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Flushing MeadowsReport Submitted to Prof. S.G.Bhagali
26/12/11
Submitted by:
Akash Shah
Puneet Soni
Nimit Shah
Dhirendra Chaudhari
Malvi sheth
Abhizer Jani
Yashovardhan Chordia
Urvish Shah
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Executive Summary
Keeping in mind the macroeconomic condition of BOPAL it is recommended to develop the
land and resolve ongoing conflicts through court cases. The Strategies are as follows:
Development Strategy
1. Product Mix 2 BHK 1000 sq ft 2 BHK 1200 sq ft 3 BHK 2050 sq ft 3 BHK 2200 sq ft 4 BHK 2600 sq ft Row Houses 3000 sq ft Bungalows 3600 sq ft
2. Phases of Development Phase I 20% of land Phase II 20% of land Phase III 20% of land Phase IV 25% of land Phase V 15% of land
Financial Strategy
1. Cost of ProjectCost/ sq
feet Total Area (sq ft) Value (Rs.)
Building 906.8 3148857.50 285,52,48,661
Open Spaces 100 370453.82 37045382.40
Amenities 906.8 555680.74 503867410.94
PHE Work 86.0 3704538.24 318,515,793
OtherDevelopment 150 555680.74 83352110.40
Total
Construction Cost 1025.24 3,798,029,359.14
Other Admin etc
Costs 205.05 759605871.8
Total Cost 1230.28 4,557,635,230.96Table 1: Cost of Project
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2. Means of FinanceA combination of Joint Venture and Advance Bookings will be used to finance the project.
The cash flows after financing are shown below:
The JV will contribute Rs. 68.89 Cr
Year 2008 2009 2010 2011 2012
opening balance 68.89 34.95 0.09 121.44 281.39
Income from
advances 39.39 61.86 144.16 184.70 479.91
Expense 73.33 96.73 22.81 24.75 22.31
Closing Balance 34.95 0.09 121.44 281.39 738.99
Table 2: Cash Flows after financing
3. Calculation of Break Even PointRs.
Avg Selling Price 2890 Per Sq. Ft
Variable
cost 993 Per Sq. Ft
Contribution 1897 Per Sq. Ft
Fixed cost 88.00 Cr
Land 3704583 sq ft
Breakeven 463827.80 sq ft
12.52 %
Table 3: Calculation of Break Even Point
Marketing Strategy
A combination of two market strategies has been adapted for this project. The two market
strategies are selective specialization and market specialization. Through selective
specialization flushing meadows offers different marketing mixes to different segments. On
the flip side the project also specializes in serving a particular market segment and offers
that segment an array of different products.
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Table of Contents
Sr. No. Title Pg. No.
1 Situation Analysis 8
2 Problem Statement 9
3 Evaluation of Problems 10
3.1 Deciding whether to sell the land
Macroeconomic Analysis Financial Analysis
10
10
12
3.2 Disputes relating to Land 14
3.3 Development Plan
Product Mix Development Plan
Duration of Project Types of Houses Distribution of Houses across land Phases of development of land
15
15
15
15
18
30
31
3.4 Evaluation of Cash Flow Requirements
Cost of Project Selling Price Distribution of Sales Projection of Cash Flows
Cash Outflows Cash Inflows Net Cash Flows
32
32
33
33
34
35
36
37
3.5 Means of Finance
Identifying Means of Finance Internal External
Employing Means of Finance Advance Booking Joint Venture Cash Flows
38
38
38
38
39
39
39
40
3.6 Marketing Strategies
Market Segmentation Product Market Grid Market Segments Criteria for selecting market segments
Strategy for selecting market segments Marketing Objectives
42
42
42
42
44
45
47
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Marketing Plan Product Positioning The 4 Ps
47
47
48
3.7 Sales and Administration Teams 51
4. Exhibits
Map Duration of Project Monthly Cash Inflow Monthly Cash Outflow Cost of Project Rules as per DC
52
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Table of Figures and Tables
Sr. No. Title Pg. No.
Fig. 1 Cyclical Trends of Real Estate Markets 10
Fig. 2 Cyclical Trends of Real Estate Markets -2 12
Fig. 3 Stages of Construction 16
Fig. 4 Increase in Selling price
Table 1 Cost of Project 2
Table 2 Cash Flows after Financing 2
Table 3 Calculating Break Even Point 3
Table 4 Sellable Area 8
Table 5 Basic Information 13
Table 6 Net Loss if land is sold 13
Table 7 Product Mix 15
Table 8 Time taken to construct a building of 11 floors 16
Table 9 Time taken to construct a house of 2 floors 17
Table 10 Distribution of product mix 30
Table 11 Phases of Development of land 31
Table 12 Total Cost of Construction 32
Table 13 Sales Plan 33
Table 14 Yearly Projected Costs 34
Table 15 Distribution of Variable Costs 34
Table 16 Distribution of Fixed Costs 34
Table 17 Types of costs 35
Table 18 Distribution of Variable Costs across stages of construction 35
Table 19 Division of costs as direct labour and direct material 36
Table 20 Distribution of income across stages of construction 37
Table 21 Annual Cash Flow 37
Table 22 Annual Income through advance bookings 39
Table 23 Joint Venture Information 39
Table 24 Cash Flow after financing 40
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Table 25 Product Market Grid 41
Table 26 Preferences of Buyers 45
Table 27 Prices of Various houses across 5 years 47
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Situation Analysis
In the middle of 1995 it was decided to start a venture called Suvidha Company Pvt. Ltd.
with an objective of availing benefits from the emerging markets of real estate. A greater
future opportunity was seen in the BOPAL markets due to increasing property prices every
year, massive urbanization and with development of IT industry in the city.
With the announcement of merger of 36 fringe village in the boundary of BOPAL city the
company sensed a huge growth opportunity to develop the business. It acquired 72 acres
(31,36,320 sq. ft.) of land with an motive of building an exclusive residential property
named Flushing Meadows.
In 1996 Suvidha construction was doing well in marketing its properties and started looking
forward to developing their new projectFlushing Meadows.
There was a change which was observed in the prevailing conditions due to abolishment ofthe Urban Land Ceiling Act and the global crises which held negative impact on the growth
of real estate market. A decline of approximately 40% to 50% was observed in the selling
prices of the properties.
The cost of the land bought for the project was continuously escalating because of the falling
demand, increasing cost and carrying forward of losses each year.
Area in Sq. Ft
Plot Area as per 7/12 extract 3087115.2
FAR permissible 1
Sellable Area 3704538.24
FSI for sellable area 1.2*
*20% for built up includes stairs, passage, balcony etc.
Table 4: Sellable Area
The present cost of the company is Rs. 11 Cr after including all expenses.
It is a partnership firm an each partner has an unlimited liability, which means that the
partners personal property is also included for paying off the debt of the company.
The balance sheet states the fact that there is a lack of parity about the amount of unsecured
loans brought in by each partner. There should be a clear set of conditions fixed on this
matter as the partner which brings in more money has greater amount of risk involved.
Therefore the partner with increased investment should get a higher percentage of return
because of increased risk in the business or the respective partner should be given more
authority and responsibility with respect to future plans. Moreover till now the interest
expense on unsecured loan was not accounted for after inclusion of which there would be an
increase seen in the cost of the land. Therefore there would be an inclusion of the interestexpense in the books of accounts from next year.
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The company is presently at a crossroad where it has to take a decision about the future of
the project. It has to decide on various problems of future and current times which are
mentioned below.
Problem Statement
1. Deciding whether the land should be sold keeping in mind that losses must beminimized.
2. Taking a decision about the method to be adopted for solving the issue of disputed land.3. Selecting a product mix for the project and deciding on a development plan.4. Evaluating the cash flow requirements keeping in mind the present and future
conditions of the real estate markets.
5. Deciding on the mode of finance that the company should adopt after considering theprofitability of all options.
6. Deciding on the marketing strategies for the project.7. Deciding the requirements of the sales team.
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Evaluation
1. Deciding whether the land should be sold keeping in mind that losses must beminimized.
Macroeconomic analysis
The prices of real estate move in a cyclical pattern. Therefore there is always a fluctuation in
residential and commercial property markets. Like all other markets, the property markets
work on the relationship between demand and supply. The cyclical trend occurs due to a
lagged relationship between demand and supply and the tendency of the market to correct
itself. The cycle usually has four phases as illustrated in the diagram below:
Figure 1: Cyclical Trend of Real Estate Markets
The equilibrium rate is characterized by stability in prices as prices have reached the
threshold limit and fewer businesses move into the given area. As shown in the figureabove, a real estate market cycle has four main determinants. The first is job growth which
is low in a region during the contraction and recession phase. The next is vacancy rates. A
vacancy rate is the numeric value calculated as a percentage of all available units in a rental
property that are vacant or unoccupied at a particular time1. Interest rates affect the phase
of the real estate market cycle as rates are high in the recovery and expansion phase when
people buy new houses.
Before we describe which stage of the cycle BOPAL is in 1997, it is important to understand
the macroeconomic factors that affect property prices in BOPAL. In 1997, the world
1http://www.thefreedictionary.com/vacancy+rate
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economy was affected by the South East Asian crisis which started with the collapse of Thai
Baht. The depreciation of the currency soon spread to most of South East Asia and caused a
slowdown in the world economy in the form of a crash in the stock markets. India was
affected by this crisis but not as badly as other countries.
The South East Asian crisis mildly affected India whereas the ASEAN-5 Singapore,
Thailand, Malaysia, Indonesia and Philippines saw a large fall in GDP.
Fluctuations in the cyclical nature of real estate markets often occur because of changes in
the demographics and economy of a particular region. By 1997 the economy of BOPAL was
slowly moving to a service sector economy. The economy was characterized by the presence
and growth of the IT sector. Therefore the demographics of BOPAL, which was known as an
educational centre, completely changed. The number of young professionals increased and
therefore the demand for housing increased.
With the increase in investments in India in the form of direct FDI and the real estate boom
of the early 1990s many investors were looking to invest in emerging real estate markets.
With the growth of the IT and automotive sector and the sanctioned plans of the Mumbai-
BOPAL expressway, BOPAL fit the category of an emerging market in terms of economy and
infrastructure.
BOPAL also received FDI in the form of NRIs returning to India. The lifestyle of these NRIs
was different from Indians as they did not depend on household help. Hence the
demographics of BOPAL changed to include two new sets of people. The first was corporate
who had a demanding schedule and would not have time for much housework and the
second was NRIs who were used to a different lifestyle.
Having understood these changes in demographics and the fact that India was affected very
little by the South East Asian Crisis, it is safe to state that BOPAL was in the recovery phase
of the real estate market cycle. BOPAL experienced job growth and construction has
increased.
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Figure 2: Cyclical Trends of Real Estate Markets -2
As seen in the figure above, as the market progresses from the recovery to the expansion
phase, the property prices will continue to rise. Hence from the macroeconomic perspective
it is recommended that the land should not be sold. Instead the development of the land
should start immediately.
Financial Analysis
The options of selling or developing the land should be considered using a cost-benefit
analysis. In the case of this company land is considered as a product. Now the product of the
company is in the process of making which means that it has not yet been converted into
finished good. Thus such products which are partially completed are termed as work-in-
progress. Such products have less value in the eyes of the customers as they have to incur
additional cost over and above the selling price. Therefore such products are valued less as
compared to their original value. The present land is a work-in-progress due to the carried
forward expenses.
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Hence the value of the land is actually higher than the price at which it will be sold.
Area of Land (sq ft) 3087115.00
Cost of land / sq ft (Rs.) 35.60Selling price/ sq ft (Rs.) 25.00
Table 5: Basic Information
Rs. Cr.
Sales of Land 7.72*
Cost of Land 11.00
Net Loss -3.28
*The total sales if the entire land is sold at Rs. 35.6 per sq ft
Table 6: Net Loss if land is sold
If the land is sold, Suvidha Constructions will incur a loss of Rs. 3.28 Cr. This loss is also
unfavorable because the partners have cumulatively brought in at the end of 1997 Rs. 9.00
Cr as capital and Rs. 6.25 Cr as unsecured loans which they have to pay back. They have also
taken a cumulative loan of Rs. 6 Cr which they have to pay back with interest.
Hence keeping in mind the macroeconomic and financial analysis it is recommended that
Suvidha Constructions keeps the land and develops it.
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CASE MAlvi Ruchi Varun Utsav Radhika Final
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14
2. Taking a decision about the method to be adopted for solving the issue ofdisputed land.
Since the land that Suvidha has bought for Flushing Meadows was originally a part of the 36
fringe villages those which were merged into the BOPAL Municipal Corporation, there are
bound to be conflicts between the locals and the company.
As seen in the map of the area allocated for the Flushing Meadows project, a nalla (water
body) lies to the west of the land. An NGO had filed a petition that Suvidha Constructions had
encroached upon the nalla. The land allocated to Suvidha is clearly demarcated in the map. It
is recommended that Suvidha reply to the petition with the help of their lawyers. They
should settle the case in court.
In the Eastern region of the plot is a 2 acre (87,120 sq ft) piece of land which is under
dispute because some locals claim to own the land. An out of court settlement with them is
possible which would cost Rs. 1.25 Cr. Suvidha should not settle the matter in this manner
for two reasons. The company has already appointed lawyers for the issue relating to the
nalla. They should follow legal procedures as the lawyers had assured them that they could
win as they hold a stronger case.
Secondly, the land will be developed in phases. The part which is under dispute is developed
in the fourth phase (approximately after 4 and a half years dealt in the later part of the
project) by which time the matter would be settled in court. This will lead to an increase in
the legal expenses. These expenses would be much less as compared to the amount of out of
the court settlement i.e. is Rs. 1.25 Cr. Moreover by looking at the present condition of thecompany it is seen that it does not have enough amount of funds to pay 1.25 Cr.
Refer Exhibit for Map.
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CASE MAlvi Ruchi Varun Utsav Radhika Final
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3. Selecting a product mix for the project and deciding on a development planProduct Mix
The product mix is selected from a range of products as shown in the product market grid below.
The most important criteria for selecting a product is the number of market segments it caters to.
The product market grid3 helps identify which products should be pitched to which segment of the
market. Having understood the product market grid, the following product mix is proposed:
PLAN buildings PLAN - houses
Type sq ft/ apt Type sq ft/house
2BHK 1200 Row House 3000
1000
Bungalow 3500
3 BHK 2050
2200
4 BHK 2600Table 7: Product Mix
The land at our disposal is extremely large. Hence the land needs to be used optimally keeping in
mind the size and demands of each market segment.
Development Plan
a. Duration of ProjectThe cost of construction depends on the time taken to build each building and house.
The construction of a building is a complex procedure and involves a number of steps. Some of these
steps need to follow a given sequence and some can take place in parallel. In order to optimize the
time required to finish a project a Program Evaluation and Review Technique (PERT) is used. PERT
is a network model that enables us to understand the completion time of activities.
3 Refer Marketing Strategy
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CASE MAlvi Ruchi Varun Utsav Radhika Final
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The PERT for the construction of a building/house must follow the following network diagram.
Figure 3: Stages of Construction
Each stage takes a certain amount of time and it is necessary to wait between some stages. Therefore
the time taken to complete one building of 11 floors is illustrated in the tables below:
Process Time Taken Lag TimeTime to Completeone floor
Total Time to
omplete onebuilding
weeks/floor weeks/floor
start(nth
week)
finish(nth
week)
start(nth
week)
finish(nth
week)
Excavation 8 0 8 0 8Foundation 8 0 9 16 9 16
RCC 1 4 17 17 17 57
Walling 3 22 24 22 54
Plastering 3 4 25 27 25 57
Doors/windows finishing 3 32 34 32 64
Table 8: Time taken to construct a building of 11 floors
Therefore a building of 11 floors can be constructed in 64 weeks.
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CASE MAlvi Ruchi Varun Utsav Radhika Final
17/52
17
Similarly, the time taken to complete one bungalow or row house of 2 floors is 32 weeks.
Process
Time
Taken Lag Time
Time to Complete
one floor
Total Time toomplete one
building
weeks/flrweeks/flr
start
(nthweek)
finish
(nthweek)
start
(nthweek)
finish
(nthweek)
Excavation 8 0 8 0 8
Foundation 8 0 9 16 9 16
RCC 1 3 17 17 17 21
Walling 3 21 23 21 26
Plastering 3 24 26 24 29
Doors/windows
/finishing 3 27 29 27 32
Table 9: Time taken to construct a house of 2 floors
Therefore PERT helps us understand the logical flow of the steps involved in construction and
enables us to time the project perfectly.
The only variable factor in the above time series is the number of floors. If the number of floors
increases to 15, the time taken to complete the building will change to 76 weeks. Therefore, the time
remains the same irrespective of the floor plan of the building.
Having understood the time taken to complete one building/house, it is easy to determine the cash
outflows arising from construction.
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