Decoding the realty challenges

Decoding the

realty challenge

kpmg.com/in

01. Foreword 02. Introduction 03. Real estate value chain 3.1 Conceptualisation

3.1.1 Land/site acquisition and maintenance

3.1.2 Project feasibility study and securing funding

3.2 Planning and designing

3.2.1 Approval and designing

3.2.2 Project scheduling and budgeting

3.2.3 Procurement and contracting

3.2.4 Sales and marketing

3.3 Development stage

3.4 Handover and maintenancen

3.4.1 Project handover and closure

3.4.2 Maintenance

04. Conclusion

Table of contents

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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1. Foreword

The real estate sector in India has witnessed phenomenal change since the start of the 21st century, grabbing the attention of the global audience. The sector’s strong growth is likely supported by high economic growth, regulatory and taxation reforms, rising disposable incomes and urbanisation. The growth has brought along several visible transformations in the sector.

The major transformations in the sector are increased scale, development of new operating models (leasing and rental), introduction of corporate, introduction of new regulations, advancement in technology, and newer funding sources (private equity, non-banking financial companies etc.), as well as product offerings.

This transformation has also likely resulted in the emergence of new challenges across the entire value chain of real estate development. Barring a few large developers, who have developed sophisticated protocols to deal with these challenges, the sector at large seems to be still grappling with these challenges.

This study, a joint initiative by KPMG in India and CREDAI — discusses the challenges in the real estate sector across the value chain and the role of various stakeholders and their evolution. We hope that you find the study interesting and useful.

Neeraj BansalPartner and HeadReal Estate and ConstructionKPMG in India


2. Introduction

India has seen an urbanisation wave since the turn of the century, which has put the country on a fast growth path. Between 2001 and 2011, about 9.1 crore population moved into the city, increasing the urbanisation rate from 27.8 per cent to 31.1 per cent respectively1. This growth resulted in housing stock in urban areas to more than double to 11 crore providing ample growth opportunity to domestic developers. The urbanisation trend is still strong as it is expected that urban areas in India would continue to add about 1 crore population (slightly more than population of New York City) annually for the next 20 years2.

The domestic real estate sector, supported largely by urbanisation, witnessed significant changes and advancement with respect to its growth, scale, operating models (leasing and rental), introduction of corporate, new regulations, technological advancement, funding sources (PE, NBFCs etc.) and product offerings (branded residences, retail malls, SEZs etc).

These advancements have transformed the domestic real estate sector into a sophisticated business. Challenges have deepened at every level of the value chain requiring specialist support. The value chain itself has witnessed several changes with respect to number of stakeholders and processes.

1. Census 2011, Government of India

2. Planning commission, KPMG in India analysis

01 | Decoding the realty challenge


Decoding the realty challenge | 02

The value chain of the Indian real estate sector is broadly spread over four categories/phases which are project conceptualisation, planning and designing, development, and handover and maintenance. The development of the entire project takes about three to six years depending upon the size, scale, location and type of development.

The first phase involves land or site acquisition and its maintenance, performing feasibility studies, securing funds etc.

The second phase involves activities such as preparing preliminary design for securing approvals from various authorities, detailed designing, preparing the project schedule and budget, procuring material and appointing contractors, and finalizing sales and marketing strategy. Some of the pre-construction activities such as procurement, and sales and marketing continue in the development and closure stage.

The development phase or construction phase starts immediately after the developer breaks

ground. It generally involves execution and monitoring of the development/construction.

The final phase, which is handover and closure, starts after the construction is over and the structure is handed over to the facility management and maintenance team. This stage has evolved the most in last few years as developers have started focussing on facility management component of the building. Developers are finding strong value addition in the maintenance function which primarily includes offering services such as leasing (for commercial real estate), security, power back-up, fire and safety management.

3. Real estate value chain

The major stakeholders, their roles and responsibilities, changes over last several years and challenges faced by developers at each stage in the value chain are explained in the following sections.

Source: KPMG in India analysis

Conceptualization

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Development

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Land acquisition

and maintenance

Feasibility study and

securing funding

Sales and

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Approval an

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Execution andmonitoring

Handover and

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Conceptualisation is the first phase in the real estate value chain. It starts with identification of suitable land or site to be developed, followed by doing feasibility studies and arranging for funds.

Validation of land title, market price, market demand, supply projections, selection of consultants etc. could lead to delays, litigations, disputes between stakeholders and even project failure. The various challenges, role of stakeholders and changes over the last several years in this phase are given below:

3.1.1 Land/site acquisition and maintenance

Land/site acquisition is one of the most critical elements in the process of real estate development. Projects often do not take off or get delayed due to unavailability of/disputes relating to land parcels. Some of the major issues in land/site acquisition and its maintenance are:

• Verification of title of the land

• Obtaining fair market price

• Preventing and dealing with encroachments or land grab

• Obtaining ‘change of land use’ (in case of agricultural land)

• Understanding the new Land Acquisition, Resettlement and Rehabilitation Act, 2013.

The various stakeholders, their respective roles and likely change in the roles are depicted below.

Expected changes in the value chain

• The new LARR Act, 2013 is expected to change the land acquisition process. It is also expected to increase the cost of land.

• With potentially soaring land prices and possible high risk in acquisition of land, joint development model is likely to gain popularity.

• The increase in digitisation of land records by various State Governments is anticipated to reduce issues related with land title.

Stakeholder Role and responsibility Change in role and responsibility

Developer • Purchase/acquire land parcels

• Coordinate with local government agencies for necessary approvals and documentation

• Arrange for fencing/security of the land parcel

• Select suitable legal consultants or law firms for land due-diligence

• Joint development model has emerged in the last few years as a result of issues in land acquisition

Government • Provide timely approvals and documents to developers

• Develop master-plans and assign proper area for different real estate activities (commercial, residential, SEZ, industrial etc.)

• Land records have improved as several State Governments have started digitizing the land records

Law firms • Perform due-diligence on land title, history, encumbrances

• Advice or represent developers on legal issues and litigations

• Law firms dealing in land were limited and have started gaining popularity in recent years.

• Evolved due to confusion surrounding land acquisition

3.1 Conceptualisation



3.1.2 Project feasibility study and securing funding

Detailed project feasibility, and thereby securing funds is one of the essential step performed in a real estate project. This step involves preparing financial models and detailed project reports, which help in estimating revenue, price, cost, returns, profitability, cash-flows, debt-equity ratio etc. It also helps in marketing the project to lenders, investors and banking institutions for

funds. Some of the key challenges faced in this stage are:

• Lack of trained professionals to develop investment models

• Availability of accurate real time data for feasibility analysis

• Identifying suitable time for project launch

• Funding agency’s reliability on these reports

• Preparing detailed project reports, developing financial models etc.

The various stakeholders, their respective roles and change in the role are depicted below:


• The funding channels are projected to widen further with the introduction of Real Estate Investment Trust (REIT) in India and the relaxation of Foreign Direct Investment (FDI) in real estate.

• The role of specialist consultants is expected to increase further in the future.

Stakeholder Role and responsibility Change in role and responsibility

Developer • Prepare project concept

• Conduct/outsource feasibility study

• Interact with funding agencies for the project

• More reliance on research and data than gut-feeling or experience based approach adopted in the past

• Reliance on specialist consultants has increased

Real estate consultants

• Collate and analyse the data and prepare detailed project report

• Assist the developer in raising funds for the project

• Role of consultants have expanded from just collator to analysis of information

• Emergence of specialist consultants focussing only on the real estate sector

Funding agencies

• Review of project report

• Provide funds

• Increase in the number of funding channels such as private equity, Initial Public Offerings, Foreign Direct Investments and listing on global Real Estate Investment Trusts (REIT)

• Expansion of investment from only corporate level to project level

• Opening up of external commercial borrowings for affordable housing projects



Planning and designing is the pre-development stage in which various activities, prior to start of the construction, are performed. The major activities include preparing preliminary design for securing approvals, detailed designing, project scheduling, budgeting and procurement, contracting, sales and marketing.

Proper planning helps in making calculated decisions, smooth execution of the project, minimal wastage of time and cost, maintaining control over the project and improving coordination within project stakeholders.

The planning and designing stage has evolved over the last several years. Many new stakeholders and new processes have been added to the system. Some of the major stakeholders, changes and challenges in the planning and designing stage are given below.

3.2.1 Approval and designing

Over the years, obtaining approvals has become a more defined and complex process for developers. Earlier only few blanket approvals were required for a real estate project, but now, a typical real estate project requires approvals from multiple authorities requiring significant effort and time of developers. Some of the major issues which developers face are:

• Inadequate knowledge of the approval process

• Difficulty in estimating timelines and cost impact of approvals

• Ambiguity resulting from multiple authorities

• Lack of clarity on required approvals.

The approval process starts after a blue-print or concept is designed. Along with approval process, the detailed designing of the project takes place. Some of the major issues faced during the designing stage are:

• Preparing design conforming to the development bye-laws

• Lack of effective communication between developer and architect leading to lack of clarity with respect

to cost efficiency of design, design specifications or requirements

• Difficulty in assessing constructability and maintainability aspects of the design

• Effective coordination among multiple design partners

• Managing the changes during design development phase.

The various stakeholders, their respective roles and change in the role are depicted below:

Stakeholder Role and responsibility Change in roles and responsibility

Developer • Prepare the project plan (pre-construction, construction and post-construction)

• Coordinate and project management for the approval stage

• Provide support to agencies in securing approvals

• Defined methodology for securing approvals

Architect • Prepare preliminary design for approval requirements

• Design development

• Base plan and services co-ordination plan according to building bye-laws

• Design approach has become systematic and broad resulting in lower design errors

• Coordination with local municipal bodies has improved

Engineering, Procurement and Contracting (EPC) contractor

• Liaison with regulatory bodies • Single point responsibility for approvals

Regulatory agencies

• Review the submitted documents

• Inspections

• Draft and implement strong regulation and byelaws

Liaison agencies

• Coordinate for the approvals and facilitations • Liaison agencies have gained importance in the last few years due to increasing complexities involved in securing approvals

3.2 Planning and designing



3.2.2 Project scheduling and budgeting

Detailed scheduling and budgeting of various development related activities help in defining development approach and setting milestones for measuring performance. These milestones help in identification of cost and time overrun at an early stage in the development process. Some of the major challenges faced in this stage are:

• Difficulty in assessing quantum of works and drafting suitable construction methodology

• Planning adequate and accurate budgetary provisions

• Establishing accurate timelines for different stages in project life-cycle

• Identifying suitable vendors to meet the time and cost expectations of the project.

The various stakeholders, their respective roles and change in the role are depicted below.


• EPC contractors are likely to emerge significantly over the next few years as developers look to outsource the entire development process.

• Usage of technology such as Building Information Modelling (BIM) is expected to gain acceptance among architects and contractors to provide integrated design solutions to their clients.


• The outsourcing of project management portfolio to the specialist project management agencies is projected to gain traction.

• Emphasis on network-based construction schedule is anticipated to increase, which could improve project planning.


Developer • Prepare the initial level project plan

• Estimate the project cost on the initial assumption

• Enable stronger project controls i.e. reduced time and cost overruns

• Outsource several activities such as project management, contractors etc.

Investor • Review the project schedule and cost and decide the instalment for investing in the project

• Higher control of investors over the project

• Funding channels have expanded. PE, IPOs, global listing, NBFCs funding in the real estate sector

Architects • Provide inputs for the drawing project schedule

• Provide inputs to PMCs for preparation of the construction schedule

• Usage of new technologies such as BIM which has resulted in improving coordination and design accuracy

Contractor • Develop project schedule

• Manage cash flow for the project

• Define goals and approach for construction

• Corporatisation of the contracting sector

Project management consultant

• Develop and review project schedule, approve and monitor the project schedule

• Track expenditure with baseline budget and calculate cost to complete

• Define the critical activities of the project

• Emphasis on better control on time and cost

Business consultant

• Management information system

• Report the critical issues and challenges, and mitigation strategy

• Understand the management requirement to report the critical issues

• Set up a project management office



3.2.3 Procurement and contracting

This stage moves along with the previous stage. It involves selection of suitable stakeholders for timely completion of a project. The procurement stage tends to continue into the development and facility management stage as well. Some of the challenges faced by developers in this stage are:

• Assessing the supplier and contractor’s credentials, their capability and payment mechanism. The challenge is compounded if the project is in SEZ.

• Identifying and planning for long-lead-supply items or imported items.

• Managing budgetary overshoot due to various internal (inaccurate cost estimation, scope change etc.) and external factors (fluctuation in currency, interest rates, material cost etc.).



• The sector is expected to witness gearing up of capabilities by contractors and specialist agencies, which is likely supported by increase in outsourcing by developers.

• Further shift towards lump-sum or design and built type contracts from item rate contracts.


Developer • Approve the procurement and contracting strategy

• Develop the procurement plan

• Access to global vendors for procurement of latest technology and material at a competitive price

Architect • Define specification for the materials to be used in the project

• Identify good quality and durable material

Business consultant

• Design the procurement and contracting model

• Implement leading international industry practices and enable knowledge sharing

• Business consultant is a fairly new stakeholder

Project management consultant

• Review procurement plan and specification of the material, inputs in selection of the contractor

• PMCs role have expanded from just monitoring agencies to project advisors

• Bring leading practices and help in achieving cost efficiencies.



3.2.4 Sales and marketing

Sales and marketing has become one of the integral parts of a real estate development process. To stand apart in stiff competition and increase reach to the consumer, drafting appropriate sales and marketing strategy has become inevitable. Some key challenges faced by developers in this aspect are:

• Inadequate strategy for sales and marketing

• Selecting the right medium

• Allocating adequate funds for sales and marketing functions

• Developing and maintaining the sales channel and agents

• Obtaining update of inventory status

• Following up with customers for payments

• Obtaining customer feedback and understanding their requirements.



• The Real Estate (Regulatory and Development) Bill, 2013, is expected to significantly improve the transparency and professionalism in the sector, after it gets enacted into the law.

• Emergence of real estate agent from a sales channel to a sales partner.


Developer • Prepare the sales and marketing strategy/scheme for the project

• Hire a specialist agency to assist the sales and marketing function

• Select channel partners

• Fix commissions and pay out mechanism

• Share periodic updates related to development with customers through web portals

• Tie up with leading luxury brands or ambassadors for promoting the project

• Draft innovative marketing schemes such as interest subvention, construction linked plan etc.

Real estate agents

• Market and sell properties

• Underwrite the projects

• Corporatisation or organisation of the agents

• Hold properties shows, events and exhibitions

• Usage of e-commerce



After necessary inputs related to a project are fixed, the next stage is usually the execution and monitoring of the construction. Some of the major issues being in this stage are:

• Preparing a detailed construction schedule

• Timely mobilisation of skilled manpower on site

• Preventing theft and corruption at the site

• Managing project and cost overruns due to change in scope/design

• Implementing adequate quality management systems

• Issues in monitoring vendor performance

• Issues related to project compliance

• Improper resource computation and mismanagement (equipment and material, labor)

• Accessing information on project progress.



• The reliance on contractors is expected to increase significantly in the future. Developers may prefer hiring contractors who offer entire gamut of services in pre-construction and construction.

• To reduce time and cost overruns, new construction technologies such as pre-fab, pre-cast etc. are expected to gain popularity in the future.


Developer • Hire contractors for execution

• Review the contractor performance on time, cost, quality, and Environment, Health and Safety (EHS) parameters

• Payment to stakeholders

• New development models such as design built, turnkey, lump-sum contracts have gained popularity

• Outsourcing a significant part of the construction and procurement related activities to the contractor

Design consultants

• Prepare Good for Construction (GFC) drawings for execution

• Assist project teams during the execution

• Specialized agencies such as architects, Mechanical, Electrical and Plumbing (MEP) consultants, building automation, Heat-Ventilation and Air-Conditioning (HVAC) have come up in the recent years.

• Their roles have expanded from being just service providers to being lead consultants

Contractors • Arrange for resources required and execute construction as per agreed parameters of time, cost, quality and EHS parameters

• Contractors have become technologically advanced

• Higher usage of machinery and equipment instead of labor

PMC • Monitor the performance and assist the developer for timely delivery of the project

• Usage of technology for tracking and re-alignment of various construction related activities

3.3 Development stage



After the construction is complete, the project is usually ready to be handed over to the maintenance team and finally to consumers. A property typically requires continuous maintenance, often

giving rise to services such as project handover, facility management, and renovation. The various challenges, stakeholders and their roles are explained below.

3.4.1 Project handover and closure

Post completion of the civil, structure, building services and interior works, handing over to the maintenance team and closure of the contracts takes place. Some of the major challenges and issues in this stage are:

• Securing various approvals and sanctions for building occupancy

• Accepting facility by the end user and facility management service provider

• Commercial closure of construction related contracts

• Managing vendors during defect liabilities period

• Managing customer interactions during delayed hand over.



Developer • Accord approvals related to occupancy

• Appoint facility management service provider

• Facilitate the process of customer hand-over

• Focus on building compliance and clearances have increased

• Increased focus on fire, safety and preventive measures

PMCs • Monitor completion of construction activities within time and quality parameters

• Manage the facility handover and commercial closeout processes

• Higher focus on coordination with various agencies involved in the project

Contractor • Attempt to ensure completion of work as per contract

• Higher level of automation has resulted in timely completion and reduction in post-construction snags

Facility managements service providers (FMSP)

• Obtain possession of the facility for operations • FMSPs have emerged in the recent years. The sector seems to be rapidly organising

Statutory agencies

• Provide timely and speedy approvals related to occupancy

• Streamline approval processes

3.4 Handover and maintenance



3.4.2 Maintenance

Developers are now increasingly offering post completion maintenance services to the building occupants. In addition to a possible revenue stream for the developer, it could also helps in maintaining the structure. Some of the key challenges faced by a developer in maintenance services are:

• Planning facility management activities

• Managing the left out activities from the construction phase

• Executing the operations and maintenance contracts

• Complying with statutory requirements and approval renewals

• Setting up a proper process for obtaining accurate and adequate management information system (MIS) reports

• Inadequate fire and fire prevention equipments knowledge

• Inadequate disaster management plan/escalation protocol briefing

• Wastage and revenue leakages from the facility management unit

• Ineffective barricading and edge protection

• Limited availability of professional asset management organisation

• Lack of trained professionals to manage facility management function

• Absence of specialised training courses/modules to train professionals in facility management

• Limited availability of technological support.



• Emergence of specialist facility management service providers.

• Increase usage of technology for automation of facility management function.

The sector has witnessed addition of several new stakeholders over the last couple of decades such as EPC contractors, PMC and facility management service providers resulting from sophistication of the real estate business. The number of stakeholders could continue to expand as the sector evolves further.


Facility management service providers

• Manage day to day operations of the facility

• Generate MIS reports

• Collect funds from consumers

• Identify and take action against defaulters

• Coordinate with regulatory authorities

• Service level agreements (such as safety, security, housekeeping, transportation, canteen, electro-mechanical works etc.) based contracts for improved vendor performance

Consumers • Constitute the welfare society/condominium

• Govern the operations of the facility

• Customers are actively participating in running the facilities

Regulatory authorities

• Grant timely approvals, clearances and no-objection certificates

• Periodic review of the structure

• Processes have become streamlined

• Fire, safety, disaster management plans have gained significant importance

Asset management companies

• Upkeep of various assets used for operation

• Maintenance of lifts, fire extinguishers and alarms, and other building management systems

• Level of automation has increased over the last few years




Conclusion

The strong growth over the last couple of decades has brought a phenomenal change in the real estate sector resulting in sophistication of the business which is expected to deepen further.

Further transformation has already begun with clearance of several reforms in the last couple of years such as the LARR Act, 2013, opening up of FDI in multi-brand retail, allowing external commercial borrowings, and changes in several regulations and taxation rulings. Several other reforms in the pipeline such as the Real Estate (Development and Regulation) Bill, 2013, Real Estate Investment Trust, relaxing foreign direct investment norms, single-window clearance mechanism and introduction of PPP mechanism in real estate are intended to promote further growth in the sector.

To achieve a sustainable growth, maintain competitive advantage and benefit from the strong urbanisation growth wave, it is advisable for developers to benchmark and adopt ‘the leading industry practices ‘.


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in India.

KPMG in India contacts:

Dinesh KanabarDeputy CEO and Chairman – Sales & Markets T: +91 22 3090 1661 E: [email protected]

Arvind MahajanPartner and Head Infrastructure and Government Services T: +91 22 3090 1740 E: [email protected]

Neeraj BansalPartner and Head Real Estate and Construction T: +91 124 307 4000 E: [email protected]

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