if you look at the kind of transaction we did, I don’t think anybody in the country has done a transaction of that size during a period when it was the most difficult time. We got the best cap rates out of it.”

12.8 million square feet sold to Brookfield, at the best cap rates available in the country, during the worst real estate moment in modern history.

The Strategic Vision

Thirumal’s framing of the deal was the most important part. He pushed back on the narrative that this was a forced deleveraging move.

“Debt was not an issue. Rentals were getting paid. So the rents take care of debt.”

The deal, in his account, was less about needing to sell and more about choosing to sell. The strategic reason was geographic expansion.

“It was required for us to become a national player. We needed that kind of impetus to get out and grow.”

The post-deal capital was deployed across Mumbai, Pune, and Delhi.

“We were able to buy land in Bombay. We were able to do deals in Pune. We bought a property in Delhi. So these are the things which we did, and that’s how the business has grown so big now.”

The Co-Working Post-Mortem

The sharpest analytical part of the segment was the post-mortem on Indian co-working.

“Co-working has evolved. It started as an infrastructure provider for people who didn’t want their own office. It was disruptive at that time. A lot of people started at that time. But it has evolved.”

The original co-working pitch was short-term flexibility. Freelancers, small teams, and project-based companies could rent space for a month or a quarter instead of signing multi-year leases.

The financial architecture of this model, Thirumal pointed out, was fundamentally broken.

“The biggest mistake people made is they took long-term leases. They spent money on it. Then tried to make money on it by doing short-term leases. If the short-term leases went away, the long-term leases, that means you had to pay. The landlord had to be paid. If you’re not getting the revenue behind it, that was the biggest mistake.”

This is the lease duration mismatch that destroyed most Indian co-working operators. They committed to 10-year leases with landlords, spent significant capital on fit-outs, then tried to generate revenue from clients who could leave with 30 days notice. When demand collapsed, the operators were locked into long-term liabilities with no corresponding revenue.

The evolution of the model addressed this directly.

“Now people are doing it where your leases and your client are fixed. Five years, this guy is going to pay. After five years, once you write it down, then you can see what to do with it.”

This is the enterprise co-working model that has replaced the original. The clients are corporates who want managed office space without the CapEx burden. The leases are 5 years. The financial mismatch is gone.

RMZ itself, he noted, still does co-working in this evolved form, just not under a brand. The business has moved from being a separate product line to being one of the offerings inside the main commercial real estate operation.

The Broader Pattern

The pattern that runs through this entire segment is the importance of structural alignment.

The 65 percent leverage rule aligns the financial structure with the cyclical reality of the business.

The customer lifecycle thinking aligns the strategic horizon with the way corporate tenants actually want to engage.

The client-led geographic expansion aligns the firm’s footprint with the demand that drives it.

The quality-of-tenants thesis aligns the tenant portfolio with the durability the business needs during stress.

The co-working failure analysis is the negative case. The early co-working operators had structural misalignment between their lease durations and their revenue contracts. The structural misalignment was invisible until the cycle turned. Then it was fatal.

The lesson generalises. Any business that takes on long-term liabilities backed by short-term revenue streams is vulnerable to the same dynamic. Real estate is the obvious case. But the pattern shows up in software companies that commit to multi-year hosting contracts while selling month-to-month subscriptions. It shows up in restaurant chains that commit to long-term commercial leases while running a cash-flow business. It shows up in any business where the cost structure is committed and the revenue structure is uncommitted.

The Investor Lens

For investors thinking about Indian commercial real estate, the segment provides several useful filters.

Filter one is leverage discipline. Firms that consistently operate above 65 percent construction leverage are the ones most likely to fail during downturns. Look at the historical leverage ratios, not just the current ones.

Filter two is tenant quality. The COVID test separated firms with high-quality tenant portfolios from firms with rent-maximising tenant portfolios. The high-quality portfolios survive. The rent-maximising portfolios do not.

Filter three is customer retention. The 70 percent retention number is the operational evidence that a firm has built a relationship-based business rather than a transaction-based one. Firms below this level are more vulnerable to client churn during downturns.

Filter four is geographic concentration. Firms concentrated in a single city are more vulnerable to city-specific downturns. Firms with national footprints, especially when those footprints were built through client relationships rather than opportunistic acquisitions, are more resilient.

What I Took Away

Three things from this segment will stay with me.

The 65 percent leverage rule. The single most useful operating discipline for any real estate developer.

The quality-of-tenants thesis. The COVID stress test showed which Indian commercial real estate firms had built tenant portfolios that could survive a crisis.

The lease duration mismatch insight. The fundamental reason most Indian co-working operators failed.

Watch the full episode here: