AN INDUSTRYANALYSIS OF THE REAL ESTATE SECTOR By: Arunav Nayak (11DM059) Sanjeev Kumar (11DM017) Sudeshna Sahu (11DM039) Sulekha Routray (11DM104)
APPROACH Analysis of the Real Estate Cycle and the parameters affecting it Current Scenario of Real Estate in India Analysis of the segments of the Real Estate Industry (i.e Residential, Commercial, Retail and Hospitality) Key Players in the Indian Real Estate Sector Market Performance in NSE Global Trends Application of Porter’s 5 Forces Model
REAL ESTATE CYCLE Real estate cycles are described as cyclic movements of price in the real estate market which, over a period of time, causes fluctuations in the residential and commercial property market. The real estate cycles involves periodic shifts of rapid growth of output (recovery and prosperity),alternating with relative stagnation or decline (contraction or recession) over time.
PHASES OF REAL ESTATE CYCLE Recession Recovery Expansion Contraction
INDICATORS OF REAL ESTATE CYCLE Population growth Employment rate Gross Domestic Product Household Disposable Income Stock Market Values Demand Supply Scenario Average house price movement Price to income ratio Net Rental Yield Interest Rate Demand Supply Scenario
CURRENT SCENARIO OF REAL ESTATE IN INDIA Biggest Prospect for Real Estate – IT/ITeS Economic Downturns in US & European markets has hampered the profit margins of such companies and consequently IT companies have begun cutting costs on real estate expenditure GDP Share of the real estate sector along with business services was 10.6% in 2010-11 Demand for real estate is expected to grow at a compounded annual growth rate of 19% Institutional credit for housing investment is growing at a CAGR of 18-20% per annum
According to World Bank’s Doing Business 2012 report, India is one of the top countries in housing & workspace needs, but ranks 181 in terms of construction permission processes Current size of the Indian Real Estate market is $65-70 billion out of which the residential segment occupies 90-95% of the market, commercial segment occupies 4-5% and organized retail with 1% of the market
GROWTH DRIVERS OF INDIAN REAL ESTATE Rapid urbanization Significant rise in consumerism Policy and Regulatory reforms (100% FDI relaxation) Surge in Industrial and Business Activities Increasing demand for newer avenues for entertainment, leisure and shopping
MARKET SIZE OF INDIAN REAL ESTATE US $ Billion70605040 US $ Billion302010 0 2008 2009 2010 2011 Source: CCI Report on Real Estate in India Aug 2012
SEGMENTS OF REAL ESTATE SECTOR IN INDIA Residential Commercial Retail Hospitality
RESIDENTIAL REAL ESTATE Phases of growth: Phase I (2001-2005): Initial growth phase with off take and prices picking up Phase II (2006-2008): High growth phase with high demand and prices more than double Phase III (2009-2010): Substantial slowdown in demand due to dented affordability and economic environment Phase IV (2011-2014): Consolidation phase, with demand, supply and prices gradually moving up in line with improvement in economic environment
This segment is highly influenced by economic cycles. Owing to global meltdown, the residential real estate market in India too witnessed an astounding fall in demand and capital values, between first half of 2008 and first half of 2009. Average residential capital values declined by 18-20 per cent in March 2009 from the peaks witnessed during the first half of 2008. Recently there has been a pickup in demand due improvements in economy
COMMERCIAL REAL ESTATE The commercial real estate has been driven largely by the growth in service sectors, especially IT/ITeS and with this began movement from CBD’s (Central Business Districts) towards city suburbs. Tax sops on the profits of IT-ITeS companies also led to massive development of IT Parks and SEZs (Special Economic Zones) Demand for office space is directly linked to addition in number of employees, which in turn is dependent on economic growth. When economy slows down, companies hold their expansion plans leading to lower demand for office space.
Due to the Subprime crisis and the ongoing Eurozone crisis, the demand for commercial space has come down drastically. Subdued demand and rentals has impacted the execution adversely in addition to cancellation of many projects. Sustained decline in this segment past 2008 has been the result of postponement of expansion plans by corporate.
ORGANIZED RETAIL REAL ESTATE The retail industry in India is in slowdown despite attaining peaks of CAGR at 28% in the 2005-08 period. The industry is expected to increase at a CAGR of 14% in the short term and 19% over the next 5 years. Organised retail penetration has grown to about 5.6% in 2009-10, which is further expected to increase to about 7.3% by 2012-13. Key driving factors for growth of this sector includes lavish lifestyles, high disposable incomes and a propensity to spend.
HOSPITALITY SECTOR REAL ESTATE Rising incomes, higher weekend trips and increased access to travel-related information over the Internet have propelled growth in hospitality. From 2003-04 to 2010-11,the market size of the hotel sector has more than doubled from Rs 77.13 billion in 2003-04 to more than Rs 200 billion in 2008-09, registering an impressive CAGR of more than 15% In 2008-09, the market size decreased by around 4 per cent due to decline in revenues. The hotel industry faced a fall in room demand due to the global financial crisis and the 26/11 terror attacks in Mumbai.
Demand is expected to increase at a CAGR of 15 per cent while room availability is expected to record a CAGR of 9 per cent across premium segments. Business destinations are poised to see higher growth in room inventory compared to leisure destinations.
KEY PLAYERS IN THE INDIAN REAL ESTATE DLF Ltd1. Presence across 30 cities in India2. Residential, townships, commercial complexes, IT parks, hotels etc pan its project coverage3. It is the only real estate company to be listed in BSE Sensex, NSE Nifty, MSCI India Index and MSCI Emerging Markets Asia Index
UNITECH1. First developer to be certified ISO 90012. Offers diversified projects across residential, commercial and IT parks, retail, hotels etc.3. First real estate company to be listed in NSE Nifty4. Has ventured into infrastructure business as UNITECH Infra
Ansal API1. Market leader in the NCR region2. Project spectrum includes integrated townships, group housing, shopping complexes and malls, hotels, IT parks and SEZ segments, and Infrastructure and Utility services3. Land reserves of about 9335 acres
SECTOR MARKET PERFORMANCE (NSE) The market trend in NSE for last 7, 15, 30 and 90 days can be obtained In this presentation, there will be focus on top gainers and losers over a period from 14th September 2012 to 28th September 2012
GLOBAL TRENDS As per a report published by Scotiabank dated September 14, 2012: Among the international property markets tracked, the number of countries reporting declining average real prices on a year-over-year basis outnumbered those reporting price increases by more than two to one. Weak consumer confidence, high unemployment and tight credit conditions continue to weigh heavily on housing demand and pricing.
Housing markets remain weakest in Europe, where sharp fiscal austerity, rising unemployment and financial sector strains are deepening recessionary conditions. In European countries that are financially sound, there were some tentative signs of improvement. The U.S. housing market is showing increasing signs of recovery.
U.S. homeowner affordability, rising rental costs and strengthening household formation are contributing to the pickup in sales. Lower inventory levels and a falling share of distressed property sales also have contributed to the stabilization in prices, though significant differences in local market conditions persist. An increasing number of cities in China are seeing renewed home price appreciation. This is being supported by an easing in monetary conditions .
APPLICATION OF PORTER’S 5 FORCES MODEL TO INDIAN REAL ESTATE The analysis of 5 Forces model has been done to determine whether the Indian Real Estate sector will remain profitable in the years to come It is important to consider the impact of the Eurozone Crisis as well as the Subprime Crisis
THREAT OF NEW ENTRANTS There will be decrease in profitability due to increase in the number of entrants. As a result of the economic downturn around the globe, it has been difficult for the new entrants to get a hold because of cost reduction in expansion plans by corporates in real estate, little scope in commercial construction, and strong rivalry between existing firms. Result: Relatively weak threat of new entrants
BARGAINING POWER OF BUYERS Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry. Customers significantly influence the business operations in real estate. Customers do possess a threat of integrating backwards. Consequently, the bargaining power of the buyers is strong.
BARGAINING POWER OF SUPPLIERS An important category of suppliers is the bank. They have the power to decide whether to fund a venture or not and at what rate. Banks have now become highly conservative especially after the economic downturn. Are significantly affected by the monetary regulations like the Repo rate & CRR formulated by the Central Bank of the country. This is in turn affects the real estate sector. Consequently the bargaining power of suppliers is very strong
THREAT OF SUBSTITUTE PRODUCTS AND SERVICES In real estate business, substitute might be some type of totally new retail space, some new location for office space or rehabilitation instead of new construction. The threat of substitute in real estate business and its impact on profitability of the industry is quite ambiguous and difficult to establish given the economic downturns and the recovery mode of the real estate business cycle.
RIVALRY AMONG EXISTING COMPETITORS Rivalry is strong due to the large no. of real estate firms operating in India (65 in total) and the difficulty to differentiate The services offered by real estate companies cannot be differentiated because these firms don’t offer a product, other than the facilities they lease and this itself is very difficult to quantify. In the current economic crisis, there is minimal profitability and only companies with large cash reserves are likely to survive.
ANALYSIS Considering all the 5 forces, it can be said that the real estate industry is not very profitable at this stage as it was before the subprime crisis of US in 2008 But considering the fact that the real estate cycle is in the recovery stage right now and given that the demand for real estate is growing at a CAGR of 19%, it can be said that there are still bright prospects ahead in a country like India.
REFERENCES (August 2012). Real Estate Sector in India. New Delhi: Competition Corporation of India (CCI) http://www.cci.in/pdf/surveys_reports/real-estate- sector-india.pdf Warren, A. (September 14,2012). Global Real Estate Trends. Toronto: Scotia Bank http://www.gbm.scotiabank.com/English/bns_eco n/retrends.pdf Porter, M. E. (June 2002). Competitive Strategy and Real Estate Development. Harvard Business School , 9. http://www.isc.hbs.edu/Porter_Strategy_Real_Est ate1.pdf
Dr.V.Chandrasekhar, G. S. (2011). Indicators of Real Estate Cycle - Implication for India. ICREI, ISB , 20.