c&s indutry analysis realestate (sece group11) v1.1

8/10/2019 C&S Indutry Analysis RealEstate (SecE Group11) v1.1

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COMPETITION & STRATEGY

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Table of Contents

i. Table of Contents 1

1. Overview of the Industry 21.1. Industry definition 21.2. Key highlights 21.3. Stakeholders and business paradigm 3

2. Industry Analysis 42.1 Intra-industry rivalry 4

Number and size of competitors 4Industry Growth 4Exit Barriers 4Price competition 5

2.2. Bargaining power of suppliers 5 Number of suppliers 5Distinctiveness of suppliers‟ products 6Switching costs 6Threat of forward integration 6Government 6

2.3. Bargaining power of buyers 7Concentration of Buyers 7Switching cost for buyers 7Threat of backward integration 7Choice of differentiated products 7

2.4. Threat of new entrants 82.5. Threat of substitutes 8

3. Comments and future trends 93.1. Summary chart of Five Forces 93.2. Future expectations 9

4. Appendix 10




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1. Overview of the Industry

1.1 Industry definition

Real estate (RE) is a key industry that deals with land and its usage in terms of constructions and

resources. Growing at about 20% p.a. this industry contributed 6.3% to India‟s GDP in 2013.[1

The industry is broadly categorized into „r esidential ‟ and „commercial ‟ segments depending on the usage andlicensing pattern of the land – and further sub-classified as per the construction (Fig.1). However, for the purposesof this report, we shall keep our comments and analysis focussed on only the key elements pertaining to theresidential, office and retail segments which account for the majority of the projects launched in the past fewyears.

1.2 Key highlights

The recent introduction of the Real Estate (Regulation and Development) Bill [1] is evidence of thesignificant governmental involvement this sector and also hints at the political influence is heavily involved

behind-the-scenes, in the workings of this industry.Recent changes that are relevant to understanding the industry as it is today are:1) Restrictions on advertising prior to complete project approval [1] 2) Introduction of REITs to assist fund-raising and exempting firms from double taxation [2] 3) Amendments to FDI regulations – reducing minimum paid up capital to $5M instead of $10M and

project areas to 50,000m2

from 20,000m2

– allowing entry into Tier 2 and other areas with smaller projects [3] 4) Allocation of 7,060 Cr. for 100 smart cities in the Union Budget of 2014 [2]

The implications of these aspects on the industry will be discussed further in the report.

Residential Commercial

Office Retail Hotels Hospital Education

(Fig. 1) Segments in Real Estate

1. www.ficci.com; EY “Brave new world for India real estate: Policies and trends that are altering Indian real estate” 2. Union Budget 2014; http://www.indiabudget.nic.in/ 3. KPMG Report : “Ind ian real estate – Opening Doors”

http://www.indiabudget.nic.in/







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1.3 Stakeholders and business paradigm

There are multiple stakeholders at various stages of real estate projects ranging from – investors, landowners and the government to developers, construction agencies, agents and final buyers. (Fig. 2)

For further clarity the flow of activities as illustrated in Fig.2 is described in detail below: Developers conceptualize a project and float the idea to investors to raise fund Investors employ valuators and legal entities to ascertain the value of the project Land is acquired by the developer from land owners (which could be the government or private entities) –

this step would also involve changing the usage pattern of the land to commercial or residential, as per theneeds of the project

The developer employs designers/architects to draw up the detailed plans for the project Permits and licences are obtained for the project, ranging from – No Objection Certificates from the

Pollution Control Board, Tree Authority, Sewerage Department, Hydraulic Department, Storm Water andDrain Department, Environmental Department, Traffic Department, Fire Clearance, Airport Authority ofIndia, etc. The final approval must then be obtained from the town planning board of the state where the

project is located. [4,5] Contractors are employed for the actual construction either individually for different aspects like

plumbing, electricity, etc. or through an integrated contract to single turnkey contractors (such as L&T)which deliver the completed project to the developer

Property Management Consultants (PMCs) are hired to overlook the execution of the project and liaison between the architects, structural engineers and the contractors

Developers launch the project just after the permits are in place – using various channels such asnewspapers, television, direct mailing and others to promote the sale of the properties

Buyers may be individual or institutional with intermediaries such as real estate agents involved in the promotion and sale of the property

o Online portals have evolved as another channel for real estate sales in the last few yearso Developers often choose to rent out properties as in the case of retail and office projectso Asset management companies are also brought in to handle unsold properties

This report shall focus on analyzing the industry from the point-of-view of real estate developers.

(Fig. 2) Stakehol ders in real estate indu stry

4. http://www.doingbusiness.org/data/exploreeconomies/india/dealing-with-construction-permits 5. National Building Code of India 2005 ( http://www.bis.org.in/sf/nbc.htm )

http://www.doingbusiness.org/data/exploreeconomies/india/dealing-with-construction-permits


http://www.bis.org.in/sf/nbc.htm








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2. Industry Analysis

Given the above background, we will now evaluate the attractiveness of this industry for incumbent realestate developers and the future outlook for the same – using the Porters‟ Five Forces framework .

2.1 Intra-industry rivalry The profitability of an incumbent developer due to competition is an outcome of the following factors:

1) Number and size of competitorsThere are over 133 developers in the Delhi, Mumbai and Bangalore regions and many more operating in the

country as a whole, each with varying sizes of operations – ranging from large players like Tata Realty to smallerfirms like Bhumi Raj Homes P Ltd. [7]

However, despite a seemingly high concentration of firms – most players are regionally localized such as theLodha Group in Maharashtra and DLF group in Haryana – with the only exception being national players like TataRealty and Godrej Realty which have entered geographically diverse markets.

This would indicate low competition as operating markets for firms remain distinct from each other.

2) Industry GrowthThe industry is expected to grow at approximately the same rate as the GDP. Factors like slow economic growth,

rising inflation and a weakening rupee resulted in a slowdown up until 2013 – with absorption in certain marketsfalling at a high rate (NCR facing the slowest occupancy of standing inventory). [6]

However, current trends indicate that both residential and commercial spaces display a positive outlook over thenext few years. The union government has announced multiple incentives for the housing sector in the recently

presented union budget. [2] The government‟s encouraging stance is expected to revitalize the sector and has resulted inan increased sales volume in the top six cities by ~26% in H2 2014 (as compared to H2 2013). However, given thelarge number of unsold properties from earlier projects fewer launches are expected in the coming years. [6]

The industry has pushed towards rentals in this period and as a result, housing rentals have sharply increased inthe last couple of years. However, the rental prices in the office rental space have remained largely unchanged – mostlikely due to commercial projects having come up in the outskirts of major cities, where rentals are unlikely to rise tillfurther growth extends to the area.

In effect – the industry growth is not expected to significantly increase competition in the industry.

3) Exit BarriersThe real estate industry mandates very large financial commitments in terms of assets and also the equity and debt

raised for projects. Relationships with the political entities, the government, contractors, suppliers and labour unionsalso take a long time to build and require long-term commitments by all players.

To support this fact, we have seen very little competition based on price, as it does not make sense to go into pricewars when most players have deep pockets and so heavily committed to different stakeholders. As a result, the larger

players in real estate industry have been present for over 30 years.Hence, exit barriers in this industry are very high, making this industry a long-term game for profits.

6. Knight Frank Research –“India Real Estate Outlook (Residential and Office) – January to June 2014” 7. http://www.moneycontrol.com/mccode/property/top_developers.php

http://www.moneycontrol.com/mccode/property/top_developers.php






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4) Price competitionAs mentioned earlier, price competition is rarely seen in this industry – as residential, office and

retail spaces are largely commoditized at this stage. Real-estate developers do not have much differentiationin terms of their product offering – only playing a coordination role between various stakeholders.

Also, given the longevity of the products offered (land and buildings) there is little incentive to start price wars for short-term gains, as the profits of projects of projects are reaped over long durations.

Hence, competition on pricing is also not a key influencer in this industry.

2.2 Bargaining power of suppliers

1) Number of suppliersThere are a large number of potential investors including national banks, foreign banks and venture

capitalists whom the real estate developers may approach. However, large and established developers have anadvantage as investors are likely to view them as more credible over the smaller players in the market.

Since there are numerous land owners, there is abundant supply of land for the developers. However, landowners are usually backed by NGOs/public bodies and their power remains high.

Developers have the option of various contractors including turnkey contractors such as L&T or a host ofsmaller contractors to carry out individual jobs. In many cases they choose to work with a few select parties thatthey are familiar with.

The Indian construction industry has reached a value of $441.6 billion having grown by 13.8% in the year2013. This trend in growth since 2009 (as seen in the table below), except for a slight decrease in 2013 comparedto the previous years, is expected to continue between 2015 and 2018. Some of the biggest players include L&Twith $14.6 billion annual revenue, Lanco Infratech with $1.7 billion annual revenue and Hindustan ConstructionCompany with $1.6 billion annual revenue in FY 2014. [9]

8. MarketLine Industry Profile; Construction in India; July 2014

(Fig. 3) Growth o f construc t ion com panies industry




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2) Distinctiveness of suppliers’ products /servicesDespite architects and contractors having specialized skills in themselves – the distinctiveness of their

offering is very high across different architectural and contractual firms. A developer could choose to float a project to any of multiple firms without significantly compromising on quality or price of the services rendered –thus reducing the bargaining power of these suppliers. Similarly for real estate agents, which have a key utility interms of their networks and buyer databases but do not have distinct offerings amongst each other.

A recent trend with regard to investment in real estate has been to approach foreign banks with lowerinterest rates as the national banks are conservative and offer high interest rates. Thus, the funds raised varydepending on the source such as various banks, venture capitalists and so on. [9]

The only exception to this distinct offering of suppliers is when the involvement of political alliances andrelationships with labour unions are considered – which have very distinct and unique offerings critical to thesuccess of the developer ‟s projects.

As a result – allowing for diplomatic alliances being maintained with unions and political entities –overall power of suppliers is relatively limited in light of their relatively non-distinct offering.

3) Switching costsFrom the previous section, it is evident that each supplier do not have a highly distinct offering.

Therefore, it is highly inconvenient to search for parties with land of a certain size and location, investors willingto offer flexible terms and agents or contractors with a specific area of specialization required for a particular

project to name a few. This makes the real estate developers incur huge switching costs in the case of shiftingfrom one supplier to another.

4) Threat of forward integrationThreat of forward integration from most parties is relatively low as it is a capital intensive industry.

However, some construction giants have the resources to enter the business of developing if they recruit or poachthe right management with adequate knowledge and experience in the industry. L&T has already stepped into this

domain with its L&T Realty arm. Similarly, certain brokers in Mumbai have entered into the development spacefor small residential units. [11]

Another form of forward integration that has already occurred and is eating into the shares of real estatedevelopers are projects undertaken by the government. The Maharashtra Housing and Area DevelopmentAuthority (MHADA) is one such example.

5) GovernmentThe key issue lies in dealing with the government. Several permits and no objection certificates are

required from the government and therefore real estate developers are bound by those laws and are required toobtain the necessary approvals in place prior to the construction. Any change in government regulations also leadsto further delays and costs.

It typically takes 2-3 years to obtain all approvals and a lot of red-tape is involved. This enlarges the factthat India ranks 181 among 183 countries to do business in [10] Therefore, the bargaining power clearly lies withthe government authorities.

9. http://articles.economictimes.indiatimes.com/2013-07-30/news/40895516_1_kotak-realty-s-sriniwasan-redfort-capital 10. CCI Report : “ A review of the competition issues in the real estate sector : An analysis of the position post DLF Case; Dec 201211. http://articles.economictimes.indiatimes.com/2013-06-14/news/39976725_1_propequity-brokerage-prestige-estate-projects

http://articles.economictimes.indiatimes.com/2013-07-30/news/40895516_1_kotak-realty-s-sriniwasan-redfort-capital


http://articles.economictimes.indiatimes.com/2013-06-14/news/39976725_1_propequity-brokerage-prestige-estate-projects







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2.3 Bargaining power of buyers

1) Concentration of Buyers

The Indian real estate sector is in a state of flux with a continuously evolving economic and demographicscenario. The trend of urbanization in India coupled with the growing purchasing power of buyers is creating an

empowered set of buyers who are driving the demand for real estate [12]

. A McKinsey study reports that in order to“meet urban demand, the [Indian] economy will have to build between 700 million and 900 million square meters ofresidential and commercial space a year”. [13]

This suggests that the higher number of buyers will have a much higher bargaining power with regards to the realestate industry. The collective strength of the buyers will force the developers to take their demands into considerationor risk losing substantial set of prospective buyers to the competition.

2) Switching cost for buyers

A number of players compete for a pie of the market share in the real estate industry. Their value proposition isaimed at wooing the customers with the best facilities and arrangements offered at affordable prices. In the midst ofthis severe competition, the major point to note is that for the consumers, it is not difficult to switch from one service

provider to another based on their choices and preferences. The buyers, conscious of the investment, choose to goahead with a developer who keeps their demands in mind and plans accordingly.

3) Threat of backward integration

The threat of backward integration is very low as it is a capital intensive industry. It is highly unlikely that thecustomers will get into the real estate business because of a lack of appropriate response from the developers! The

best they can do is switch from the current developer to one of its competitors.

4) Choice of differentiated products

Today‟s buyer is not content with the traditional apartments that the developers have to offer. They demand more

flexibility and control in terms of designing the layout and customizing their homes. [14]

This concept of customisablehomes is both throwing a challenge as well as presenting an opportunity for the developers to differentiate themselvesfrom their competitors. The more differentiation they can build in terms of their offerings, the higher will they beapproached by the customers. This clearly indicates that the choice of differentiated products (flexi homes) is drivingthe power in the hands of the buyers.

12. http://businesstoday.intoday.in/story/real-estate-property-market-new-deals-to-attract-home-buyers/1/19535.html 13. http://www.mckinsey.com/insights/urbanization/urban_awakening_in_india 14. http://businesstoday.intoday.in/story/real-estate-property-market-new-deals-to-attract-home-buyers/1/19535.html

http://businesstoday.intoday.in/story/real-estate-property-market-new-deals-to-attract-home-buyers/1/19535.html


http://www.mckinsey.com/insights/urbanization/urban_awakening_in_india










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2.4 Threat of new entrants

The real estate market has seen stable returns for decades. Major players have been entering since theearly 80‟s and have stayed fairly profitable over the years. However, this is an industry where growth inoperations needs fringe investments in stakeholders such as public offices, real estate agents, suppliers‟ industriesand the sort. Hence to survive, all players, even if they operate in different regions, need to have deep connectionsin these fields. This implies that a significant investment (financial and other) has to be devoted over a period oftime. This acts as a barrier to new entrants. However, players with financial and political resources have enteredthe market previously and will continue to do so. The prerequisite for this entry being that the entity is preparedfor the long haul.

When we consider demand, consumer buying is attached to a careful balance between emotion and logic.In addition to this, there are a lot of players with similar offerings and hence new entrants might face challenges inselling their products. This will increase spending in the spheres of branding and marketing which further lead toincrease in costs, acting as a deterrent. Hence it not uncommon to see players leveraging existing brand images inthis industry. A recent example would be Tata‟s latest venture - Tata Housing.

As of 2014, FDI in real estate has been opened up and the latest union budget has relaxed norms for

foreign players. Major foreign players with far superior technology, design and financial capacities can enter themarket. The weakening rupee also makes it cheaper for conglomerates to enter. As India is a country where

people have an affinity foreign brands, it will only get more competitive for local players like DLF.

2.5 Threat of substitutes

The addition of capacity in terms of extra floors on buildings and modification/ renovation of existing facilitiesinstead of building new ones are substitutes for the real estate industry. The above substitutes have very lessimpact on the profitability of the business and the threat of substitutes is low.




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3. Comments and future trends

3.1 Summary chart of Five Forces

3.2 Future expectationsConsidering the time taken to get clearances, the ambiguity in terms of ways to deal with delays caused on

account of lapses by external agencies can result in unfair penalization of the developers. The Bill [2] is silent on theroutes that developers must follow if they fail to get clearance even after a substantial amount of time. The ban onadvertising by developers before receiving complete approval for their projects, might inadvertently lead to fewer

projects coming into the market. A reduced supply will lead to an increase in demand and, ultimately, a rise in prices.The Bill, with its several proposed checks and restrictions may slow down the industry in the short run and may

challenge the existence of many non-serious players in the real estate industry. On the other hand, existence of onlyserious players might make the sector more organized and credible in the long run. The novel aspect of this Bill willmake it interesting to note the outcome of its implementation on the real estate sector in India.

And with the allowance of 100% FDI in this sector, international players such as Emaar Properties, PortmanHoldings, Homex and many others have also stepped in alongside the more established domestic players such as DLF,Tata Housing, Unitech, Godrej Realty, etc. How this will help tap the huge potential of the real estate market in India,and change the dynamics of the industry is yet to be seen.

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Concentration of buyers

Switching cost for

Threat of backward

Choice of differentiated products

1

2

3

4

Number of suppliers

buyersDistinctiveness of

integrationSwitching costs

Threat of forward integration

1

2

3

4

Government

Threat of new entrants

Threat of substitutes

Intra-Industr Rivalr

Competitors

Industry Growth

Exit Barriers

Price competition

1

2

3

4

Bargaining power of suppliers Bargaining power of buyersLow Hi h

Low

Low

Low




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4. Appendix

(App endix 1) Market size of real estate in India (USD billio n)

(Appendix 2a) Ci ty wise New Launches and Ab sorpt io n dur in g H1 2014

(Appendix 2b) Ci ty wise New Launch es and Abso rpt ion forecasted for H1 2014




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(Appendix 2c) New Complet ion, Ab sorpt io n and Vacancy (Top Six Ci t ies)

(Appendix 3a) Sector Wise Abs orpt ion Trend (India

(Appendix 3b) Ci ty wise sh are of IT/ITES, BFSI and Manufactur ing sectors absorpt ion




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(Appendix 3c) Industry -wise spl i t of Bengaluru, Chennai and Mumbai off ice space absorpt ion

(Appendix 3d) Bengaluru, Chennai and Mumb ai off ice market analysis




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(Appendix 3e) New supply and absorpt ion of off ice space in Bengaluru, Chennai and Mumbai

(Appendix 4a) Demand project ions and analysis of to p seven ci t ies in Resident ia l sector (‘000 units)2010-14

(Appendix 4b) Demand p roject ions and analysis of top seven cities in Commercial sector (‘000 units)2010-14




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(Appendix 4c) Demand projections and analysis of top seven cities in Retail sector (‘000 units) 2010 -14

c&s indutry analysis realestate (sece group11) v1.1

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