CnS RealEstate ConsolidatedReport

8/22/2019 CnS RealEstate ConsolidatedReport

1/26

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)


2/26

Real Estate

ContentsContents..................................................................................................................... 2

Table of Figures..........................................................................................................31INTRODUCTION.........................................................................................................4

2 REAL ESTATE SCENARIO IN BANGALORE.................................................................8

3 INDUSTRY ANALYSIS: PORTERS FIVE FORCES......................................................11

APPENDIX................................................................................................................. 26

2 | P a g e


3/26

Real Estate

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

3 | P a g e


4/26

Real Estate

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.

4 | P a g e


5/26

Real Estate

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

5 | P a g e

Figure 2: Market Size of Indian Real Estate


6/26

Real Estate

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

6 | P a g e

Figure 3: Housing Shortage in India


7/26

Real Estate

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.

7 | P a g e

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


8/26

Real Estate

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

8 | P a g e


9/26

Real Estate

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

9 | P a g e


10/26

Real Estate

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

10 | P a g e


11/26

Real Estate

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.

11 | P a g e


12/26

Real Estate

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/

12 | P a g e


13/26

Real Estate

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.

13 | P a g e


14/26

Real Estate

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

14 | P a g e


15/26

Real Estate

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

15 | P a g e


16/26

Real Estate

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

16 | P a g e


17/26

Real Estate

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:

17 | P a g e


18/26

Real Estate

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

18 | P a g e

Figure 8: Statewise urban housing shortage in 2012


19/26

Real Estate

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

19 | P a g e


20/26

Real Estate

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

20 | P a g e

Figure 9: State wise loan disbursement in India


21/26

Real Estate

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.

23 Real Estate and Construction; Bridging the Urban Housing Shortage in India KPMG;kpmg.com/in

21 | P a g e


22/26

Real Estate

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

22 | P a g e


23/26

Real Estate

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.

24 Reaping the Returns : Decoding Private Equity Real Estate Exists in India by Jones LangLasalle

23 | P a g e


24/26

Real Estate

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

25 Reaping the Returns : Decoding Private Equity Real Estate Exists in India by Jones LangLasalle

24 | P a g e


25/26

Real Estate

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.

25 | P a g e


26/26

Real Estate

APPENDIXYearly results summary for major players

RealEstate_YearlyResults.xls

Date post:	08-Aug-2018
Category:	Documents
Upload:	rajani-ch
View:	216 times
Download:	0 times

CnS RealEstate ConsolidatedReport

Documents