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Indian Institute of Management, Bangalore
Real EstateIndustry Analysis
Submitted By:Kumar Amar (1211352)Paryant Buch (1211336)Soumya Basu (1211385)Rajani Ch (1211368)
Neena Pandey (1221024)
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ContentsContents..................................................................................................................... 2
Table of Figures..........................................................................................................31INTRODUCTION.........................................................................................................4
2 REAL ESTATE SCENARIO IN BANGALORE.................................................................8
3 INDUSTRY ANALYSIS: PORTERS FIVE FORCES......................................................11
APPENDIX................................................................................................................. 26
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Table of FiguresFigure 1: Value of Indian Real Estate under Construction2.........................................5
Figure 2: Market Size of Indian Real Estate................................................................5Figure 3: Housing Shortage in India............................................................................6
Figure 4: Share of each segment................................................................................7
Figure 5: Share of segments in commercial space.....................................................7
Figure 6: Real Estate trend in office market and property registration....................10
Figure 7: Cost heads of Cement and Labor...............................................................15
Figure 8: Statewise urban housing shortage in 2012................................................18
Figure 9: State wise loan disbursement in India.......................................................20
Figure 10: Multiple and statutory approvals.................................................21
Figure 11: Major channels of financing real estate development in India.24
Figure 12: Private Equity Investments in Indian Rea Estate (2005-2011).................24
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1 INTRODUCTIONThe Real estate industry in India has seen drastic changes since the 90s, when only
a handful of players dominated the entire industry and it was highly fragmented at
regional levels. Currently India boasts an ever expanding base of developers,
national and foreign investors attracted by the growing construction industry in
India. The industry had witnessed a historic boom back during the growth period of
2002-07. Multitude of projects was launched during the period. The real estate
industry of India had garnered greater prominence with liberalization of the
economy. It had resulted in increased business opportunities followed by migration
of labor. Real estate business remained a key constituent of economic growth of the
country until we witnessed the economic slowdown that has taken away the juice
out of its momentum. The period preceding the recession witnessed several
companies going for IPO and luring in both domestic and foreign investors to raise
capital. The current scenario although not entirely gloomy, has witnessedconsolidation of positions and business followed by conscious attempts at finding
sustainable growth strategies.
The Indian real estate sector has been historically dominated by several players at
regional levels, making it highly fragmented and low skilled/low expertise. It has
seldom attracted institutional capital and was more dependent on individuals with
high net-worth and informal ways of financing. The sector being highly regional in
nature and involving huge capital inflow and returns,
has always been low on transparency.
The real estate industry in India can be broadlycategorized into two categories Residential and
Commercial and Commercial segment can be further
categorized into office spaces and Retail.
India is still considered to be one of the most
attractive investment destinations from a global
perspective and has been backed by a multitude of factors such as
1. Strong Economic growth, which has stuttered a bit but still continues to woo
investors
2. Rapid Urbanization fuelled by increasing industrialization and disposable
income
3. Rapidly growing middle class population
4. Large Demographic profile
5. And, an increased push towards infrastructural reforms.
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The above reasons clearly show the impetus of real estate growth in India. As per
JLL-Reis estimates1, the market value of investment grade real estate in India under
construction has increased from USD 69.4 billion in 2006 to USD 160.1 billion in
2012, which equated to 9.8% of Indias nominal GDP in 2010. This also implied a
CAGR of 20.3% between the years 2006-20122. The division of the sector is shown
in Figure 1 below:
Figure 1: Value of Indian Real Estate under Construction2
1.1 PRESENT SCENARIO OF REAL ESTATEThe current contribution of housing sector in Indias GDP is about 5 percent. It grew
at around 10.4% in 2008-09, followed by slow down to 7.8% in 2009-10 and further
grew by 6.9% in 2010-11.It is estimated that around 78% of investment in housing
and construction gets added to GDP3. Notwithstanding the slowdown in growth of
the segment, real estate is estimated to grow at annual rate of 19% CAGR during
2010-2014 with Tier1 cities contributing approximately 40%. The sectors fuelling
this growth will be real estaterequirements in healthcare,
education and tourism sector. The
current economic value of real
estate in India is estimated at
USD 66.8 billion (which is
approximately 5 to 6% of GDP).
The market is largely dominated
by residential category
accounting for 90 to 95%. The
growth in each of the major
sectors of real estate is touted to be as :
i. Residential Real Estate : 18~19%
ii. Retail Real Estate : 55~60%
1 Real Estate Intelligence Service (Jones Lang LaSalle, 2011)2Reaping the Returns,Jones lang Lasalle India Capital Markets Report3 A brief report on Real Estate Sector in India, August 2012 by ASA&Associates
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Figure 2: Market Size of Indian Real Estate
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iii. Commercial Real Estate : 20~22%
1.2 MARKET SEGMENTS
1.2.1 COMMERCIAL SEGMENT
The commercial segment in India has significantly grown in the last decadelargely driven by service sector growth i.e, IT-ITES industries, etc. The growth
of these industries meant requirement of more office spaces and the industry
witnessed moving out of the city towards suburbs like in the case of Gurgaon
and Bangalore. However this growth being directly related to the economic
growth of the country; there has seen slowdown in recent years due to
postponement of expansion plans by corporate.
1.2.2 RESIDENTIAL SEGMENT
It is the mainstay of real estate market in
India. Its growth is driven by rise in
disposable income, increasing number ofnuclear families as well as government
policies permitting tax savings on home
mortgage. The demand for houses
currently outstrips the supply which has
led to increasing capital values
especially in urban areas. The following
figure4 shows the housing shortages in
Rural and urban India.
1.2.3 RETAIL SEGMENT
The growth in retail segment is fuelled by development of retail mall area. The
retail stock share will increase to 36%in the coming years5. The retail
expansion is slowly moving from Tier-I cities to Tier-II and Tier-III.
1.2.4 HOSPITALITY SEGMENT
This segment has been witnessing robust growth over the last few years. It is
fuelled by increasing domestic and international business trips by executives,
as well as higher disposable income leading to leisure travel. Another
important driver has been the rise of e-commerce sites providing hotel and
travel information readily to internet users. Previously the segment was
polarized by large five star and small lodges, but now both domestic and
4 A brief report on Real Estate Sector in India, August 2012 by Corporate Catalyst India,www.cci.in5 A brief report on Real Estate Sector in India, August 2012 by Corporate Catalyst India,www.cci.in
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Figure 3: Housing Shortage in India
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international players are queuing up to open different category of hotels from
budget class to executive class.
1.2.5 SPECIAL ECONOMIC ZONES (SEZ)
The SEZ Act was introduced by the government in 2005, and is aimed towards
promoting exports and creating employment. The perks and benefits as well aslower cost associated with its construction have lured developers into looking
at it positively.
1.3
REGULATORY ENVIRONMENTFinance has been the greatest challenge of real estate industry in India because of
its fragmented nature. It has been greatly impacted by growing interest rates which
directly affect the borrowing developers as well as the buyers who are dependent
on bank for housing loans. A few important regulatory changes impacting the
industry in general have been enlisted below:
1.3.1 GENERAL ANTI AVOIDANCE RULE (GAAR)Mounting fiscal deficit level of the government has been putting great pressure
on the finance ministry and in turn forced the IT authorities to adopt stricter
pro revenue measures. The introduction of GAAR in budget 2012 gave wide
ranging powers to the IT authorities to monitor and penalize investment
activities aimed at accessing tax breaks. The real estate sector will have to
bear the brunt of GAAR since transactions are structured in such a manner that
it involves several steps and entities.
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Figure 4: Share of each segment Figure 5: Share of segment in
CommercialFigure 4: Share of each segmentFigure 5: Share of segments in
commercial space
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1.3.2 REAL ESTATE (REGULATIONS & DEVELOPMENT) BILL, 2011
The bill aims to regulate all real estate projects over 4000 Sq meter by
establishing Real Estate Regulatory Authority. The bill aims at protecting the
consumers by mandating the developer to deposit at least 70% of the fund
received from the end customers in a dedicated project account. The bill also
proposes several other provisions like extending of registrations, power to take
over development work by authority and mandatory web presence etc.
1.3.3 FINANCE ACT, 2012 REAL ESTATE
With the slabs for individual taxation being raised only slightly, the additional
tax saving will not bring relief to the young first time house buyers. Transfer
pricing provisions will now also be applicable on domestic transfers to prevent
unfair practices and tax avoidance. Apart from this several other provisions
were added to qualify a housing scheme under affordable domain. Affordable
housing has continued to be the focus of government. The rate of service tax
and excise has also been increased which will increase the construction costincurred by developers.
1.3.4 LAND ACQUISITION AND REHABILITATION AND RESETTLEMENT BILL
(LARR), 2011
The number of stalled projects and agitations resulting from increased demand
for land for infrastructure and real estate projects has prompted the
government to introduce LARR to protect the rights of land owners as well as
to smoothen the land acquisition process. The bill aims to provide proper
compensation and lay down proper procedure for land acquisition process.
LARR attempts to address the concerns of farmers who are completely
dependent on their land price after selling of land.
2 REAL ESTATE SCENARIO IN BANGALOREBangalore has been the fastest growing city of India for the past two decades.
Termed as World City or Silicon valley of India, Bangalores real estate market
has attracted all kinds of stakeholders like developers, landowners, investors, etc.
The growth is being fuelled by educated, young, migrant and high income
individuals and their families. Few interesting facts predicting and exemplifying
Bangalores real estate growth story is shown below 6 :
Bangalore Metropolitan Population by 2021 14 MillionResidential Units Absorbed in 2011 20600Avg. annual addition in IT/ITeS workforce for past 2years; expected to grow at this rate for atleast 3 years
100,000+
Residential Units Available 55,400Avg. Price Appreciation rate in residential sector forlast 4 years
13%
6 Bangalore Residential market Report 2012, VESTIAN
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Avg. annual residential yield rate 4.5%Residential units launched in 2011 44,000CAGR for residential sector during 2008-2011 15%
The real estate story in Bangalore is complemented by increasing focus oninfrastructural developments by the government. A few of the important projects
underway7 in Bangalore which have huge impact on real estate are:
i. Bangalore NAMMA Metro
ii. Outer Ring Road
iii. Elevated Expressway and Access Controlled Corridor on Tumkur Road
iv. Hosur Road Elevated Expressway
v. Bangalore-Mysore Infrastructure Corridor
The most promising micro market in Bangalore are Outer Ring Road, Whitefield and
North Bangalore. Untapped potential lies in Old madras road and Mysore road
areas. Hence it is being predicted that the South Eastern quadrant of micro markets
will remain active in the medium run but the growth will accelerate in the North
Eastern quadrant. The budget housing market (less than 25L) has the greatest
demand while the mid segment (25-50L) is witnessing the launch of several
oversized apartment projects. The higher segment is facing downward pressure due
to slowing economic scenario across the globe and reduced risk appetite. This
behavior is accentuated by the attitude of Bangalores buyers who are more
sensitive towards quality, amenities and unit sizes of projects as compared to otherSouth Indian buyers. Bangalores residential segment is touted to grow at 15%
annually for next three years. With predicted absorption of 23000 residential units
in 2012, the capital value is going to appreciate between 12-20% due to increased
construction cost and land prices.
Economic slowdown notwithstanding, Bangalore real estate has shown resilience
and recorded the least quarter on quarter drop of home unit sales in last quarter of
2012 among the major metros of India. The city surpassed others by absorbing 49
million sq. feet of residential properties followed by NCR in 46.88 million sq ft. The
office space real estate was not far behind in Bangalore. It was the highest absorber
of office space among metros in the last quarter of 2012 during which it sold 3.4
million sq ft of office space (up by 89%) compared to 0.9 million sq ft in NCR. A
good range of products at various price points seem to be driving mechanism when
combined with constant hiring by IT industries in Bangalore and growing disposable
income. According to National Housing Bank Residex, the city saw a rise of 4.5%
increase in price point. The important question here remains if Bangalore will be
7 Bangalore Residential Real Estate Overview, 2011 published by ICICI property Services
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able to maintain the momentum both in short term and long term. According to Mr.
Irfan Razak, chairman and MD of Prestige Estates, Bangalore will be able to
maintain good sales momentum, have stable land prices and offer good products at
reasonable rates8. The trend will at least stay till next three to six months.
Figure 6: Real Estate trend in office market and property registration
9
8 http://www.sobhadevelopers.com/about/pdf/press-clips_2012/june2012/21st_june_2012_BS.pdf9 Bangalore Real Estate Sector report, 2012 by Emkay
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3 INDUSTRY ANALYSIS: PORTERS FIVE FORCESThe real-estate industry could be segmented into various segments as Residential,
Commercial, Infrastructure (building sea-ports, airports, rail-links, etc.) and it evencovers the SEZ developers. While the major promoters of the infrastructure and SEZdevelopers are the government authorities and also have Public-Private partnershipmodels, the residential and the commercial developers are majorly privatecorporate companies competing for the various resources within a defined market.Such stark differences change the influence of the different forces of Industryanalysis and we shall concentrate only on the residential and commercial real-estate industry.
Residential and commercial Real Estate Industry witnesses a wide diaspora ofplayers competing with each other. From national players like DLF involved indeveloping huge townships in acres of land to the local builders developingindividual houses in small properties; the size, strength, market and the risksinvolved across the various competitors vary substantially.With such a large number of developers existing in the space, barriers to entry intothe real estate sector could not be considered to be very high. However, due to thedifference in the size and the market of these different competitors, we wouldconcentrate on the analysis for the high-middle players involved in the mid-highsegment of the residential and the commercial estate developers in the urban area.
3.1 RIVALRY AMONG COMPETITIORSAnalyzing this industry on this parameter gives us a good insight about industry
dynamics. Industry is majorly segmented into commercial space and residentialspace and further in both spaces we have multiple players competing with each
other. In Bangalore area some of the major players are Brigade group, Prestige
group, Purvankara, Sobha developers, Skyline, etc. National players like Godrej, DLF
and Hiranandani also have started their ventures in Bangalore to get some their
footprint in this market. In our analysis we have analyzed the attractiveness of
industry on different matrices which relate directly to competition.
Number of competitors (R-3, C-4)10
A large number of players are present in this industry but most of incumbents are
not having significant influence in the market. Capital requirements and otherfactors like location, time period of development and product differentiation by
large developers limit the reach of small players in the industry. Hence they are not
affecting the competition in significant way. In commercial space all the above
mentioned barriers are becoming so large that numbers of competitors are getting
10 The attractiveness index for residential is 3(R-3) and for commercial sector it is 4(C-4),throughout the analysis we have followed same convention. These values will be used forarriving at final index for major forces.
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reduced to very few. Among established players competition is present. To beat the
competition incumbents try hard to differentiate their product using their brand,
better architecture and location. But overall industry attractiveness is moderate to
favorable.
Industry Growth(R, C-4)
The industry has been on the growth path during the last decade due to industrial
growth and migration from other location. In the last decade the population of the
city has risen by approx 47%11, which resulted in significant growth in the industry.
Recently the growth in the market is stabilized but capital appreciation to the tune
of 12-15% is making the industry attractive for investment.12 Development in
commercial space is also happening in full swing, with new technology parks and
office complexes are being constructed as many new companies are expanding
their operations in Bangalore. These all factors are making this industry attractive.
Fixed Cost(R, C -3.5)
One of the most important fixed cost factors is land in this industry. If a player has
already invested in land at key location with better judgment then they can reap
significant advantage out of this investment when the price at those locations goes
up. But this kind of investment sometimes adds significant risk for developers.
Without this kind of advantage fixed cost due to land can become significant cost
for the incumbents. Other fixed cost like marketing and administrative cost are not
that significant compared to land costs. Hence attractiveness due to fixed cost can
be classified as moderate to high.
Openness of terms of sale(R-1, C-3)
For the residential space openness is less. Most of the times terms and conditions of
sale are very clear to potential customer; hence one has to do proper research
before making a buying decision. In the case of commercial space the term are
more open than that in the case of residential. Generally commercial space
customers are having a team of people who possess significant knowledge about
the industry, hence more openness. But overall due to this factor attractiveness is
low to moderate.
3.2 BARRIERS TO ENTRY
Economies of Scale(R, C-3)
As per the general trend observed in the real estate sector, the firms need to
aggregate huge chunks of land to build large projects. Contrary to the normal
industries where the large projects provide lower costs per unit, the incumbent
11 Banaglore residential market report 2012, Westain12 http://www.joneslanglasalleblog.com/realestatecompass/real-estate/2012/12/bangalore-real-estate-review-2012-predictions-2013/
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players in the real estate segment feel the diseconomies of scale in handling the
larger projects. Though the industry helps in bargaining the prices for the raw
materials, the labour workforce and the associated legal, paralegal and the political
efforts required in executing the large projects increase exponentially, leading to
diseconomies of scale.
Both in the residential as well as the commercial segment, due to larger initial
investments in aggregating land and in handling labour force while executing the
project, the economies of scale doesnt work in the favour of the industry.
Product Differentiation(R-4.5, C-3.5)
In the residential space, the consumers attach a huge chunk of their present and
the future life savings while buying a house. The projects implemented by the
competitors would not be able to differentiate while acquiring the land, but at the
end of the project initialization, the competitors are in a comfortable position to
differentiate their projects from the other ongoing projects. There does exists a highlevel of product differentiation between the players. However, in the commercial
space, the buyers are less concerned about the differentiating factors provided by
the real-estate developers. The commercial buyers would be in a position to enforce
the design and the features as per their taste and likings and hence the real-estate
developers are not in a position to differentiate based on the features.
Brand Identity (R, C-4)
The branding effect created by the real-estate developers based on their past
history plays a significant role in the decision-making of the individuals while buying
a house. The purchase of a house being a life-time decision, the real-estate
developer brand and its associations form a major part of the social acceptance andprestige. Though branding does play a small role in the commercial space, it
doesnt have a significant effect in the commercial industry as the commercial
buyers are known by their own individual identities and the real-estate brand may
or may not add any particular value to the same.
Switching costs(R, C-5)
In the residential space, the switching costs are very high. The choice of selecting
the residence also factors in the location and such decisions are generally made in a
group, looking into the convenience, infrastructure and access to the daily needs.
The lifetime of the purchased houses is very high and hence the switching costs arealso extremely high. Coming to the commercial space, most of the real-estate
transactions take place only in leases. In case of changing commercial requirements
and trends, the commercial buyers would be in a position to end the lease and
switch to better options. However, if the services of the real-estate developer are
good, it is better for the commercial buyers to shift to other properties of the same
developer.
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Capital Requirements (R, C-4)
The capital requirements for both the residential as well as the commercial space
are huge. In order to develop attractive projects, the company needs to have
enough upfront capital to aggregate land and develop the land to meet the project
requirements. Also, the gestation period of the real-estate projects is very high andthe working capital required in maintaining the pace and the quality of the project
asks for high capital investment throughout the project life-cycle.
As evident in the financials of the companies, interest expense of these companies
form as much as 8%-10% of the total sales revenues bring the gross profit margin
of 20%-25% down to net profit of 10%-15%13.
13 Yearly Financial Results of Major Real-Estate Developers, Appendix A
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Access to raw materials/labour(R, C-4)
The incumbent players enjoy an established supply chain of the basic raw materials
required for the industry. New players could get easy access to the raw materials as
there is excess capacity available for the production of the raw materials. However,
skilled labourers are in shortage across the industry and in order to maintain theschedule and the quality of the project, there is a fierce competition in attracting
and retaining the unskilled, semi-skilled and the un-skilled labourers. This plays a
crucial factor is the implementation of the projects. Over the years, the cost of the
raw materials and the labour cost have been increasing steadily and putting a strain
on the margins of the incumbent players. The increase of nearly 30% in both
cement and labour costs are an indication of the increasing complexities in the real-
estate industry14.
Figure 7: Cost heads of Cement and Labor
As per NSDC estimates, the real-estate industry shall face an aggregate labour
shortage of 60% by 202015.
3.3 BARGAINING POWER OF SUPPLIERSThe main suppliers for the real estate industry are:
Land Owners
Labor and Equipment suppliers
Building and furnishing material suppliers
Capital providers
For the different segments of real estate industry the role of above mentioned
suppliers are different. In our analysis we have analyzed the impact of above
mentioned factors for both commercial and residential segments.
Number of suppliers (R, C-4.5)
14 Real-Estate And Construction, Bridging the Urban Housing Shortage in India KPMG;kpmg.com/in15 Human Resources and Skill Requirements in the Building, Construction Industry and RealEstate Services, NSDC
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Land being the scarce resource is the most crucial item for the developers, hence
very few suppliers and mostly it becomes the costliest resource to get. In Karnataka
land prices has increased 10 fold in some cities in last few years 16. In the case of
commercial developments land requirement reduces potential suppliers to
countable few and many a times government intervention becomes necessary for
land acquisition. Sometimes a developer has to get necessary approval to start
development at a particular location. Material and labor share cost in 65/35 ratio in
the construction cost17. A large number of suppliers are present to provide for this
resource. Over the year the labor in the country is becoming costlier due to new
emerging earning avenues and government policies.
In some of the cases raising capital is not a costly affair for residential projects as
developers are getting upfront advance in stages from the future occupants during
the development period. But mostly in other cases for both commercial and
residential developments for meeting capital requirement builders have to approach
banks or institutional lenders. Borrowed money from different sources results incostly interest payment which adds to development costs.
Availability of substitutes (R, C-4)
Apart from land for other resources substitutes are available. Different kind of
building materials are available and if labor is getting costly a significant of
construction can be mechanized by using sophisticated construction equipments.
Suppliers threat of forward integration(R, C -3.5)
Given the nature of this industry for a supplier it is very difficult to forward
integrate. Only for some of the suppliers it is possible to a certain extent to forward
integrate, provided they are able to get land at the right location.
Industry threat of backward integration (R, C -5)
Again only in the case of construction work industry can think of backward
integration, for other supplies industry has to rely on owners of land or for capital
requirement they have to rely in capital providers.
Contribution to Quality (R, C -4)
To come up with an attractive and better quality project the importance of key
suppliers are prime. Location of project and quality of materials used for
construction can give a significant advantage to the developer. Apart from to meetthe regulatory requirement also they need to invest in better quality material.
Contribution to cost (R, C -2)
16 http://articles.timesofindia.indiatimes.com/2013-01-21/bangalore/36462321_1_price-rise-secondary-cities-dharwad17 http://www.indianrealestateforum.com/chennai/t-break-up-cost-building-civil-works-7437.html
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For a real estate project the other costs (i.e. marketing, administrative) are very
less compared to construction and land. Hence, contribution to cost is high vis--vis
suppliers.
Industrys importance to supplier (R, C -4)
For the suppliers the importance of industry is very high. Land owners are getting
good deal for their land and for the constructors this industry is the main industry to
which they are catering. Capital providers are also getting good return for their
money in this industry. But sometimes land acquisition becomes contentious issue;
in that case government has to come in to resolve the issue.
3.4 THREAT OF SUBSTITUTESProducts of real estate industry serve different purpose for different individuals.
Some people own a house or a space for their personal housing/commercial needs,
some use these products as investment vehicle, which gives them return through
capital appreciation and rentals. From the industry perspective substitutes arepresent for all these kind of uses. For a person who is having housing requirements
rental options are substitute of buying options and for a person who is looking for
investment options other investment products such as equity market, commodities
market are available substitutes. We have analyzed the threat of substitutes on
different parameters.
Availability of close substitutes(R, C -4)
Practically there are no close substitutes for real estate projects. Some of the
substitutes like rental are the secondary product of same industry. As an
investment opportunity also given the Indian scenario the return on investment is
significantly higher than other investment options.
Switching cost (R, C-5)
The switching cost for this industry is very high. One reason for this is emotional
attachment, being accustomed to the location is also making the switching cost
higher. However in case of investment people do cash in and invest in other
properties. But this switching is also mostly confined within the same industry.
Substitutes price value(R, C-4)
As already has been established that substitutes are not fetching better return,
hence worse price value.
3.5 BARGAINING POWER OF BUYERSBargaining power is the ability to influence the setting of prices. In general,
industries are more attractive when buyers have little power to set the terms and
conditions under which they will buy. In our analysis for real estate industry,
bargaining power of buyers is low to medium because of the following reasons:
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Buyer Knowledge(R, C-3)
Real estate has become a popular investment but lack of transparency and tight
regulations, buyers are making investment decisions with limited understanding.
This is known as asymmetric information which gives the suppliers tremendous
power. However, the real estate market is moving towards more organised industryand with the implementation of laws to protect consumer interests by making the
information more transparent and readily available especially in tier 1 and 2 cities;
the bargaining power of buyer is increasing.
Purchase size (R, C -2)
As more and more suppliers are competing directly and indirectly within the
industry, suppliers tend to direct their business on real estate due to the growing
market share. Buyers have less power to pressure suppliers for a low price, not
unless discounts are offered.
Concentration to buyers(R, C -3)The total housing shortage by the end of 2012 is 26.53 million units, more than
three-fourth of which is from low-income household18. Also, the total demand for
housing units for the next five years (2013-17) is expected to increase at a CAGR of
2.8% due to the rise in disposable incomes of the Indian middle income group.
Similarly, the demand for commercial office space is likely to be over 180 million
sqft in the next five years (201216) in the top eight cities of the country and the
total expected supply for the next five years in these eight cities at 219.6 million
sqft19. Therefore, with the growing market share of real estate, suppliers are more
concentrated than buyers. With a shortage in the housing over the years in the
urban areas, it is difficult for the buyers to bargain hard with the real-estate
18 http://businesstoday.intoday.in/story/buying-property-here-are-risks-that-you-must-avoid/1/187425.html19 http://www.thehindubusinessline.com/industry-and-economy/article3964967.ece
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Figure 8: Statewise urban housing shortage in 2012
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developers. The figure lists the shortages in urban housing across different states in
India20.
Undifferentiated Products(R, C -4)
Real estate products are in a way offer the same but there is an increase in
customers seeking for more information in order to make informed decisions while
making purchases. So, deployment of technology provides an opportunity to
suppliers to differentiate their marketing efforts from that of their competitors and
customers are facing more choices on where to buy such products. They can easily
switch to another supplier without incurring significant switching costs.
Buyer's threat of backward integration(R, C-5)
Even if real estate companies hold a large share in the market, it is still a matter of
buyers decision to find the best deal among the many options to choose. Also in
residential segment, companies like Home Buyers Combine (Pune) started to build
the bargaining strength of buyers using numbers. They put together a group ofbuyers and mediate with developers to either launch a new project or picks up
properties in an existing project. This generally helps the buyers in reducing the
home loan by a margin of INR 5 to 10 Lakhs 21. Such firms will increase the
bargaining power of buyers.
Product Quality (R, C -2.5)
The product in real estate industry includes the plan, location and facilities. So,
buyer has to pay a premium in order to get the product as per his/her requirement.
Also, since there is mismatch between demand and supply, superior product always
demands a higher price. Therefore, buyer has low bargaining power in order to
purchase a product at low price.
3.6 GOVERNMENT ACTIONS
Government protection(R, C-2)
Political clout has enormous influence on the real estate market. Infrastructure
development, future macroeconomic factors and the political changes are under the
control of the government. Major processes involved in title transfer of land are
controlled by the local government authorities. It is very essential for the companies
to have a strong connection with these authorities to fast-track their projects. New
players find it difficult to share such strong affiliation with the local governmentauthorities. Hence despite less government protection, the political clout required is
high.
Ensuring transparency in land deals(R, C -3)
20 Real-Estate And Construction, Bridging the Urban Housing Shortage in India KPMG;kpmg.com/in21 http://www.thehindubusinessline.com/news/real-estate/banding-buyers-for-bargaining-
power/article4081414.ece
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One of the major hurdles in buying a property in Indian scenario is the lack of
transparency in land deals. Because of no concept of property title and other
nuances of land ownership, it becomes a huge reason of contemplation before
entering the market because of the cost factor involved. Government action in
enhancing transparency will boost the industry extensively.
Fiscal Policy (R, C-3)
The tax sops provided in annual government budgets can also be a huge
complement for the industry. Right amount of tax sops on the home loan taken will
tilt the demand in favor of buying a property as opposed to renting it.
Investment friendly government (R, C-3)
The boom in the real estate sector, in all affordable, mid-level and luxury segment is
because of investment friendly government leading to a boom to job market and
giving huge lift to citizens earning potential. Hence government policies leading to
attracting investment is the biggest complement for the industry.
3.7 COMPLIMENTORS: BANKING / FINANCIAL INSTITUTIONS
Since most of the properties are bought on loans, banking and other financial
institutions like LIC also complement the real estate industry. Following are some of
the ways through which they influence buyers decisions:
Easy access to loans
Even though the range of interest rates for buying a property is not solely a banks
decision and government has a major say in that, the ease with which the loans can
be accessed is also a criteria buyers are concerned about. Thus making the process
of getting loan easier will have positive effect on the industry. The figure given
below is a representation of the size-wise loan disbursement made by Housing-
Finance Companies in India22.
22 Real Estate and Construction; Bridging the Urban Housing Shortage in India KPMG;kpmg.com/in
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Figure 9: State wise loan disbursement in India
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Approving real estate projects
Since high amount of opacity in transacting with real estate developers proves as a
hindrance to the industry, the approval of real estate projects by leading banks
(especially the nationalized ones) instill confidence in the buyer community. It isassumed that basic checks on property would have taken place before such an
approval and hence gives big boost to buyers to enter the industry as a consumer.
It is necessary to reduce the life-cycle of the infrastructure projects 23.
Figure 10: Multiple and statutory approvals
Providing special facilities
By providing special facilities like ADF (Advance Disbursement Facility) for specific
projects also send signals of confidence to the overall buyer community in real
estate industry.
3.8 SUMMARY OF FIVE FORCES
Analyzing the five forces we have identified that this industry is very concluded that
industry is very attractive. For both commercial and residential space the
attractiveness index value is fairly good. The attractive index is calculated by takingsimple average of indices of all the major forces. For major forces the index is
calculated by taking average of different parameters within that forces for which we
have already assigned the value earlier. We can easily identify that commercial
segment is more attractive than residential segment.
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FORCESCOMMERC
IALIMPACT
RESIDENTIAL
IMPACT
RIVALRY AMONGCOMPETITORS
3.63 Low 2.88Moderate to
lowBARRIERS TO ENTRY 3.92 High 4.08 High
BARGAINING POWEROF SUPPLIERS
4.21 Very Low 4.21 Very Low
THREAT OFSUBSTITUTES
4.33 Very Low 4.33 Very Low
BARGAINING POWEROF BUYERS
3.25 Low 3.25 Low
GOVERNMENTACTIONS
2.75Moderate to
high2.75
Moderate tohigh
ATTRACTIVENESS 3.99 3.58
For the commercial sector attractiveness index is 3.99 and for the residential
segment it is coming around 3.58. This analysis also shows us that the role of
government is prominent in this industry.
4 KEY SUCCESS FACTORS FOR REAL ESTATE INDUSTRY
Based on the experiences of the incumbent players in the residential as well the
commercial real-estate developers, it is found that there are three (3) critical factors
which play a significant role in the success of the projects undertaken by the
developers.
1. Political Clout
The valuation of the real-estate projects are highly co-related with the
location, infrastructure available in the area, facilities existing in the near-by
surroundings as well as the ease of access to the daily needs. The future
trends of the infrastructure growth, city expansion details, urban
development authorities etc. are under the tight control of the local
politicians.
It is imperative for the real-estate developers to maintain good relationships
with the local politicians to gauge the future trends of the land attractiveness.
In addition to being the information source, the political clout is highly
influential in the processing activities related to the land title transfers,
background checks and other land related legal and paralegal activities. Such
influential political clout is one of the critical success factors for initializing
the project.
2. Capital Source
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Any residential or commercial project requires a huge upfront investment and
also the need for the working capital is high as the gestation period for these
projects is pretty high.
The main source of capital funding for the real-estate players are the bank
loans. The high interest expenses, as evident in the table below over the 5year horizon, are a testimony to the same.
Mar 12 Mar 11 Mar10
Mar 09 Mar 08
SobhaDevelopers
106.20(7.60%)
41.30(2.84%)
66.40(5.96%)
103.90(10.66%)
59.70(4.20%)
Prestige Estate 119.27(11.61%)
123.42(8.00%)
78.25(7.64%)
Brigade 60.39(10.05%)
16.79(3.73%)
8.87(2.5%)
2.99(1.79%)
3.57(0.77%)
Nitesh Estate 6.58(8.33%)
3.68(3.77%)
10.64(14.96%)
(All Figures in Cr. Rupees, % in brackets are the Interest
Expense/Sales Ratio)
Such huge interest expenses make it imperative for the real-estate
developers to maintain healthy relationships with the leading corporate
banks to enable them to source capital as and when required to fund their
projects.
The major channels of financing real estate development in India are given
below24.
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Figure 11: Major channels of financing real estate development in India
However, since the opening of real-estate sector to the foreign investments,
many foreign companies and a few domestic financial institutions raised and
invested capital into the sector. A sneak peek into the P.E. investments made
in Indian Real Estate is given below25.
Figure 12: Private Equity Investments in Indian Rea Estate (2005-2011)
With the entry of the P.E. funds, the money holding capacity of the firms have
increased and as a result, the land prices have either remained flat or
increased; helping the industry wither away the bad times with a stronger
financial backing.3. Productive Labour Yield
The most important measurable criteria for the timely execution of the
project is the productive labour yield, which is defined as the ratio of the
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direct labour hours spent in completing a project to that of the total available
labour hours. Over and above the acute shortage of the manpower, the real-
estate industry needs to acutely time its project keeping in mind the possible
delays in the execution.
The time spent in holidays and strikes, absenteeism, temporary stoppagesdue to weather, setup-times, union meetings etc. or the time spent in
cleaning, rework etc. are all supposed to be deducted from the total available
(potential) work hours.
Productive Labour Yield (Y) =
Actual Labour spent in completion project / Total Available
(Potential) Labour Hours
The real-estate players keep a strict watch on this critical factor for the timely
completion of its projects.
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APPENDIXYearly results summary for major players
RealEstate_YearlyResults.xls