PORTER’S FIVE FORCES ANALYSIS

REAL ESTATE SECTOR IN INDIA

Compiled by: Abhinav Srivastava Akash Sen Atish Mukherjee Samarth Upadhyaya

Bargaining Power of Buyers

Residential buyers

o India's urban population is estimated to touch 590 million by 2030, from 340 million

in 2008, according to McKinsey Global Institute. This increase at an annual growth

rate of 11.36 per cent will directly result in increase in demand of residential real-

estate in the country.

o Moreover, the economic condition of the country is improving, resulting in higher

savings with the people. They are intending to go for improved housing facilities

adding on the demand of Residential real-estate in the country.

o As demand is much more, Buyers are having less and less bargaining power and the

prices are expected to rise by 10-15 per cent in India in the next five years.

According to RBI’s Housing Price Index, Prices of residential real estates in nine

major cities increased by more than 20 per cent y-o-y in Q4 of 2012-13. On an

average, the index of house prices increased annually by around 21 per cent during

the past four years as per the index.

o Housing slump in 2013

Year 2013 was mired in a housing slump caused by subdued sales and piles of unsold

inventory. According to a research by property research firm Liasas Foras shows that

Mumbai saw the maximum inventory of unsold homes at 155.27 million square feet

or 48 months of unsold inventory during the first quarter of FY14. For NCR, the

inventory has more than doubled to 31 months in the first quarter of FY14.

According to the Residex, an index by National Housing Bank to track the movement

of prices of residential properties on a quarterly basis, during the period between

April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall

in prices.

Source: RBI’s Housing Price Index

This correction in the market due to the slump improved the bargaining capacity of

residential house buyers and the sellers struggling to raise funds in the sluggish

market started coming out with assured buyback/return schemes to attract buyers.

They also started coming with schemes like 20-80 payment option in which a

property buyer has to pay just 20 per cent of the price upfront while the rest can be

paid at the time of possession.

Commercial buyers

o Sluggish economy had a direct effect on the prices of the commercial real estate in

the country and due to low demand, buyers had an upper hand in bargaining with

the developers as the sales was down. In the NCR, the supply of Offices was much

more than the demand and vacant estates were high.

o Between 2008 and 2012, the office stock in Mumbai doubled from 47.4 million

square feet to 95.1 million square feet, according to real estate consultancy Knight

Frank. Vacancy, as a result, went up sharply from 4.3% in 2008 to 23.2% in 2012;

rentals fell 10-40% during the period shifting the market in buyer’s favour.

Source : Business Today

Source: Business Today

Bargaining power of the suppliers

The Real Estate sector exudes a large influence over a number of suppliers including

Financial Services, Steel, Cement, Glass, Paints, Furniture, etc.

o Financial Services

The source of funding for real estate funding is through a mix of internal

accruals, customer advances, and debt. Debt forms the major chunk of

funding. The total exposure of banks calculated as percentage increase in

lending towards the real estate sector has also followed a decreasing

trend. Bank loans to real estate sector have increased only by around 12%

in FY12 against FY11 whereas, the same increased by around 23% in FY11

against FY10 indicating the cautious outlook of the banks towards the

sector. And even when the debt is extended, the terms are inclined in

Banks’s favour.

Thus the bargaining power of financial services as a supplier to the real

estate industry is pretty high.

o Cement

As per the Aranca Research, 64% of cement demand was from the

Housing Sector, followed by other sectors. Moreover, the production and

domestic consumption of cement are almost at the same level. Due to

presence of large number of cement suppliers and real estate being the

growth driver of the cement industry, the bargaining power of the

cement suppliers is less.

Source: Aranca Research

o Steel

The construction sector accounts for around 60 per cent of the country's

total steel demand. As the consumption of steel is dependent on real-

estate and infrastructure industry, these industries have an upper hand

and the bargaining power of steel suppliers is less.

Threat of new entrants

Economies of scale

o The economies of scale allow the existing players in the market to build more

and more apartments at a reducing cost. This effect is quite prominent in real

estate sector, wherein, established players produce more output at reduced

making it substantially difficult for the new players to enter the market and

succeed. Thus, the competitiveness of new entrants is less as and when they

try to enter the market.

Absolute Cost Advantages

o The already existing companies have huge advantage in terms of cost. As the

land on which the construction has to be done as well as the technological

advantage that they have allows them to have a sufficient cost advantage

especially over new entrants. The cost advantage, thus, might act as a

discouraging factor for new entrants into the market.

Product Differentiation

o The bigger players have moved on to creating smart cities rather than just

developing apartments in order to differentiate their offerings from the

smaller rivals. The prominent examples include Jaypee Greens on Noida-

Greater Noida Highway, Lodha Group in Hyderabad and Mumbai etc. These

bigger players came out with niche and high end products catering to

esteemed needs of rich buyers.

Source: JSPL May 2013 presentation, Aranca Research

Technological Advancements

o With established players using more and more advanced technologies

especially in the shuttering equipments, ready to use concrete mix etc., make

it harder for the newer entrants to compete in terms of technology which

influence their pricing competitiveness.

High switching costs for customers

o Real Estate sector especially in residential sector involves high switching costs

for the customers. This forces the customers to stick to the present real

estate suppliers, even though the new entrants might provide a better deal

to the customers.

Government and Legal Barriers

o A real estate developer needs to follow a number of laws even before entering the

market. The major laws that govern the sector include

Registration Act, 1908

Special Relief Act, 1963

Urban Land (Ceiling and Regulation) Act (ULCRA), 1976.

The Indian Evidence Act, 1872

Rent Control Acts

The Town & Country Planning Acts

Land Acquisition, Rehabilitation and Resettlement Act, 2013

o Union Government will be introducing the Real Estate Development

Regulatory Bill in the winter session of the Parliament, in order to put a check

on the unscrupulous builders who try and escape responsibility of providing

promised facilities to the property buyers.

o These rules and regulations make it harder for the new entrants to enter the

market.

Existing Internal Rivalry

Diversity of Competition

o The residential real estate market is largely localised and there are several

small players that run mainly as family businesses and lack any professional

structure.

o The localization gives a strategic advantage to these small players forcing the

bigger players to go for either product differentiation or reduced prices.

Product Differentiation

o The rivalry and competition between the firms compels them to keep costs

under limit and cut down on their offerings in residential real estate sector.

As the bigger players cannot match the prices, their presence is limited in the

space.

o Big corporates like Tata Housing, Adani Housing and Mahindra Lifespace are

the existing players in the sector. But many large players have left this space

as it’s tough to operate in the low-margin environment.

o The bigger players have moved on to creating small and smart cities rather

than just developing apartments in order to differentiate their offerings from

the smaller rivals. The prominent examples include Jaypee Greens on Noida-

Greater Noida Highway, Lodha Group in Hyderabad and Mumbai etc. These

bigger players came out with niche and high end products catering to

esteemed needs of rich buyers.

Exit Barriers

o The exit barriers in terms of Government Regulations are relatively lower in

the real estate sector making it easier for them to relinquish the sector and

leave.

Threat of substitutes:

There are hardly any substitutes for Real Estate rendering the factor “Threat of Substitutes”

a little less effective to analyze the sector.

Conclusion:

Real estate industry continues to remain fragile in FY 14. As per the analysis, the bargaining power of buyers and suppliers with the sector is weak and is in favour of the sector. Moreover, there is no direct substitute of the sector. The internal rivalry is helping the sector to be cost-effective and efficient. Government policies and plans are also in favour of the sector. They are expected to bring a positive effect on the sector pushing it on the path of high growth. Combination of the above factors and aggressive marketing and pricing of inventory will help the real estate players to stride on smoother ground and help real-estate to be a start performing sector of the Indian economy in the coming decade.