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Flushing Meadows

Report Submitted to Prof. S.G.Bhagali 26/12/11

Submitted by: Akash Shah Puneet Soni Nimit Shah Dhirendra Chaudhari Malvi sheth Abhizer Jani Yashovardhan Chordia Urvish Shah

Executive Summary
Keeping in mind the macroeconomic condition of BOPAL it is recommended to develop the land and resolve ongoing conflicts through court cases. The Strategies are as follows: Development Strategy 1. Product Mix 2 BHK 1000 sq ft 2 BHK 1200 sq ft 3 BHK 2050 sq ft 3 BHK 2200 sq ft 4 BHK 2600 sq ft Row Houses 3000 sq ft Bungalows 3600 sq ft 2. Phases of Development Phase I 20% of land Phase II 20% of land Phase III 20% of land Phase IV 25% of land Phase V 15% of land

Financial Strategy 1. Cost of Project Cost/ feet 906.8 100 906.8 86.0 150 sq Total Area (sq ft) 3148857.50 370453.82 555680.74 3704538.24 555680.74 Value (Rs.) 285,52,48,661 37045382.40 503867410.94 318,515,793 83352110.40

Building Open Spaces Amenities PHE Work Other Development Total Construction Cost

1025.24

3,798,029,359.14

Other Admin etc Costs 205.05

759605871.8

Total Cost 1230.28 Table 1: Cost of Project


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4,557,635,230.96

2. Means of Finance A combination of Joint Venture and Advance Bookings will be used to finance the project. The cash flows after financing are shown below: The JV will contribute Rs. 68.89 Cr Year opening balance Income from advances Expense Closing Balance 2008 68.89 39.39 73.33 2009 34.95 61.86 96.73 2010 0.09 144.16 22.81 2011 121.44 184.70 24.75 2012 281.39 479.91 22.31 738.99

34.95 0.09 121.44 281.39 Table 2: Cash Flows after financing

3. Calculation of Break Even Point Avg Selling Price Variable cost Contribution Fixed cost Land Breakeven Rs. 2890 993 1897 88.00 3704583 Per Sq. Ft Per Sq. Ft Per Sq. Ft Cr sq ft

463827.80 sq ft 12.52 % Table 3: Calculation of Break Even Point

Marketing Strategy A combination of two market strategies has been adapted for this project. The two market strategies are selective specialization and market specialization. Through selective specialization flushing meadows offers different marketing mixes to different segments. On the flip side the project also specializes in serving a particular market segment and offers that segment an array of different products.

Table of Contents
Sr. No. 1 2 3 3.1 Title Situation Analysis Problem Statement Evaluation of Problems Deciding whether to sell the land Macroeconomic Analysis Financial Analysis Disputes relating to Land Development Plan Product Mix Development Plan Duration of Project Types of Houses Distribution of Houses across land Phases of development of land Evaluation of Cash Flow Requirements Cost of Project Selling Price Distribution of Sales Projection of Cash Flows Cash Outflows Cash Inflows Net Cash Flows Means of Finance Identifying Means of Finance Internal External Employing Means of Finance Advance Booking Joint Venture Cash Flows Marketing Strategies Market Segmentation Product Market Grid Market Segments Criteria for selecting market segments Strategy for selecting market segments Marketing Objectives
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Pg. No. 8 9 10 10 10 12 14 15 15 15 15 18 30 31 32 32 33 33 34 35 36 37 38 38 38 38 39 39 39 40 42 42 42 42 44 45 47

3.2 3.3

3.4

3.5

3.6

3.7 4.

Marketing Plan Product Positioning The 4 Ps Sales and Administration Teams Exhibits Map Duration of Project Monthly Cash Inflow Monthly Cash Outflow Cost of Project Rules as per DC

47 47 48 51 52

Table of Figures and Tables Sr. No. Fig. 1 Fig. 2 Fig. 3 Fig. 4 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24 Title Cyclical Trends of Real Estate Markets Cyclical Trends of Real Estate Markets -2 Stages of Construction Increase in Selling price Cost of Project Cash Flows after Financing Calculating Break Even Point Sellable Area Basic Information Net Loss if land is sold Product Mix Time taken to construct a building of 11 floors Time taken to construct a house of 2 floors Distribution of product mix Phases of Development of land Total Cost of Construction Sales Plan Yearly Projected Costs Distribution of Variable Costs Distribution of Fixed Costs Types of costs Distribution of Variable Costs across stages of construction Division of costs as direct labour and direct material Distribution of income across stages of construction Annual Cash Flow Annual Income through advance bookings Joint Venture Information Cash Flow after financing
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Pg. No. 10 12 16

2 2 3 8 13 13 15 16 17 30 31 32 33 34 34 34 35 35 36 37 37 39 39 40

Table 25 Table 26 Table 27

Product Market Grid Preferences of Buyers Prices of Various houses across 5 years

41 45 47

Situation Analysis
In the middle of 1995 it was decided to start a venture called Suvidha Company Pvt. Ltd. with an objective of availing benefits from the emerging markets of real estate. A greater future opportunity was seen in the BOPAL markets due to increasing property prices every year, massive urbanization and with development of IT industry in the city. With the announcement of merger of 36 fringe village in the boundary of BOPAL city the company sensed a huge growth opportunity to develop the business. It acquired 72 acres (31,36,320 sq. ft.) of land with an motive of building an exclusive residential property named Flushing Meadows. In 1996 Suvidha construction was doing well in marketing its properties and started looking forward to developing their new project Flushing Meadows. There was a change which was observed in the prevailing conditions due to abolishment of the Urban Land Ceiling Act and the global crises which held negative impact on the growth of real estate market. A decline of approximately 40% to 50% was observed in the selling prices of the properties. The cost of the land bought for the project was continuously escalating because of the falling demand, increasing cost and carrying forward of losses each year. Plot Area as per 7/12 extract FAR permissible Area in Sq. Ft 3087115.2 1

Sellable Area 3704538.24 FSI for sellable area 1.2* *20% for built up includes stairs, passage, balcony etc. Table 4: Sellable Area The present cost of the company is Rs. 11 Cr after including all expenses. It is a partnership firm an each partner has an unlimited liability, which means that the partners personal property is also included for paying off the debt of the company. The balance sheet states the fact that there is a lack of parity about the amount of unsecured loans brought in by each partner. There should be a clear set of conditions fixed on this matter as the partner which brings in more money has greater amount of risk involved. Therefore the partner with increased investment should get a higher percentage of return because of increased risk in the business or the respective partner should be given more authority and responsibility with respect to future plans. Moreover till now the interest expense on unsecured loan was not accounted for after inclusion of which there would be an increase seen in the cost of the land. Therefore there would be an inclusion of the interest expense in the books of accounts from next year.
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The company is presently at a crossroad where it has to take a decision about the future of the project. It has to decide on various problems of future and current times which are mentioned below. Problem Statement 1. Deciding whether the land should be sold keeping in mind that losses must be minimized. 2. Taking a decision about the method to be adopted for solving the issue of disputed land. 3. Selecting a product mix for the project and deciding on a development plan. 4. Evaluating the cash flow requirements keeping in mind the present and future conditions of the real estate markets. 5. Deciding on the mode of finance that the company should adopt after considering the profitability of all options. 6. Deciding on the marketing strategies for the project. 7. Deciding the requirements of the sales team.

Evaluation 1. Deciding whether the land should be sold keeping in mind that losses must be minimized. Macroeconomic analysis The prices of real estate move in a cyclical pattern. Therefore there is always a fluctuation in residential and commercial property markets. Like all other markets, the property markets work on the relationship between demand and supply. The cyclical trend occurs due to a lagged relationship between demand and supply and the tendency of the market to correct itself. The cycle usually has four phases as illustrated in the diagram below:

Figure 1: Cyclical Trend of Real Estate Markets The equilibrium rate is characterized by stability in prices as prices have reached the threshold limit and fewer businesses move into the given area. As shown in the figure above, a real estate market cycle has four main determinants. The first is job growth which is low in a region during the contraction and recession phase. The next is vacancy rates. A vacancy rate is the numeric value calculated as a percentage of all available units in a rental property that are vacant or unoccupied at a particular time1. Interest rates affect the phase of the real estate market cycle as rates are high in the recovery and expansion phase when people buy new houses. Before we describe which stage of the cycle BOPAL is in 1997, it is important to understand the macroeconomic factors that affect property prices in BOPAL. In 1997, the world
1

http://www.thefreedictionary.com/vacancy+rate

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economy was affected by the South East Asian crisis which started with the collapse of Thai Baht. The depreciation of the currency soon spread to most of South East Asia and caused a slowdown in the world economy in the form of a crash in the stock markets. India was affected by this crisis but not as badly as other countries. The South East Asian crisis mildly affected India whereas the ASEAN-5 Singapore, Thailand, Malaysia, Indonesia and Philippines saw a large fall in GDP. Fluctuations in the cyclical nature of real estate markets often occur because of changes in the demographics and economy of a particular region. By 1997 the economy of BOPAL was slowly moving to a service sector economy. The economy was characterized by the presence and growth of the IT sector. Therefore the demographics of BOPAL, which was known as an educational centre, completely changed. The number of young professionals increased and therefore the demand for housing increased. With the increase in investments in India in the form of direct FDI and the real estate boom of the early 1990s many investors were looking to invest in emerging real estate markets. With the growth of the IT and automotive sector and the sanctioned plans of the MumbaiBOPAL expressway, BOPAL fit the category of an emerging market in terms of economy and infrastructure. BOPAL also received FDI in the form of NRIs returning to India. The lifestyle of these NRIs was different from Indians as they did not depend on household help. Hence the demographics of BOPAL changed to include two new sets of people. The first was corporate who had a demanding schedule and would not have time for much housework and the second was NRIs who were used to a different lifestyle. Having understood these changes in demographics and the fact that India was affected very little by the South East Asian Crisis, it is safe to state that BOPAL was in the recovery phase of the real estate market cycle. BOPAL experienced job growth and construction has increased.

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Figure 2: Cyclical Trends of Real Estate Markets -2 As seen in the figure above, as the market progresses from the recovery to the expansion phase, the property prices will continue to rise. Hence from the macroeconomic perspective it is recommended that the land should not be sold. Instead the development of the land should start immediately. Financial Analysis The options of selling or developing the land should be considered using a cost-benefit analysis. In the case of this company land is considered as a product. Now the product of the company is in the process of making which means that it has not yet been converted into finished good. Thus such products which are partially completed are termed as work-inprogress. Such products have less value in the eyes of the customers as they have to incur additional cost over and above the selling price. Therefore such products are valued less as compared to their original value. The present land is a work-in-progress due to the carried forward expenses.

http://www.google.co.in/imgres?q=phases+of+a+real+estate+cycle&um=1&hl=en&safe=a ctive&sa=N&biw=1138&bih=508&tbm=isch&tbnid=sA5NRRUTldl8gM:&imgrefurl=http://doug mitchell123.wordpress.com/&docid=dsIDpwT3Q0Iz0M&imgurl=http://4.bp.blogspot.com/_cp Nlk43LRS4/SPEAX9L8AI/AAAAAAAAABs/8lurI2Sihhk/s400/SEO%252Bcycles_graph.jpg&w=400&h=313&ei=Fj -YTpjMOMbOrQf3yZGtCg&zoom=1

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Hence the value of the land is actually higher than the price at which it will be sold.

Area of Land (sq ft) 3087115.00 Cost of land / sq ft (Rs.) 35.60 Selling price/ sq ft (Rs.) 25.00 Table 5: Basic Information

Rs. Cr. Sales of Land 7.72* Cost of Land 11.00 Net Loss -3.28 *The total sales if the entire land is sold at Rs. 35.6 per sq ft Table 6: Net Loss if land is sold If the land is sold, Suvidha Constructions will incur a loss of Rs. 3.28 Cr. This loss is also unfavorable because the partners have cumulatively brought in at the end of 1997 Rs. 9.00 Cr as capital and Rs. 6.25 Cr as unsecured loans which they have to pay back. They have also taken a cumulative loan of Rs. 6 Cr which they have to pay back with interest. Hence keeping in mind the macroeconomic and financial analysis it is recommended that Suvidha Constructions keeps the land and develops it.

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2. Taking a decision about the method to be adopted for solving the issue of disputed land. Since the land that Suvidha has bought for Flushing Meadows was originally a part of the 36 fringe villages those which were merged into the BOPAL Municipal Corporation, there are bound to be conflicts between the locals and the company. As seen in the map of the area allocated for the Flushing Meadows project, a nalla (water body) lies to the west of the land. An NGO had filed a petition that Suvidha Constructions had encroached upon the nalla. The land allocated to Suvidha is clearly demarcated in the map. It is recommended that Suvidha reply to the petition with the help of their lawyers. They should settle the case in court. In the Eastern region of the plot is a 2 acre (87,120 sq ft) piece of land which is under dispute because some locals claim to own the land. An out of court settlement with them is possible which would cost Rs. 1.25 Cr. Suvidha should not settle the matter in this manner for two reasons. The company has already appointed lawyers for the issue relating to the nalla. They should follow legal procedures as the lawyers had assured them that they could win as they hold a stronger case. Secondly, the land will be developed in phases. The part which is under dispute is developed in the fourth phase (approximately after 4 and a half years dealt in the later part of the project) by which time the matter would be settled in court. This will lead to an increase in the legal expenses. These expenses would be much less as compared to the amount of out of the court settlement i.e. is Rs. 1.25 Cr. Moreover by looking at the present condition of the company it is seen that it does not have enough amount of funds to pay 1.25 Cr. Refer Exhibit for Map.

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3. Selecting a product mix for the project and deciding on a development plan Product Mix The product mix is selected from a range of products as shown in the product market grid below. The most important criteria for selecting a product is the number of market segments it caters to. The product market grid3 helps identify which products should be pitched to which segment of the market. Having understood the product market grid, the following product mix is proposed: PLAN buildings Type 2BHK sq ft/ apt 1200 1000 Bungalow 3 BHK 2050 2200 4 BHK 2600
Table 7: Product Mix

PLAN - houses Type Row House sq ft/house 3000 3500

The land at our disposal is extremely large. Hence the land needs to be used optimally keeping in mind the size and demands of each market segment. Development Plan a. Duration of Project The cost of construction depends on the time taken to build each building and house. The construction of a building is a complex procedure and involves a number of steps. Some of these steps need to follow a given sequence and some can take place in parallel. In order to optimize the time required to finish a project a Program Evaluation and Review Technique (PERT) is used. PERT is a network model that enables us to understand the completion time of activities.

Refer Marketing Strategy

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The PERT for the construction of a building/house must follow the following network diagram.

Figure 3: Stages of Construction

Each stage takes a certain amount of time and it is necessary to wait between some stages. Therefore the time taken to complete one building of 11 floors is illustrated in the tables below: Time to one floor start (nth week) 0 9 17 22 25 32 Complete finish (nth week) 8 16 17 24 27 34 Total Time to omplete one building start finish (nth (nth week) week) 0 8 9 16 17 57 22 54 25 57 32 64

Process

Time Taken

Lag Time

weeks/floor weeks/floor Excavation 8 Foundation 8 0 RCC 1 4 Walling 3 Plastering 3 4 Doors/windows finishing 3 Table 8: Time taken to construct a building of 11 floors

Therefore a building of 11 floors can be constructed in 64 weeks.

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Similarly, the time taken to complete one bungalow or row house of 2 floors is 32 weeks. Time Taken weeks/flr 8 8 1 3 3 /finishin g 3 Time to one floor start (nth week) 0 9 17 21 24 27 Complete finish (nth week) 8 16 17 23 26 29 Total Time to omplete one building start finish (nth (nth week) week) 0 8 9 16 17 21 21 26 24 29 27 32

Process

Lag Time weeks/fl r 0 3

Excavation Foundation RCC Walling Plastering Doors /windows

Table 9: Time taken to construct a house of 2 floors

Therefore PERT helps us understand the logical flow of the steps involved in construction and enables us to time the project perfectly. The only variable factor in the above time series is the number of floors. If the number of floors increases to 15, the time taken to complete the building will change to 76 weeks. Therefore, the time remains the same irrespective of the floor plan of the building. Having understood the time taken to complete one building/house, it is easy to determine the cash outflows arising from construction.

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b. Types of Houses 1. 2BHK 1200 sq ft

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Product Built up Area Carpet Area

2 BHK 1200 sq ft 1200 960 Room Toilet Total 195.3 120 315.3 360 88 81 39.3 78 961.6

Bedroom 1 Bedroom 2 Total of the rooms Living Kitchen Study Room Toilet Miscellaneous Total

156 120

39.3

In this 2 BHK house, on the left side of the entrance is a kitchen. The kitchen has separate section for the refrigerator. On the right hand side corner is the basin. The apartment also has a study room. It can also be used has a separate room for recreational activity or as a store room. The living area is divided in to two sections. One section is the TV area and the other section is the dining area. After the living room ends there are two bedrooms located on both the sides. The dining area leads to an open terrace. The master bedroom has attached restrooms. The second restroom is located next to the second bedroom but is common to all.

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2. 2 BHK 1000 sq ft

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Product Built up Area Carpet Area

2 BHK 1000 sq ft 1000 900 Room Toilet Total 195.3 140 315.3 400 88 39.3

Bedroom 1 Bedroom 2 Total of the rooms Living Kitchen Toilet

156 140

39.3

Total

900

This 2 BHK is slightly smaller than the previously described 2 BHK. On the left side of the entrance is a kitchen. The kitchen has separate section for the refrigerator. On the right hand side corner is the basin. The living area is divided in to two sections. One section is the TV area and the other section is the dining area. After the living room ends there are two bedrooms located on both the sides. The dining area leads to an open terrace. The master bedroom has attached restrooms. The second restroom is located next to the second bedroom but is common to all.

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3. 3 BHK 2050 sq ft

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Product

3 BHK 2050 sq ft

Built up Area Carpet Area

2050 1640 Room Toilet Total

Bedroom 1 Bedroom 2 Bedroom 3 Total of the rooms Dining Living Kitchen

172 172 172

53 53 53

225 225 225 675 240 330 175

Miscellaneous

215

Total

1635

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4.

3BHK 2200 sq ft

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Product

3 BHK2200 sq ft

Built up Area Carpet Area

2200 1760 Room Toilet Total

Bedroom 1 Bedroom 2 Bedroom 3 Total of the rooms Dining Living Kitchen Servant room Miscellaneous

172 172 172

53 53 53

225 225 225 675 240 330 175 90 245

Total

1755

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5. 4 BHK 2600 sq ft

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Product Built up area Carpet area

4 BHK

2600 2080 Room Dressing Wardrobe room 10 11 11 Balcony Toilet 40 44 40 45 Total 186 267 311 182 946 73 225 293 225 43 97 55 43 81 2079

Bedroom 1 Bedroom 2 Bedroom 3 Bedroom 4 Total of the rooms Entrance Dining Living Terrace Passage Kitchen Servant room Toilet Dry Balcony Total

136 146 200 137

66 60

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6.

Bungalows (3500 sq ft)

Ground Floor

1st floor

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7.

Row Houses (3000 sq ft)

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c. Distribution of Products across land

The various products mentioned in the product mix are distributed across the land. The 2BHK category has the highest land allotted to it as most of the targeted market segments are interested in 2BHK houses. Similarly, the Row Houses and Bungalows have the least amount of land allotted to them as very few segments are looking at buying these products. The distribution of products is shown below: Distribution of Product Mix Land (sq ft) 3704582 sq ft/ no. of no. Type apt apt flrs 2BHK 1000 4 11 1200 2 11 3 BHK 2050 2200 2600 3000 3500 4 2 2 11 11 11 2 2

of no. bldgs 18 18 5 7 11

of No. Houses 792 396 220 154 242 104 43

of % of total area (sq Land ft) 25 792010 15 475200 15 10 20 10 5 Total 451000 338800 629200 306000 154000 3146200

4 BHK Row House Bungalow

Table 10: Distribution of Product Mix

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d. Phases of Development of Land After knowing how many buildings and row houses of each type will be build over the five years, it is necessary to plan the development process to know how and when to target which segment. Hence the development plan is given in the table below: Year Area (%) sq ft/ apt 1000 1200 2050 2200 2600 2008 20% Bldgs 14 2009 21% Area* Bldgs 616000 4 18 2010 20% Area Bldgs Area 176000 475200 5 4 2011 25% Bldgs Area 2012 15% Houses Area

Type 2 BHK 3 BHK 4BHK

451000 193600 3 11

145200 629200

Row House 3000 B A Total Area 3500 111136 727136 111136 762336 111136 755736 138920 913320

104 43

306000 154000 83352.1 543352

Total Area
Table 11: Phases of Development of Land

3701881

*All areas are measured in sq ft Since the 2BHK and 3BHK houses can attract the most number of segments these are developed over the first three years of the project. Similarly, we want to ensure that the bungalows and row houses fetch us more money hence they are being developed in the last year where the prices will be the highest according to the macro economic trends.

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4. Evaluating the cash flow requirements after calculating the duration and the financials of the projects keeping in mind the present and future conditions of the real estate markets. a. Cost of Construction After identifying the development plan of the project, the next step is to understand the cost structure of the development. Total Cost of Construction: (For details refer exhibit) Nature of Cost Amount (Rs.) Variable Cost 3,67,76,31,866 Fixed Cost 88,00,03,365 Total Cost 4,55,76,35,231 Table 12: Total cost of Construction Variable Cost includes the following elements: Building construction Cost Amenities PHE Work

Fixed Cost includes the following elements: Open Space development Other development road construction Other costs - Administration Cost - Marketing Cost - Architect fees

Refer Exhibit for breakdown of use of land for development

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b. Selling Price As explained in the macroeconomic analysis, in 2008 the real estate markets are transitioning from the recession to the recovery phase. By 2012 the markets are expected to be at the peak of the expansion phase. This means that the prices will rise incrementally every year.

Figure 4:

Year 2008 2009 2010 2011 2012

Price/sq ft 1550 2010 2500 3000 3600

Increase in Selling Price

c. Distribution of Sales across project The table below shows the development and sales plan for the next 5 years. As we want to capitalize on the higher selling price in the last year, the sales are minimum when the selling price is low and the sales are high in the last year when the selling price is high. Land for development 3705000 sq km % development 20% 20% 20% 25% 15% of Land developed 741000 741000 741000 926250 555750 Land for selling 3148860 sq km Selling (Rs.) 1550 2010 2500 3000 3600 Price Sales (Rs. Cr) 48.80733 62.9772 157.443 188.9316 453.43584

Year 2008 2009 2010 2011 2012

% of sales 10% 10% 20% 20% 40%

Table 13: Sales Plan

Having understood the development and sales plan of the project, it is important to understand the costs of developing the land and the cash flows. This will enable us to understand whether we need external financing or the project will prove to be self sufficient. The cash flows also help us understand when the peak short fall in cash arises and hence helps us use external finance in an optimal manner.

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d. Projection of cost As per the details provided above we can summarize the development area in each year and also the percentage of land to be sold at a particular estimated price in each year. By taking into consideration the development happening in each year we can further estimate the cost that the company will incur. The table below shows the calculation of cost each year with bifurcation of fixed and variable costs.
YEARLY PROJECTED COSTS 2008 2009 2010 2011 2012 Total

Total area in % Area Development in each year Cost Variable Cost* Fixed Cost Total

20% 740908

20% 740908

20% 740908

25% 926135

15% 555681

73,55,26,373 17,60,00,673 91,15,27,046

80,90,79,011 17,60,00,673 98,50,79,684

88,99,86,912 17,60,00,673 1,06,59,87,585

1,22,28,12,596 17,60,00,673 1,39,88,13,268

80,54,01,379 17,60,00,673 98,14,02,052

4,46,28,06,270 88,00,03,365 5,34,28,09,634

*Variable cost is increasing at the compounding rate of 10% because of inflation and the real estate market being in the recovery stage
Table 14: Yearly Projected Costs

Variable Costs are further broken down into the following: Variable Cost Building Amenities PHE Break down & 91% 9%

Table 15: distribution of variable costs

Fixed Costs are further broken down into the following: Fixed Cost Road Area Others 1. 2. 3. 4. and Open 86 Rs./Sq. Ft. As a % of other cost Government Sanction Marketing Architecture Administration Every year equally distributed Accounting Treatment of each item

25% 25% 25% 25%

In the beginning of the year) Equal amount is accounted for every month Is paid twice in a year - duration of 6 months Equal amount is accounted for every month

Table 16: Distribution of Fixed costs

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Fixed costs are included in the cash flows according to the accounting treatment shown here. Taking into consideration the percentages given here the respective cost are calculated.

I. Cash Outflow Cash outflow is the amount of money paid by the organization for its operating, investment and financial activities. The variable costs depends on the stage of development that a building or house is in. The PERT in the previous section showed the time taken at every stage. Therefore in the first two months of the construction of the building the variable costs comprise of excavation costs and so on for the later months of the year. (Refer PERT and CPM chart above) Nature of Cost Variable Cost Fixed Cost Total Cost Table 17: Types of Costs Amount (Rs.) 3,67,76,31,866 88,00,03,365 4,55,76,35,231

Step 1: Break the 91% of the variable cost of building and amenities according to the month in which it is incurred. % of Variable Duration of the Beginning Time cost cost* 2 1st Month Excavation 15% 2 3rd Month Foundation 10% 8 5th Month RCC 20% 8 6th Month Walling 10% 8 7th Month Plastering 15% Doors and 8 9th Month Windows 5% 8 9th Month Finishing 25% Total 100% *All the cost are one time cost therefore once we start developing a particular land one cost goes till a specific time only. For example: Excavation cost is incurred in the first two months of the year only. Table 18: Distribution of Variable costs across stages of construction Step 2: Apart from the mentioned cost of 9% of PHE Work cost also included in the cash flow as part of the total variable cost.

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Step 3: Further these costs are divided into Direct Labour and Direct Material. Direct labour is accounted for in the month in which it is incurred and direct labour has been accounted for in subsequent months as there is a credit period offered by the suppliers for each function of construction. The table below shows the details of direct labour and direct material and the duration of credit period offered to each. Direct (DL) Labour Direct (DM) 35% Material Credit period for payment of costs DL Current Month DM Half of 35% with 1 month lag and the other half with 2 month lag* DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag DL Current Month DM 1 Month lag

Excavation Foundation RCC Walling

65% 65% 35% 65% 35% 65% 35% 65%

Plastering 35% Doors and Windows 35% Finishing 35%

65% 65% 45%

PHE Work 55% *this is because of good relations with the suppliers

Table19: Division of Costs as direct labour and direct material

Step 4: The Fixed Costs are spread over the months according to their occurrence which is mentioned in the fixed cost table above. Refer exhibit Hence here the cash outflow is calculated on a monthly basis, where each element mentioned in the table above is accounted for according to the actual cash expense made in the month.

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II. Cash Inflow Cash inflow is the money received by a company due to its operating, investment or financing activities. For cash inflows we have considered adopting the strategy of Book in advance, where the individual will have to make payment according to the development phase the building is in. The land is being developed in phases and the construction moves at a rate faster than the sales as per the development plan. Therefore it is necessary to receive income from customers as the construction progresses. Therefore if a customer buys a house during the excavation phase of the building, he will pay only for the excavation at that point in time. He will pay the remaining amount on a monthly basis as the construction progresses. However if a customer buy a house during the walling phase he will make a down payment of all the costs incurred in the construction of the building so far. After he has bought the house, he will pay for each stage as the work progresses on a monthly basis. The table below shows the distribution of income over different stages of construction. % of income Advance 15% Excavation 20% Foundation 15% RCC 10% Walling 10% Plastering 10% Doors 10% Finishing 10% Table 20: Distribution of income across stages of construction

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III. Net Cash Flows Having understood the process of cash inflows and outflow, the net cash flows are calculated. The net cash flow is the total inflows less the total outflows. The net cash flow helps identify the peak shortfall in cash. The annual cash flows are shown in the table below: Year Opening Balance Varaiable cost Fixed Cost Open Area and other Development Government Sanction Once Marketing Equal Architecture fess - 6 month Administration Equal Total Cost Cash Sales Cash Deficit/Surplus Closing Balance 2008 0.00 55.73 2009 -33.94 79.13 2010 -68.81 5.21 2011 52.55 7.15 2012 212.50 4.71

2.41 3.80 3.80 3.80 3.80 73.33

2.41 3.80 3.80 3.80 3.80 96.73

2.41 3.80 3.80 3.80 3.80 22.81 144.16 52.55 52.55

2.41 3.80 3.80 3.80 3.80 24.75 184.70 212.50 212.50

2.41 3.80 3.80 3.80 3.80 22.31 479.91 670.09 670.09

39.39 61.86 33.94 -68.81 33.94 -68.81 Table 21: Annual Cash Flow

For a detailed monthly cash flow refer exhibits 5. Means of Finance Identifying Means of Finance Two main sources of finance have been identified internal and external. If the internal sources can fund the entire project, there is no need to receive financing from outside the company. A. Internal 1. Advance Bookings Advantages: Even though it is known that the prices are likely to increase in the future, advance bookings help fund the project as the construction progresses.

Disadvantages:

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A major disadvantage of advance booking is not being able to deliver the promised rate of development. The risk of receiving a low price for a product that we know will appreciate in the future.

B. External 1. Corporate Loan Advantages In this option, all profits earned can be retained by the business.

Disadvantages: The business is liable to pay back the loan irrespective of a profit or loss by the business. The rate of a corporate loan is higher than a bank loan or the rate offered by a JV. The expense per month increases due to high interest rates. After applying, the loan can be availed of only after 12-24 months. The earnings through advance bookings have to be paid back to the corporate as EMI. Due diligence is high in corporate in terms of scrutiny of documents.

2. Joint Venture Advantages: The risk gets divided between two or more entities. The Venture Capitalist usually approves of the loan within a period of 30-60 days.

Disadvantages: The owner cannot take money out of the business during the period of the Joint Venture. The profits have to be shared with the JV as per the terms of the contract.

Employing Means of Finance Keeping in mind the costs and benefits of all the options it is suggested that a combination of internal and external means of finance be employed. Therefore a combination of advance booking and a joint venture will be used to fund the project.

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1. Advance Booking Having understood that an advance will be taken from customers at the time of booking a house, the annual income earned through advanced bookings are given in the table below: Year 2008 2009 2010 Advance from customers (Rs. Cr) 39.39 61.86 144.16 Table 22: Annual income through advance booking 2011 184.70 2012 479.91

2. Joint Venture The Joint Venture Partner will fund the cash requirements and earn a profit at the end of the project end of 5 years. The amount to be invested by the Joint Venture Partner is determined by calculating the present value of the future profits the JV will earn. The present value is the total value that a series of future payments is worth in the present. The variables used to calculate the present value are the interest rate, the number of payments and the future value. As per the projected Profit and Loss account, we will earn a profit before interest and tax of Rs. 364 Cr. Therefore to optimize the cash flow requirements, it is recommended that we enter into a JV of 15%. The amount to be invested by the JV in 2008 is shown by the table below:
Profits Profit Sharing Profits to JV Int Rate Number of years Present value Rs. Rs. Rs. 3647388552 15% 547108282.8 20% 5 219,870,548

Table 23: Joint Venture details The investment of Rs.219,870,548 is profitable for the JV Partner as he earns a return on investment of 472%.

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Cash Flow Requirements: Therefore, with an investment of Rs. 219,870,548 and advance bookings, the cash flow requirements are fulfilled as shown in the table below:
Year Opening balance Income from advances Expense Closing Balance 2008 2009 2010 Rs. 219,870,548.33 119,564,578.45 468,199,998.78 393853192.5 733288319.3 618620390.5 967255810.8 1441598041 228064907.3 2011 2012

745,333,134.51 2,344,846,668.63 1847048744 247535209.8 4799077819 223116653.6 6,920,807,834

119,564,578.45 468,199,998.78 745,333,134.51 2,344,846,668.63

All figures are in Rs.


Profit to JV In Percentage Rs. 1038121175 472%

Table 24: Cash Flow after financing

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6. Marketing Strategy
1. Market segmentation: The product market grid shown below consists of all the possible market segments and the products that Flushing Meadows offers. a. Preparing a Product market grid

Segments Retirees DINKS Bachelors Landlord (bachelors/students) Corporate Migrants General Investors NRI Investors Bachelors with high income Joint family 3 generation family Family - nulear Holiday Homes People from old buildings Corporates (selling to companies) NRI Return

2 bhk1000 sq ft YES YES YES YES YES YES YES YES YES

2 bhk- 3 bhk- 3bhk1200 2050 2200 sq ft sq ft sq ft YES YES YES YES YES YES YES YES

4 bhk2600 Row sq ft Duplex Bungalows houses

YES YES YES YES YES YES YES YES YES YES YES YES YES YES

YES

YES

YES YES YES

YES

YES YES

YES YES YES YES

YES YES

YES YES YES

YES

YES

YES

YES

YES

Table 25: Product Market Grid

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b. Market Segments Retirees Retirees belong to that segment of the society who prefer staying away from the hustle and bustle. They choose to stay in an environment with the neighbourhood of their age group. The most important factors for them are security, health care facilities, parks and easy transportation availability. They usually dont prefer high tech constructions rather choose simple ones. A retiree might invest in his second home utilizing his savings and the money received through pension plans, hence he might not be looking for an expensive living. There could always be exceptions of retirees who have spent all their lives earning and would now like to invest in to luxury apartments. As this project is situated in the outskirts of BOPAL, the retirees could sell their previous houses in exchange for a bigger and better housing away for the monotonous city life. DINKS DINKS (dual income and no kids) are a newly formed segment of the society. They are often the target of marketing efforts for luxury items. This segment comprises of working married couples who dont have kids. These couples are usually newly married and prefer young crowd around. They like luxurious and high tech construction that not only caters to their usability but also defines their style statement. They also prefer homes near their work place to reduce the travel time. They look for easy accessibility to shopping complexes and grocery stores. They prefer all possible amenities around, for instance, jogging track, gymnasium, club house, swimming pool etc. Family Nuclear Family This segment prefers good locality and warm environment like many others. Nuclear family comprises of a married couple and their child/children. Hence it is extremely important for them to have a helping and secure neighbourhood. While selecting homes they look at the distance between their house and the work place. They also prefer their house to be close to their childs school. They desire good amenities and facilities for recreation. Joint Family This segment prefers good locality, amenities, infrastructure, and good connectivity. Income is not a hurdle while targeting this segment. As the family comprises of quite a few earning members, they do not concentrate on ROIs or re-sale value of the house. They chose to stay in big and spacious houses. Corporate
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Around 1997 there were several IT and Automobile firms that were setting up base in BOPAL. The IT companies were setting up base around Hinjewadi in the Rajiv Gandhi IT Park. As a result there were several corporate employees that would require housing. Mid and high level managers would want houses in these areas. They have lives with long working hours and relatively high stress. They would require a peaceful house to come home to, with plenty of amenities in the building to enjoy the little free time that they have. They would require houses close to their work place, since they would not like to travel. Companies Companies have money to invest in property. Most company HR policies give money to their employees to pay for their accommodation. They are called House rent allowance. Some companies also offer low interest loans to their employees in order to help them buy a house. Instead of paying for their employees rent, it would make sense for companies to just spend that same amount of money per month on EMIs and then buy the house instead. Companies also have a lot of employees that visit BOPAL from time to time. These employees would require places to stay. Instead of putting them up in hotels, companies could put them up in serviced apartments that they own. NRI Returns This market segment desires for spacious and luxurious apartments. This segment is expected to return back to India for good. Hence they prefer maintaining their style statement and family lifestyle. They desire for good connectivity, infrastructure, amenities, good locality, and to an extent re sale value of the house. Investors Investors care mostly about the ROI. To them, the cost of the house is important. To them the re-sale value of the house is important. To them, the rate of increase in property prices is important. BOPAL is generally considered a safe place for property investors. Landlords We assume that these landlords specifically invest for bachelors and students in the city. This segment comprises of students and the low income group of bachelors who stay in these apartments on rent. The investors therefore particularly look at the re sale value of the apartment. Landlords also desire for good connectivity for their tenants. Bachelors and students dont emphasize on luxury or infrastructure as they look for houses with affordable rents.

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c. Criteria for selecting market segments Market can be segmented using various base elements. Bases for segmentation in the consumer market can be divided as: Geographic Segmentation With the help of geographic segmentation we have chosen our market grid. Geographic location is a major factor in segmenting as it helps us determine our potential customers. The various geographic factors taken in to account are population density, climate and geographical location of the product. Demographic segmentation: With the help of this segment we have categorized the market using different demographic factor such as age, gender, education, income, family size and status. Psychographic Segmentation: Psychographic segmentation is very important to understand the choice preferences of the buyer. It is based on variables such as values, attitudes and lifestyle. Psychographic segmentation helps understand the needs of a buyer. The factors involved in the psychographic segmentation helps evaluate the demands of the buyer as shown in Table-3. Behaviour Segmentation: Behavioural segmentation is related to the behaviour of the buyer. It is a different method altogether as there is a distinction between buyers characteristics those which are reflected by their geographic, demographic and psychographics profiles and their buying behaviour

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d. Strategy for selecting a market segment A combination of two market strategies has been adapted for this project. The two market strategies are selective specialization and market specialization. Through selective specialization flushing meadows offers different marketing mixes to different segments. For instance the variety in 2 BHK houses and 3 BHK are not very different from each other but promotional message and distribution channels vary. On the flip side the project also specializes in serving a particular market segment and offers that segment an array of different products. The Project mainly emphasizes on high income group of the society. It has been observed that BOPAL experienced a boom in the automobile industry in 1995 and the boom kept escalating over the years. This pattern justifies that people were adapting to high standards of living. The final market grid has been chosen depending upon the products which targeted maximum market segment. For instance, as depicted in the table General Investors would be interested in most of the products proposed by Flushing Meadows.

Column1 General Investors NRI Investors Nuclear Family NRI Return Company for employees Corporate Migrants DINKS Landlords v(bachelors/student s) Joint Families

2-BHK1000sqft YES YES

2-BHK1200sqft YES YES YES YES YES YES YES YES

3-BHK2050sqft YES YES YES YES YES YES YES

3-BHK2200sqft YES YES YES YES

4BHK YES YES YES

Row House s YES YES YES

Bungalow s YES YES

YES YES YES YES

YES YES

YES

YES YES

YES

YES

YES YES
Table 26: Selected Product Market Grid

YES

YES

YES

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The market segment is further divided depending upon the preferences on which the target audiences chose their place of living. The grid below describes the features that every buyer would consider before investing in a home. The preferences could be never ending but the grid below consolidates the most important ones.
Income General Investors NRI Investors Nuclear Family NRI Return Corporate Company for Employees Migrants DINKS Landlords (bachelors/students) Joint Families YES YES YES YES YES YES YES YES YES Resale Value YES YES YES YES YES YES YES YES Amenities Connectivity YES Locality YES YES YES YES YES YES YES Luxury Infrastructure YES YES YES YES YES ROI YES YES

YES YES YES YES YES

YES YES YES

YES

YES

YES YES YES Table 26: Preferences of Buyers YES YES

After analyzing Table-25 and Table-26 market segments can be clubbed together depending upon the audiences preference to buy houses. For instance after analyzing Table-3 we could conclude Corporate, DINKS and Migrants have similar preferences and they can be clubbed together. We have clubbed these sections to reduce the training costs of the sales department that we shall be employing in order to market flushing meadows. The sales department will now be required to research only on particular market segments and specific demands of the concerned market segment. For instance, primary needs of Joint families and Nuclear families are good amenities, good locality, good connectivity and good infrastructure. Hence the sales person handling joint family and nuclear family buyers will explicitly market the product depending upon their geographic, demographic, psychographic and behavioural segments. The sales person will now have to particularly concentrate on the preferences and the needs of Joint families and Nuclear families.
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2. Marketing Objective We want to sell the following apartments within the following time frame: 792 2bhk apartments of 1000 square feet (2008-2012) 396 2bhk apartments of 1200 square feet (2009-2012) 220 3bhk apartments of 2050 square feet (2010-2012) 154 3bhk apartments of 2200 square feet (2010-2012) 242 4bhk apartments of 2600 square feet (2011-2012) 51 row houses of 3000 square feet (2012) 22 bungalows of 3500 square feet (2012)

3. Marketing Plan: a. Product positioning: To differentiate our product we have decided to brand it as having ample open spaces and being an environmentally friendly product. The reason we have decided to market the open spaces is because we have a massive plot of land. Our primary audience which includes corporate, companies and NRIs would like to have open spaces to maintain a certain lifestyle. Most buildings or complexes have limited land and hence cannot offer much open spaces. Also we have decided to position the product as environment friendly. The reason for this is that we want to set ourselves apart from the competition. Most of the competition is focusing on affordability as well as amenities as their USP. Instead we will take a unique approach and market the building as being high class and environment friendly. The environment friendly products that we will be offering are solar water heating, rain water harvesting, light pipes etc. The environment friendly trend is very famous in the western world but hasnt reached India yet. We want to be the first ones to introduce this concept to the society. As our target audience comprises of corporate, NRI and investors, this environment friendly concept should appeal to them.

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b. The 4 Ps of marketing: Price: The price at which we are trying to sell the apartments will be different at different points in time. This is because of the constant rise in real estate prices. The rates that we will be charging for each product is estimated to be as follows: Type 2BHK sq ft/ 2008 2009 2010 2011 2012 apt 1000 1550000 2010000 2500000 3000000 3600000 1200 2400000 3000000 3600000 4320100 2050 2200 2600 3000 5125000 6150000 7380000 5500000 6600000 7920100 7800000 9360000 9000000

3 BHK

4 BHK Row House

Bungalow 3500 Table 27: Prices of various houses over 5 years

12600000

Promotion

In flight advertising: (Investors) We will publish our advertisements in flights along a particular route. The route will be BOPAL-Mumbai. The reason for this is that anyone who travels from BOPAL to Mumbai by air in 1997 instead of using the high way is obviously a very high net worth individual. This method of advertising is likely to bring in a lot of potential customers. Print Media: (General PR of the project) In 1997 the internet wasnt yet very big in India yet. Neither was the radio. Television and the print media were the primary methods of communication. We intend to use the print media to target the local and national audiences. Selective print media would be more effective. We wish to use the print media for PR purposes instead of advertising since it would be cheaper and more effective. We would position our product as being one of the first entirely eco friendly projects in India at that time. The articles and editorials would come in the following Print Media: 1. BOPAL Times: An editorial which states one of BOPALS first eco friendly constructions. 2. India Today: An article which talks about one of Indias first eco friendly construction
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3. Elle Dcor: Row house, Bungalows, Luxury 4 BHK apartments Direct Approach (Companies): Meet company executives directly. The salesman will be of a high status level and his income will be on a commission per sale basis. This will give incentive to the salesman. Also the offer to the company would be that they get a price that is lower than the market price. Most companies have and HRA policy (House Rent Allowance). Under this policy, the company pays the rent of the house that the employee is living in. Our sales person has to convince the company that it doesnt make sense paying rent for so many years and then not even ending up with ownership of the property. Our salesman will suggest that instead the company should buy our property on a loan (The EMI of the Loan is equal to the rent amount that the company would be paying anyway). Such an offer would be very difficult for a company to resist. Furthermore, we would target MNCs who dont have a well established base in India/ BOPAL. Since they are new to the country and are trying to set up base, they may be more tempted to accept our offer. Exhibitions: (Investors) We can target various property exhibitions to attract investors. These exhibitions could be national exhibitions, local exhibitions or international exhibitions depending on the type of investor that we are trying to attract. Times Property Expo is one of the exhibitions that we wish to target. Brokers: (Local Nuclear and Joint Families) We will inform all the brokers in the near vicinity of the project and offer them attractive commissions on sales that are made: Direct Mail/ Direct calls: (locals) We would get information from various society managers of different buildings as to the data of who lives in the building and the customer profile. We would find out all the people who are living in rented apartments and then target them through direct mails or more preferably by directs calls. Advertisements within companies: (Corporates) Ask IT companies and automobile companies to circulate a notice via emails on their managers personal IDs speaking about Flushing Meadows. The special offer that we would offer managers from the companies is that they would get a special discount which is exclusive to employees of that particular company. The advertisement which the employee would see on his email account would be a 3D digital model of the house. This would give the employee something to visualize, since the project doesnt yet exist. Hoarding outside car showrooms/ 5 star hotels: (General Branding)
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You can be quite sure that if someone is going to buy a new car they have a decent amount of disposable income. Also if someone is going to have a meal at a five star hotel you can be quite sure that they too have a decent amount of disposable income. A branding advertisement could be strategically placed outside such areas. The advertisement will contain no more than the name and the tag line of the project. This will serve to reinforce the brand value among the elite and will also create some curiosity and buzz amongst them. BOPAL Airport: (General Branding) Since the project is going on over a span of five years, our marketing strategy should also include some brand building. An eye catching 3D model of the building in the middle of BOPAL airport, with the project name only, will create a lot of buzz among all the people in BOPAL. One can assume that in 1997 all those travelling from BOPAL by Plane belong to a certain class of society. Place:

The place for a real estate project is of Prime importance. The place for our project is Baner. Product:

The products offered by us are as follows: 2BHK 1000 square feet 2BHK 1200 square feet 3BHK 2050 square feet 3BHK 2200 square feet 4BHK 2600 square feet Row house 3000 square feet Bungalow 3500 square feet

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7. Team Our market segment is broadly categorized in to four sections as follows: 1. General Investors, NRI investors and NRI who have returned back to the home country for good. 2. Joint families and Nuclear families 3. Companies which buys for their employees and landlords of students and bachelors 4. Corporate, DINKS and Migrants Our team shall comprise of six departments namely, HR, marketing, finance and sales. For every section we could have a sales team of six. These four will specialize in their respective market segment. For example, sales team A will be only responsible for catering the market audience that involves Corporates, DINKS and migrants. Sales team A will be entirely responsible to identify the needs of this segment of the society and the method in which different products will be positioned to the concerned segment.

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