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CnS RealEstate ConsolidatedReport

CnS RealEstate ConsolidatedReport

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Competition and Strategy, Bangalore Real Estate
Competition and Strategy, Bangalore Real Estate

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Indian Institute of Management, Bangalore

Real Estate
Industry Analysis

Submitted By: Kumar Amar Paryant Buch Soumya Basu Rajani Ch Neena Pandey

(1211352) (1211336) (1211385) (1211368) (1221024)

Real Estate
Contents
Contents..................................................................................................................... 2 Table of Figures.......................................................................................................... 3 1INTRODUCTION......................................................................................................... 4 2 REAL ESTATE SCENARIO IN BANGALORE.................................................................8 3 INDUSTRY ANALYSIS: PORTER’S FIVE FORCES......................................................11 APPENDIX................................................................................................................. 26

2 |Page

...15 Figure 8: Statewise urban housing shortage in 2012...............................7 Figure 6: Real Estate trend in office market and property registration........................10 Figure 7: Cost heads of Cement and Labor.......24 Figure 12: Private Equity Investments in Indian Rea Estate (2005-2011)...5 Figure 2: Market Size of Indian Real Estate.......................................5 Figure 3: Housing Shortage in India...................................................................21 Figure 11: Major channels of financing real estate development in India..............................6 Figure 4: Share of each segment.....................................................................................................................................18 Figure 9: State wise loan disbursement in India......20 Figure 10: Multiple and statutory approvals....................................7 Figure 5: Share of segments in commercial space..............................................................................................Real Estate Table of Figures Figure 1: Value of Indian Real Estate under Construction2...................................................24 3 |Page ............................................

The real estate industry in India can be broadly categorized into two categories – Residential and Commercial and Commercial segment can be further categorized into office spaces and Retail. It had resulted in increased business opportunities followed by migration of labor. Strong Economic growth. has always been low on transparency. The period preceding the recession witnessed several companies going for IPO and luring in both domestic and foreign investors to raise capital. which has stuttered a bit but still continues to woo investors 2. The sector being highly regional in nature and involving huge capital inflow and returns. 4 |Page . national and foreign investors attracted by the growing construction industry in India. has witnessed consolidation of positions and business followed by conscious attempts at finding sustainable growth strategies. And. when only a handful of players dominated the entire industry and it was highly fragmented at regional levels. The current scenario although not entirely gloomy. 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. Rapidly growing middle class population 4. The real estate industry of India had garnered greater prominence with liberalization of the economy. 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.Real Estate 1 INTRODUCTION The Real estate industry in India has seen drastic changes since the 90s. The industry had witnessed a historic boom back during the growth period of 2002-07. It has seldom attracted institutional capital and was more dependent on individuals with high net-worth and informal ways of financing. Rapid Urbanization fuelled by increasing industrialization and disposable income 3. making it highly fragmented and low skilled/low expertise. an increased push towards infrastructural reforms. Multitude of projects was launched during the period. The Indian real estate sector has been historically dominated by several players at regional levels. Currently India boasts an ever expanding base of developers. Large Demographic profile 5.

8 billion (which is approximately 5 to 6% of GDP). Notwithstanding the slowdown in growth of the segment. The growth in each of the major sectors of real estate is touted to be as : i.3% between the years 2006-2012 2. 1 2 3 Residential Real Estate : 18~19% Retail Real Estate : 55~60% Figure 2: Market Size of Indian Real Estate Real Estate Intelligence Service (Jones Lang LaSalle. The division of the sector is shown in Figure 1 below: Figure 1: Value of Indian Real Estate under Construction 2 1. It grew at around 10.It is estimated that around 78% of investment in housing and construction gets added to GDP 3. ii. followed by slow down to 7. Jones lang Lasalle India Capital Markets Report A brief report on Real Estate Sector in India.4 billion in 2006 to USD 160. As per JLL-Reis estimates1.1 billion in 2012.8% in 2009-10 and further grew by 6.Real Estate The above reasons clearly show the impetus of real estate growth in India. The sectors fuelling this growth will be real estate requirements in healthcare. which equated to 9. The current economic value of real estate in India is estimated at USD 66.9% in 2010-11. 2011) Reaping the Returns.8% of India’s nominal GDP in 2010.1 PRESENT SCENARIO OF REAL ESTATE The current contribution of housing sector in India’s GDP is about 5 percent. education and tourism sector. August 2012 by ASA&Associates 5 |Page . the market value of investment grade real estate in India under construction has increased from USD 69. The market is largely dominated by residential category accounting for 90 to 95%. This also implied a CAGR of 20.4% in 2008-09. real estate is estimated to grow at annual rate of 19% CAGR during 2010-2014 with Tier1 cities contributing approximately 40%.

The following figure4 shows the housing shortages in Rural and urban India. 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. 1. Its growth is driven by rise in disposable income. Another important driver has been the rise of e-commerce sites providing hotel and travel information readily to internet users.cci.2. Figure 3: Housing Shortage in India 1. as well as higher disposable income leading to leisure travel. but now both domestic and 4 A brief report on Real Estate Sector in India.Real Estate iii. August 2012 by Corporate Catalyst India. IT-ITES industries. August 2012 by Corporate Catalyst India.in 5 A brief report on Real Estate Sector in India.2 MARKET SEGMENTS 1. Previously the segment was polarized by large five star and small lodges. The demand for houses currently outstrips the supply which has led to increasing capital values especially in urban areas. www.cci. www.2 RESIDENTIAL SEGMENT It is the mainstay of real estate market in India.2.2. there has seen slowdown in recent years due to postponement of expansion plans by corporate.1 COMMERCIAL SEGMENT The commercial segment in India has significantly grown in the last decade largely driven by service sector growth i.in 6 |Page .2.4 HOSPITALITY SEGMENT This segment has been witnessing robust growth over the last few years. The retail stock share will increase to 36%in the coming years 5. increasing number of nuclear families as well as government policies permitting tax savings on home mortgage. etc. However this growth being directly related to the economic growth of the country. 1. It is fuelled by increasing domestic and international business trips by executives.3 RETAIL SEGMENT The growth in retail segment is fuelled by development of retail mall area.e. The retail expansion is slowly moving from Tier-I cities to Tier-II and Tier-III. Commercial Real Estate : 20~22% 1.

1. Figure 4: Share of each segment 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. 7 |Page . 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 perks and benefits as well as lower cost associated with its construction have lured developers into looking at it positively. and is aimed towards promoting exports and creating employment. It has been greatly impacted by growing interest rates which directly affect the borrowing developers as well as the buyer’s who are dependent on bank for housing loans.2.3 Figure 4: Share of each segment REGULATORY ENVIRONMENT Figure 5: Share of segment in Figure 5: Share of segments in Commercial commercial space Finance has been the greatest challenge of real estate industry in India because of its fragmented nature. 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. A few important regulatory changes impacting the industry in general have been enlisted below: 1.5 SPECIAL ECONOMIC ZONES (SEZ) The SEZ Act was introduced by the government in 2005.Real Estate international players are queuing up to open different category of hotels from budget class to executive class.

3. investors. VESTIAN 8 |Page . expected to grow at this rate for atleast 3 years Residential Units Available Avg. The growth is being fuelled by educated. annual addition in IT/ITeS workforce for past 2 years. 2012 – REAL ESTATE With the slabs for individual taxation being raised only slightly.000+ 55. The rate of service tax and excise has also been increased which will increase the construction cost incurred by developers.3 FINANCE ACT.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. Termed as “World City” or “Silicon valley of India”.400 13% Bangalore Residential market Report 2012.3. landowners. Few interesting facts predicting and exemplifying Bangalore’s real estate growth story is shown below 6 : Bangalore Metropolitan Population by 2021 Residential Units Absorbed in 2011 Avg. Apart from this several other provisions were added to qualify a housing scheme under affordable domain. power to take over development work by authority and mandatory web presence etc. 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 additional tax saving will not bring relief to the young first time house buyers. young.3. 1. Affordable housing has continued to be the focus of government. The bill also proposes several other provisions like extending of registrations.4 LAND ACQUISITION AND REHABILITATION AND RESETTLEMENT BILL (LARR). 1. 2 REAL ESTATE SCENARIO IN BANGALORE Bangalore has been the fastest growing city of India for the past two decades. Bangalore’s real estate market has attracted all kinds of stakeholders like developers. Price Appreciation rate in residential sector for last 4 years 6 14 Million 20600 100. migrant and high income individuals and their families. The bill aims to provide proper compensation and lay down proper procedure for land acquisition process. Transfer pricing provisions will now also be applicable on domestic transfers to prevent unfair practices and tax avoidance. LARR attempts to address the concerns of farmers who are completely dependent on their land price after selling of land.Real Estate 1. etc. 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.

2011 published by ICICI property Services 9 |Page .9 million sq ft in NCR. iii. The city surpassed others by absorbing 49 million sq. iv. Bangalore’s residential segment is touted to grow at 15% annually for next three years. 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.5% increase in price point. Economic slowdown notwithstanding.4 million sq ft of office space (up by 89%) compared to 0.000 15% The real estate story in Bangalore is complemented by increasing focus on infrastructural developments by the government. the capital value is going to appreciate between 12-20% due to increased construction cost and land prices. The higher segment is facing downward pressure due to slowing economic scenario across the globe and reduced risk appetite. annual residential yield rate Residential units launched in 2011 CAGR for residential sector during 2008-2011 4.Real Estate Avg. This behavior is accentuated by the attitude of Bangalore’s buyers who are more sensitive towards quality. A few of the important projects underway7 in Bangalore which have huge impact on real estate are: i. The office space real estate was not far behind in Bangalore. v. amenities and unit sizes of projects as compared to other South Indian buyers.5% 44. It was the highest absorber of office space among metros in the last quarter of 2012 during which it sold 3. Untapped potential lies in Old madras road and Mysore road areas. 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. The important question here remains if Bangalore will be 7 Bangalore Residential Real Estate Overview.88 million sq ft. 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. ii. With predicted absorption of 23000 residential units in 2012. 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 saw a rise of 4. Bangalore “NAMMA” Metro Outer Ring Road Elevated Expressway and Access Controlled Corridor on Tumkur Road Hosur Road Elevated Expressway Bangalore-Mysore Infrastructure Corridor The most promising micro market in Bangalore are Outer Ring Road. feet of residential properties followed by NCR in 46. Whitefield and North Bangalore. According to National Housing Bank Residex.

Irfan Razak. According to Mr. chairman and MD of Prestige Estates.Real Estate able to maintain the momentum both in short term and long term.pdf 9 Bangalore Real Estate Sector report.sobhadevelopers. Bangalore will be able to maintain good sales momentum.com/about/pdf/pressclips_2012/june2012/21st_june_2012_BS. 2012 by Emkay 10 | P a g e . 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. have stable land prices and offer good products at reasonable rates8.

strength. 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). With such a large number of developers existing in the space. Infrastructure (building sea-ports. Sobha developers.1 RIVALRY AMONG COMPETITIORS Analyzing this industry on this parameter gives us a good insight about industry dynamics. the size. etc. However. due to the difference in the size and the market of these different competitors. These values will be used for arriving at final index for major forces. time period of development and product differentiation by large developers limit the reach of small players in the industry. DLF and Hiranandani also have started their ventures in Bangalore to get some their footprint in this market. the residential and the commercial developers are majorly private corporate companies competing for the various resources within a defined market. In our analysis we have analyzed the attractiveness of industry on different matrices which relate directly to competition. Hence they are not affecting the competition in significant way. Commercial. airports. Skyline. market and the risks involved across the various competitors vary substantially.Real Estate 3 INDUSTRY ANALYSIS: PORTER’S FIVE FORCES The real-estate industry could be segmented into various segments as Residential. Prestige group.) and it even covers the SEZ developers. Industry is majorly segmented into commercial space and residential space and further in both spaces we have multiple players competing with each other. we would concentrate on the analysis for the high-middle players involved in the mid-high segment of the residential and the commercial estate developers in the urban area. In Bangalore area some of the major players are Brigade group. 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. Residential and commercial Real Estate Industry witnesses a wide diaspora of players competing with each other. National players like Godrej. Number of competitors (R-3. barriers to entry into the real estate sector could not be considered to be very high. From national players like DLF involved in developing huge townships in acres of land to the local builders developing individual houses in small properties. While the major promoters of the infrastructure and SEZ developers are the government authorities and also have Public-Private partnership models. throughout the analysis we have followed same convention. Purvankara. 3. Capital requirements and other factors like location. 11 | P a g e . rail-links. etc. Such stark differences change the influence of the different forces of Industry analysis and we shall concentrate only on the residential and commercial realestate industry.

5) One of the most important fixed cost factors is land in this industry. Among established players competition is present. C-4) The industry has been on the growth path during the last decade due to industrial growth and migration from other location. 3. C-3) For the residential space openness is less. C -3. Other fixed cost like marketing and administrative cost are not that significant compared to land costs.joneslanglasalleblog. Generally commercial space customers are having a team of people who possess significant knowledge about the industry. better architecture and location. Most of the times terms and conditions of sale are very clear to potential customer. Openness of terms of sale(R-1. In the case of commercial space the term are more open than that in the case of residential. the firms need to aggregate huge chunks of land to build large projects. In the last decade the population of the city has risen by approx 47% 11.12 Development in commercial space is also happening in full swing. Hence attractiveness due to fixed cost can be classified as moderate to high. C-3) As per the general trend observed in the real estate sector. hence one has to do proper research before making a buying decision.com/realestatecompass/real-estate/2012/12/bangalorereal-estate-review-2012-predictions-2013/ 12 | P a g e . Without this kind of advantage fixed cost due to land can become significant cost for the incumbents. Contrary to the normal industries where the large projects provide lower costs per unit. Fixed Cost(R.2 BARRIERS TO ENTRY Economies of Scale(R. But overall due to this factor attractiveness is low to moderate. 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. which resulted in significant growth in the industry.Real Estate reduced to very few. But overall industry attractiveness is moderate to favorable. Recently the growth in the market is stabilized but capital appreciation to the tune of 12-15% is making the industry attractive for investment. Westain http://www. To beat the competition incumbents try hard to differentiate their product using their brand. But this kind of investment sometimes adds significant risk for developers. the incumbent 11 12 Banaglore residential market report 2012. Industry Growth(R. 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. hence more openness.

Real Estate players in the real estate segment feel the diseconomies of scale in handling the larger projects. it is better for the commercial buyers to shift to other properties of the same developer. 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. The choice of selecting the residence also factors in the location and such decisions are generally made in a group. 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. Coming to the commercial space. the competitors are in a comfortable position to differentiate their projects from the other ongoing projects. Though branding does play a small role in the commercial space.5. the labour workforce and the associated legal. 13 | P a g e . There does exists a high level of product differentiation between the players. 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. it doesn’t 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. but at the end of the project initialization. Both in the residential as well as the commercial segment. Though the industry helps in bargaining the prices for the raw materials. The lifetime of the purchased houses is very high and hence the switching costs are also extremely high.5) In the residential space. most of the real-estate transactions take place only in leases. Brand Identity (R. leading to diseconomies of scale. Switching costs(R. the buyers are less concerned about the differentiating factors provided by the real-estate developers. However. In case of changing commercial requirements and trends. the real-estate developer brand and its associations form a major part of the social acceptance and prestige. C-5) In the residential space. looking into the convenience. The purchase of a house being a life-time decision. due to larger initial investments in aggregating land and in handling labour force while executing the project. infrastructure and access to the daily needs. the economies of scale doesn’t work in the favour of the industry. paralegal and the political efforts required in executing the large projects increase exponentially. in the commercial space. the commercial buyers would be in a position to end the lease and switch to better options. Product Differentiation(R-4. C-3. the switching costs are very high. However. if the services of the real-estate developer are good.

As evident in the financials of the companies. 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. C-4) The capital requirements for both the residential as well as the commercial space are huge.Real Estate Capital Requirements (R. Also. 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. the gestation period of the real-estate projects is very high and the working capital required in maintaining the pace and the quality of the project asks for high capital investment throughout the project life-cycle. Appendix A 14 | P a g e . 13 Yearly Financial Results of Major Real-Estate Developers.

This plays a crucial factor is the implementation of the projects. 3. the real-estate industry shall face an aggregate labour shortage of 60% by 202015. skilled labourers are in shortage across the industry and in order to maintain the schedule and the quality of the project. 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. Bridging the Urban Housing Shortage in India – KPMG.3 BARGAINING POWER OF SUPPLIERS The 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. The increase of nearly 30% in both cement and labour costs are an indication of the increasing complexities in the realestate industry14.5) 14 Real-Estate And Construction.Real Estate Access to raw materials/labour(R. C-4.com/in 15 Human Resources and Skill Requirements in the Building. Number of suppliers (R. semi-skilled and the un-skilled labourers. However. NSDC 15 | P a g e . there is a fierce competition in attracting and retaining the unskilled. New players could get easy access to the raw materials as there is excess capacity available for the production of the raw materials. Over the years. C-4) The incumbent players enjoy an established supply chain of the basic raw materials required for the industry. kpmg. In our analysis we have analyzed the impact of above mentioned factors for both commercial and residential segments. Figure 7: Cost heads of Cement and Labor As per NSDC estimates. Construction Industry and Real Estate Services.

Availability of substitutes (R. C -2) 16 http://articles. C-4) Apart from land for other resources substitutes are available. In Karnataka land prices has increased 10 fold in some cities in last few years 16. Material and labor share cost in 65/35 ratio in the construction cost17. C -5) Again only in the case of construction work industry can think of backward integration.com/chennai/t-break-up-cost-building-civil-works7437. A large number of suppliers are present to provide for this resource.timesofindia.indiatimes. But mostly in other cases for both commercial and residential developments for meeting capital requirement builders have to approach banks or institutional lenders. 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. Only for some of the suppliers it is possible to a certain extent to forward integrate. Borrowed money from different sources results in costly interest payment which adds to development costs.com/2013-01-21/bangalore/36462321_1_price-risesecondary-cities-dharwad 17 http://www. Contribution to cost (R. Apart from to meet the regulatory requirement also they need to invest in better quality material. Suppliers threat of forward integration(R. C -3.indianrealestateforum. hence very few suppliers and mostly it becomes the costliest resource to get. Sometimes a developer has to get necessary approval to start development at a particular location. for other supplies industry has to rely on owners of land or for capital requirement they have to rely in capital providers. 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. 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. C -4) To come up with an attractive and better quality project the importance of key suppliers are prime.Real Estate Land being the scarce resource is the most crucial item for the developers. Industry threat of backward integration (R. Contribution to Quality (R. provided they are able to get land at the right location.html 16 | P a g e . Location of project and quality of materials used for construction can give a significant advantage to the developer.5) Given the nature of this industry for a supplier it is very difficult to forward integrate.

3. We have analyzed the threat of substitutes on different parameters. In our analysis for real estate industry. Availability of close substitutes(R. some use these products as investment vehicle. From the industry perspective substitutes are present for all these kind of uses. C-4) As already has been established that substitutes are not fetching better return. Industry’s importance to supplier (R.e. bargaining power of buyers is low to medium because of the following reasons: 17 | P a g e . Some of the substitutes like rental are the secondary product of same industry. Land owners are getting good deal for their land and for the constructors this industry is the main industry to which they are catering. commodities market are available substitutes. C -4) Practically there are no close substitutes for real estate projects. However in case of investment people do cash in and invest in other properties. Some people own a house or a space for their personal housing/commercial needs. 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.4 THREAT OF SUBSTITUTES Products of real estate industry serve different purpose for different individuals. Substitute’s price value(R. in that case government has to come in to resolve the issue. Hence. administrative) are very less compared to construction and land. hence worse price value. C -4) For the suppliers the importance of industry is very high. One reason for this is emotional attachment. marketing. 3. But sometimes land acquisition becomes contentious issue. C-5) The switching cost for this industry is very high. being accustomed to the location is also making the switching cost higher.5 BARGAINING POWER OF BUYERS Bargaining power is the ability to influence the setting of prices. which gives them return through capital appreciation and rentals. In general.Real Estate For a real estate project the other costs (i. Capital providers are also getting good return for their money in this industry. contribution to cost is high vis-à-vis suppliers. industries are more attractive when buyers have little power to set the terms and conditions under which they will buy. Switching cost (R. As an investment opportunity also given the Indian scenario the return on investment is significantly higher than other investment options. But this switching is also mostly confined within the same industry.

Purchase size (R. C -3) The total housing shortage by the end of 2012 is 26.ece 18 | P a g e . Buyers have less power to pressure suppliers for a low price. with the growing market share of real estate. suppliers are more concentrated than buyers. Therefore. the real estate market is moving towards more organised industry and 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. This is known as asymmetric information which gives the suppliers tremendous power. Concentration to buyers(R. the bargaining power of buyer is increasing. more than three-fourth of which is from low-income household 18.Real Estate Buyer Knowledge(R. it is difficult for the buyers to bargain hard with the real-estate 18 http://businesstoday.thehindubusinessline. C-3) Real estate has become a popular investment but lack of transparency and tight regulations. Also. With a shortage in the housing over the years in the urban areas. buyers are making investment decisions with limited understanding.in/story/buying-property-here-are-risks-that-you-mustavoid/1/187425. the demand for commercial office space is likely to be over 180 million sqft in the next five years (2012–16) in the top eight cities of the country and the total expected supply for the next five years in these eight cities at 219. the total demand for housing units for the next five years (2013-17) is expected to increase at a CAGR of 2. Figure 8: Statewise urban housing shortage in 2012 Similarly.intoday.html 19 http://www. However. C -2) As more and more suppliers are competing directly and indirectly within the industry.com/industry-and-economy/article3964967.8% due to the rise in disposable incomes of the Indian middle income group. not unless discounts are offered. suppliers tend to direct their business on real estate due to the growing market share.6 million sqft19.53 million units.

buyer has low bargaining power in order to purchase a product at low price.thehindubusinessline. Buyer's threat of backward integration(R. So.ece 19 | P a g e . Hence despite less government protection. Such firms will increase the bargaining power of buyers. This generally helps the buyers in reducing the home loan by a margin of INR 5 to 10 Lakhs 21.Real Estate developers. 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. kpmg. superior product always demands a higher price. C -3) 20 Real-Estate And Construction. 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. buyer has to pay a premium in order to get the product as per his/her requirement. They put together a group of buyers and mediate with developers to either launch a new project or picks up properties in an existing project. New players find it difficult to share such strong affiliation with the local government authorities. Therefore. It is very essential for the companies to have a strong connection with these authorities to fast-track their projects. So. The figure lists the shortages in urban housing across different states in India20. C-2) Political clout has enormous influence on the real estate market. location and facilities. it is still a matter of buyer’s decision to find the best deal among the many options to choose. Product Quality (R. They can easily switch to another supplier without incurring significant switching costs. the political clout required is high. since there is mismatch between demand and supply. future macroeconomic factors and the political changes are under the control of the government. 3.5) The product in real estate industry includes the plan.com/in 21 http://www. Also.6 GOVERNMENT ACTIONS Government protection(R. companies like Home Buyers Combine (Pune) started to build the bargaining strength of buyers using numbers. Undifferentiated Products(R. C-5) Even if real estate companies hold a large share in the market. Infrastructure development. Bridging the Urban Housing Shortage in India – KPMG. C -2. Major processes involved in title transfer of land are controlled by the local government authorities.com/news/real-estate/banding-buyers-for-bargainingpower/article4081414. Ensuring transparency in land deals(R. Also in residential segment.

22 Real Estate and Construction.Real Estate One of the major hurdles in buying a property in Indian scenario is the lack of transparency in land deals. banking and other financial institutions like LIC also complement the real estate industry.com/in 20 | P a g e . Hence government policies leading to attracting investment is the biggest complement for the industry. mid-level and luxury segment is because of investment friendly government leading to a boom to job market and giving huge lift to citizen’s earning potential. Bridging the Urban Housing Shortage in India – KPMG. Investment friendly government (R. Figure 9: State wise loan disbursement in India kpmg. C-3) The tax sops provided in annual government budgets can also be a huge complement for the industry. it becomes a huge reason of contemplation before entering the market because of the cost factor involved. Following are some of the ways through which they influence buyer’s decisions: Easy access to loans Even though the range of interest rates for buying a property is not solely a bank’s decision and government has a major say in that. 3. Thus making the process of getting loan easier will have positive effect on 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. in all affordable. Government action in enhancing transparency will boost the industry extensively. Fiscal Policy (R. the ease with which the loans can be accessed is also a criteria buyers are concerned about. C-3) The boom in the real estate sector.7 COMPLIMENTORS: BANKING / FINANCIAL INSTITUTIONS Since most of the properties are bought on loans. The figure given below is a representation of the size-wise loan disbursement made by HousingFinance Companies in India22. Because of no concept of property title and other nuances of land ownership.

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. The attractive index is calculated by taking simple average of indices of all the major forces. 3. It is assumed 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. kpmg. Bridging the Urban Housing Shortage in India – KPMG.8 SUMMARY OF FIVE FORCES Analyzing the five forces we have identified that this industry is very concluded that industry is very attractive. We can easily identify that commercial segment is more attractive than residential segment. 23 Real Estate and Construction.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 is necessary to reduce the life-cycle of the infrastructure projects 23.com/in 21 | P a g e . For both commercial and residential space the attractiveness index value is fairly good. 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.

2.75 3. are under the tight control of the local politicians. In addition to being the information source. The future trends of the infrastructure growth. urban development authorities etc.25 2. infrastructure available in the area.33 3.25 2. facilities existing in the near-by surroundings as well as the ease of access to the daily needs.21 4. Political Clout The valuation of the real-estate projects are highly co-related with the location. Such influential political clout is one of the critical success factors for initializing the project.33 3. background checks and other land related legal and paralegal activities.88 4.99 IMPACT Low High Very Low Very Low Low Moderate to high RESIDENTI AL 2. 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.99 and for the residential segment it is coming around 3.Real Estate FORCES RIVALRY AMONG COMPETITORS BARRIERS TO ENTRY BARGAINING POWER OF SUPPLIERS THREAT OF SUBSTITUTES BARGAINING POWER OF BUYERS GOVERNMENT ACTIONS ATTRACTIVENESS COMMERC IAL 3. This analysis also shows us that the role of government is prominent in this industry. 1.63 3. 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.21 4. 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.58.08 4.75 3.58 IMPACT Moderate to low High Very Low Very Low Low Moderate to high For the commercial sector attractiveness index is 3. the political clout is highly influential in the processing activities related to the land title transfers. Capital Source 22 | P a g e .92 4. city expansion details.

Rupees.30 66. 24 Reaping the Returns : Decoding Private Equity Real Estate Exists in India by Jones Lang Lasalle 23 | P a g e .96% ) Prestige Estate 119.77%) the Interest 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.40 Developers (7.27 123.5%) Nitesh Estate 6. The major channels of financing real estate development in India are given below24.84%) (5. are a testimony to the same.77%) (14.25 (11.64% ) Brigade 60.05%) (3.66 %) Mar ‘08 59.99 (1. The main source of capital funding for the real-estate players are the bank loans.96 %) (All Figures in Cr. % in brackets are Expense/Sales Ratio) Mar ‘12 Mar ‘11 Mar ‘09 103.68 10. Mar ‘10 Sobha 106.33%) (3.61%) (8.70 (4.79%) 3.90 (10.39 16.79 8.64 (8.58 3.87 (10.20 41.42 78. as evident in the table below over the 5 year horizon. The high interest expenses.20%) 2.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.57 (0.73%) (2.00%) (7.60%) (2.

Productive Labour Yield The most important measurable criteria for the timely execution of the project is the productive labour yield. Figure 12: Private Equity Investments in Indian Rea Estate (2005-2011) With the entry of the P. investments made in Indian Real Estate is given below25. since the opening of real-estate sector to the foreign investments.E. funds.Real Estate Figure 11: Major channels of financing real estate development in India However. many foreign companies and a few domestic financial institutions raised and invested capital into the sector. helping the industry wither away the bad times with a stronger financial backing. A sneak peek into the P. which is defined as the ratio of the 25 Reaping the Returns : Decoding Private Equity Real Estate Exists in India by Jones Lang Lasalle 24 | P a g e . 3. the land prices have either remained flat or increased.E. the money holding capacity of the firms have increased and as a result.

are all supposed to be deducted from the total available (potential) work hours. the realestate industry needs to acutely time its project keeping in mind the possible delays in the execution. 25 | P a g e . 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. union meetings etc. setup-times.Real Estate direct labour hours spent in completing a project to that of the total available labour hours. rework etc. or the time spent in cleaning. Over and above the acute shortage of the manpower. absenteeism. temporary stoppages due to weather. The time spent in holidays and strikes.

Real Estate APPENDIX Yearly results summary for major players RealEstate_YearlyRe sults.xls 26 | P a g e .

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