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)

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

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

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1 INTRODUCTION
The 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 witnessed consolidation 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 broadly categorized 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 |Page

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The above reasons clearly show the impetus of real estate growth in India. As per JLL-Reis estimates1, the market value of investment grade real estate in India under construction has increased from USD 69.4 billion in 2006 to USD 160.1 billion in 2012, which equated to 9.8% of Indias nominal GDP in 2010. This also implied a CAGR of 20.3% between the years 2006-2012 2. The division of the sector is shown in Figure 1 below:

Figure 1: Value of Indian Real Estate under Construction 2

1.1 PRESENT SCENARIO OF REAL ESTATE

The 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 GDP 3. 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 estate requirements 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. ii.
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, 2011) Reaping the Returns, Jones lang Lasalle India Capital Markets Report A brief report on Real Estate Sector in India, August 2012 by ASA&Associates

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iii. Commercial Real Estate : 20~22%

1.2 MARKET SEGMENTS

1.2.1 COMMERCIAL SEGMENT The commercial segment in India has significantly grown in the last decade largely 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 of nuclear 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.

Figure 3: Housing Shortage in 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 years 5. 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

A brief report on Real Estate Sector in India, August 2012 by Corporate Catalyst India, www.cci.in 5 A brief report on Real Estate Sector in India, August 2012 by Corporate Catalyst India, www.cci.in

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international players are queuing up to open different category of hotels from budget class to executive class. 1.2.5 SPECIAL ECONOMIC ZONES (SEZ) The SEZ Act was introduced by the government in 2005, and is aimed towards promoting exports and creating employment. The perks and benefits as well as lower cost associated with its construction have lured developers into looking at it positively.

Figure 4: Share of each segment 1.3 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. 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 |Page

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1.3.2 REAL ESTATE (REGULATIONS & DEVELOPMENT) BILL, 2011 The bill aims to regulate all real estate projects over 4000 Sq meter by establishing Real Estate Regulatory Authority. The bill aims at protecting the consumers by mandating the developer to deposit at least 70% of the fund received from the end customers in a dedicated project account. The bill also proposes several other provisions like extending of registrations, power to take over development work by authority and mandatory web presence etc. 1.3.3 FINANCE ACT, 2012 REAL ESTATE With the slabs for individual taxation being raised only slightly, the additional tax saving will not bring relief to the young first time house buyers. Transfer pricing provisions will now also be applicable on domestic transfers to prevent unfair practices and tax avoidance. Apart from this several other provisions were added to qualify a housing scheme under affordable domain. Affordable housing has continued to be the focus of government. The rate of service tax and excise has also been increased which will increase the construction cost incurred 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 BANGALORE

Bangalore 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 Residential Units Absorbed in 2011 Avg. annual addition in IT/ITeS workforce for past 2 years; expected to grow at this rate for atleast 3 years Residential Units Available Avg. Price Appreciation rate in residential sector for last 4 years
6

14 Million 20600 100,000+ 55,400 13%

Bangalore Residential market Report 2012, VESTIAN

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Avg. annual residential yield rate Residential units launched in 2011 CAGR for residential sector during 2008-2011 4.5% 44,000 15%

The real estate story in Bangalore is complemented by increasing focus on infrastructural developments by the government. A few of the important projects underway7 in Bangalore which have huge impact on real estate are: i. ii. iii. iv. v. 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, 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 other South Indian buyers. Bangalores residential segment is touted to grow at 15% annually for next three years. With predicted absorption of 23000 residential units in 2012, the capital value is going to appreciate between 12-20% due to increased construction cost and land prices. Economic slowdown notwithstanding, Bangalore real estate has shown resilience and recorded the least quarter on quarter drop of home unit sales in last quarter of 2012 among the major metros of India. The city surpassed others by absorbing 49 million sq. feet of residential properties followed by NCR in 46.88 million sq ft. The office space real estate was not far behind in Bangalore. It was the highest absorber of office space among metros in the last quarter of 2012 during which it sold 3.4 million sq ft of office space (up by 89%) compared to 0.9 million sq ft in NCR. A good range of products at various price points seem to be driving mechanism when combined with constant hiring by IT industries in Bangalore and growing disposable income. According to National Housing Bank Residex, the city saw a rise of 4.5% increase in price point. The important question here remains if Bangalore will be
7

Bangalore Residential Real Estate Overview, 2011 published by ICICI property Services

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able to maintain the momentum both in short term and long term. According to Mr. Irfan Razak, chairman and MD of Prestige Estates, Bangalore will be able to maintain good sales momentum, have stable land prices and offer good products at reasonable rates8. The trend will at least stay till next three to six months.

Figure 6: Real Estate trend in office market and property registration 9

http://www.sobhadevelopers.com/about/pdf/pressclips_2012/june2012/21st_june_2012_BS.pdf 9 Bangalore Real Estate Sector report, 2012 by Emkay

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3 INDUSTRY ANALYSIS: PORTERS FIVE FORCES

The real-estate industry could be segmented into various segments as Residential, Commercial, Infrastructure (building sea-ports, airports, rail-links, etc.) and it even covers the SEZ developers. While the major promoters of the infrastructure and SEZ developers are the government authorities and also have Public-Private partnership models, the residential and the commercial developers are majorly private corporate companies competing for the various resources within a defined market. 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. Residential and commercial Real Estate Industry witnesses a wide diaspora of players competing with each other. From national players like DLF involved in developing huge townships in acres of land to the local builders developing individual houses in small properties; the size, strength, market and the risks involved across the various competitors vary substantially. With such a large number of developers existing in the space, barriers to entry into the real estate sector could not be considered to be very high. However, due to the difference in the size and the market of these different competitors, 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.

3.1 RIVALRY AMONG COMPETITIORS

Analyzing this industry on this parameter gives us a good insight about industry dynamics. Industry is majorly segmented into commercial space and residential space 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 other factors 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 for arriving at final index for major forces.

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reduced to very few. Among established players competition is present. To beat the competition incumbents try hard to differentiate their product using their brand, better architecture and location. But overall industry attractiveness is moderate to favorable. Industry Growth(R, C-4) The industry has been on the growth path during the last decade due to industrial growth and migration from other location. In the last decade the population of the city has risen by approx 47% 11, which resulted in significant growth in the industry. Recently the growth in the market is stabilized but capital appreciation to the tune of 12-15% is making the industry attractive for investment.12 Development in commercial space is also happening in full swing, with new technology parks and office complexes are being constructed as many new companies are expanding their operations in Bangalore. These all factors are making this industry attractive. Fixed Cost(R, C -3.5) One of the most important fixed cost factors is land in this industry. If a player has already invested in land at key location with better judgment then they can reap significant advantage out of this investment when the price at those locations goes up. But this kind of investment sometimes adds significant risk for developers. Without this kind of advantage fixed cost due to land can become significant cost for the incumbents. Other fixed cost like marketing and administrative cost are not that significant compared to land costs. Hence attractiveness due to fixed cost can be classified as moderate to high. Openness of terms of sale(R-1, C-3) For the residential space openness is less. Most of the times terms and conditions of sale are very clear to potential customer; hence one has to do proper research before making a buying decision. In the case of commercial space the term are more open than that in the case of residential. Generally commercial space customers are having a team of people who possess significant knowledge about the industry, hence more openness. But overall due to this factor attractiveness is low to moderate.

3.2 BARRIERS TO ENTRY

Economies of Scale(R, C-3) As per the general trend observed in the real estate sector, the firms need to aggregate huge chunks of land to build large projects. Contrary to the normal industries where the large projects provide lower costs per unit, the incumbent
11 12

Banaglore residential market report 2012, Westain http://www.joneslanglasalleblog.com/realestatecompass/real-estate/2012/12/bangalorereal-estate-review-2012-predictions-2013/

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players in the real estate segment feel the diseconomies of scale in handling the larger projects. Though the industry helps in bargaining the prices for the raw materials, the labour workforce and the associated legal, paralegal and the political efforts required in executing the large projects increase exponentially, leading to diseconomies of scale. Both in the residential as well as the commercial segment, due to larger initial investments in aggregating land and in handling labour force while executing the project, the economies of scale doesnt work in the favour of the industry. Product Differentiation(R-4.5, C-3.5) In the residential space, the consumers attach a huge chunk of their present and the future life savings while buying a house. The projects implemented by the competitors would not be able to differentiate while acquiring the land, but at the end of the project initialization, the competitors are in a comfortable position to differentiate their projects from the other ongoing projects. There does exists a high level 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 and prestige. 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 are also extremely high. Coming to the commercial space, most of the real-estate transactions take place only in leases. In case of changing commercial requirements and trends, the commercial buyers would be in a position to end the lease and switch to better options. However, if the services of the real-estate developer are good, it is better for the commercial buyers to shift to other properties of the same developer.

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Capital Requirements (R, C-4) The capital requirements for both the residential as well as the commercial space are huge. In order to develop attractive projects, the company needs to have enough upfront capital to aggregate land and develop the land to meet the project requirements. Also, the gestation period of the real-estate projects is very high 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. 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.

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Yearly Financial Results of Major Real-Estate Developers, Appendix A

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Access to raw materials/labour(R, C-4) The incumbent players enjoy an established supply chain of the basic raw materials required for the industry. New players could get easy access to the raw materials as there is excess capacity available for the production of the raw materials. However, skilled labourers are in shortage across the industry and in order to maintain the schedule 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 realestate 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 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. 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)
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Real-Estate And Construction, Bridging the Urban Housing Shortage in India KPMG; kpmg.com/in 15 Human Resources and Skill Requirements in the Building, Construction Industry and Real Estate Services, NSDC

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Land being the scarce resource is the most crucial item for the developers, hence very few suppliers and mostly it becomes the costliest resource to get. In Karnataka land prices has increased 10 fold in some cities in last few years 16. In the case of commercial developments land requirement reduces potential suppliers to countable few and many a times government intervention becomes necessary for land acquisition. Sometimes a developer has to get necessary approval to start development at a particular location. Material and labor share cost in 65/35 ratio in the construction cost17. A large number of suppliers are present to provide for this resource. Over the year the labor in the country is becoming costlier due to new emerging earning avenues and government policies. In some of the cases raising capital is not a costly affair for residential projects as developers are getting upfront advance in stages from the future occupants during the development period. But mostly in other cases for both commercial and residential developments for meeting capital requirement builders have to approach banks or institutional lenders. Borrowed money from different sources results in costly 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 meet the 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-risesecondary-cities-dharwad 17 http://www.indianrealestateforum.com/chennai/t-break-up-cost-building-civil-works7437.html

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For a real estate project the other costs (i.e. marketing, administrative) are very less compared to construction and land. Hence, contribution to cost is high vis--vis suppliers. Industrys importance to supplier (R, C -4) For the suppliers the importance of industry is very high. Land owners are getting good deal for their land and for the constructors this industry is the main industry to which they are catering. Capital providers are also getting good return for their money in this industry. But sometimes land acquisition becomes contentious issue; in that case government has to come in to resolve the issue.

3.4 THREAT OF SUBSTITUTES

Products 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 are present 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 BUYERS

Bargaining 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

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Buyer Knowledge(R, C-3) Real estate has become a popular investment but lack of transparency and tight regulations, buyers are making investment decisions with limited understanding. This is known as asymmetric information which gives the suppliers tremendous power. However, the real estate market is moving towards more organised 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; 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 household 18. 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.

Figure 8: Statewise urban housing shortage in 2012

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-mustavoid/1/187425.html 19 http://www.thehindubusinessline.com/industry-and-economy/article3964967.ece

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developers. The figure lists the shortages in urban housing across different states in India20. Undifferentiated Products(R, C -4) Real estate products are in a way offer the same but there is an increase in customers seeking for more information in order to make informed decisions while making purchases. So, deployment of technology provides an opportunity to suppliers to differentiate their marketing efforts from that of their competitors and customers are facing more choices on where to buy such products. They can easily switch to another supplier without incurring significant switching costs. Buyer's threat of backward integration(R, C-5) Even if real estate companies hold a large share in the market, it is still a matter of buyers decision to find the best deal among the many options to choose. Also in residential segment, companies like Home Buyers Combine (Pune) started to build the bargaining strength of buyers using numbers. They put together a group of buyers 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 government authorities. Hence despite less government protection, the political clout required is high. Ensuring transparency in land deals(R, C -3)
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Real-Estate And Construction, Bridging the Urban Housing Shortage in India KPMG; kpmg.com/in 21 http://www.thehindubusinessline.com/news/real-estate/banding-buyers-for-bargainingpower/article4081414.ece

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One of the major hurdles in buying a property in Indian scenario is the lack of transparency in land deals. Because of no concept of property title and other nuances of land ownership, it becomes a huge reason of contemplation before entering the market because of the cost factor involved. Government action in enhancing transparency will boost the industry extensively. Fiscal Policy (R, C-3) The tax sops provided in annual government budgets can also be a huge complement for the industry. Right amount of tax sops on the home loan taken will tilt the demand in favor of buying a property as opposed to renting it. Investment friendly government (R, C-3) The boom in the real estate sector, in all affordable, mid-level and luxury segment is because of investment friendly government leading to a boom to job market and giving huge lift to citizens earning potential. Hence government policies leading to attracting investment is the biggest complement for the industry.

3.7 COMPLIMENTORS: BANKING / FINANCIAL INSTITUTIONS

Since most of the properties are bought on loans, banking and other financial institutions like LIC also complement the real estate industry. Following are some of the ways through which they influence buyers decisions: Easy access to loans Even though the range of interest rates for buying a property is not solely a banks decision and government has a major say in that, the ease with which the loans can be accessed is also a criteria buyers are concerned about. Thus making the process of getting loan easier will have positive effect on the industry. The figure given below is a representation of the size-wise loan disbursement made by HousingFinance Companies in India22.

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Real Estate and Construction; Bridging the Urban Housing Shortage in India KPMG; Figure 9: State wise loan disbursement in India kpmg.com/in

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Approving real estate projects Since high amount of opacity in transacting with real estate developers proves as a hindrance to the industry, the approval of real estate projects by leading banks (especially the nationalized ones) instill confidence in the buyer community. It 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. 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 taking simple average of indices of all the major forces. For major forces the index is calculated by taking average of different parameters within that forces for which we have already assigned the value earlier. We can easily identify that commercial segment is more attractive than residential segment.
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Real Estate and Construction; Bridging the Urban Housing Shortage in India KPMG; kpmg.com/in

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FORCES RIVALRY AMONG COMPETITORS BARRIERS TO ENTRY BARGAINING POWER OF SUPPLIERS THREAT OF SUBSTITUTES BARGAINING POWER OF BUYERS GOVERNMENT ACTIONS ATTRACTIVENESS COMMERC IAL 3.63 3.92 4.21 4.33 3.25 2.75 3.99 IMPACT Low High Very Low Very Low Low Moderate to high RESIDENTI AL 2.88 4.08 4.21 4.33 3.25 2.75 3.58 IMPACT Moderate to low High Very Low Very Low Low Moderate to high

For the commercial sector attractiveness index is 3.99 and for the residential segment it is coming around 3.58. This analysis also shows us that the role of government is prominent in this industry.

4 KEY SUCCESS FACTORS FOR REAL ESTATE INDUSTRY

Based on the experiences of the incumbent players in the residential as well the commercial real-estate developers, it is found that there are three (3) critical factors which play a significant role in the success of the projects undertaken by the developers. 1. Political Clout The valuation of the real-estate projects are highly co-related with the location, infrastructure available in the area, facilities existing in the near-by surroundings as well as the ease of access to the daily needs. The future trends of the infrastructure growth, city expansion details, urban development authorities etc. are under the tight control of the local politicians. It is imperative for the real-estate developers to maintain good relationships with the local politicians to gauge the future trends of the land attractiveness. In addition to being the information source, the political clout is highly influential in the processing activities related to the land title transfers, background checks and other land related legal and paralegal activities. Such influential political clout is one of the critical success factors for initializing the project. 2. Capital Source

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Any residential or commercial project requires a huge upfront investment and also the need for the working capital is high as the gestation period for these projects is pretty high. The main source of capital funding for the real-estate players are the bank loans. The high interest expenses, as evident in the table below over the 5 year horizon, are a testimony to the same. Mar 10 Sobha 106.20 41.30 66.40 Developers (7.60%) (2.84%) (5.96% ) Prestige Estate 119.27 123.42 78.25 (11.61%) (8.00%) (7.64% ) Brigade 60.39 16.79 8.87 (10.05%) (3.73%) (2.5%) Nitesh Estate 6.58 3.68 10.64 (8.33%) (3.77%) (14.96 %) (All Figures in Cr. Rupees, % in brackets are Expense/Sales Ratio) Mar 12 Mar 11 Mar 09 103.90 (10.66 %) Mar 08 59.70 (4.20%)

2.99 (1.79%)

3.57 (0.77%)

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. The major channels of financing real estate development in India are given below24.

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Figure 11: Major channels of financing real estate development in India

However, since the opening of real-estate sector to the foreign investments, many foreign companies and a few domestic financial institutions raised and invested capital into the sector. A sneak peek into the P.E. investments made in Indian Real Estate is given below25.

Figure 12: Private Equity Investments in Indian Rea Estate (2005-2011)

With the entry of the P.E. funds, the money holding capacity of the firms have increased and as a result, the land prices have either remained flat or increased; helping the industry wither away the bad times with a stronger financial backing. 3. Productive Labour Yield The most important measurable criteria for the timely execution of the project is the productive labour yield, which is defined as the ratio of the
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direct labour hours spent in completing a project to that of the total available labour hours. Over and above the acute shortage of the manpower, the realestate 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 stoppages due to weather, setup-times, union meetings etc. or the time spent in cleaning, rework etc. are all supposed to be deducted from the total available (potential) work hours.

Productive Labour Yield (Y) = Actual Labour spent in completion project / Total Available (Potential) Labour Hours
The real-estate players keep a strict watch on this critical factor for the timely completion of its projects.

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APPENDIX
Yearly results summary for major players

RealEstate_YearlyRe sults.xls

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