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AN INDUSTRY ANALYSIS OF THE REAL ESTATE SECTOR By: Arunav Nayak (11DM059) Sanjeev Kumar (11DM017) Sudeshna Sahu (11DM039) Sulekha Routray (11DM104)
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Industry analysis of the real estate sector

Aug 23, 2014

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Real Estate

Arunav Nayak

 
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Page 1: Industry analysis of the real estate sector

AN INDUSTRY ANALYSIS OF THE

REAL ESTATE SECTOR By: Arunav Nayak (11DM059) Sanjeev Kumar (11DM017) Sudeshna Sahu (11DM039) Sulekha Routray (11DM104)

Page 2: Industry analysis of the real estate sector

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

Page 3: Industry analysis of the real estate sector

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.

Page 4: Industry analysis of the real estate sector

PHASES OF REAL ESTATE CYCLE Recession

Recovery

Expansion

Contraction

Page 5: Industry analysis of the real estate sector
Page 6: Industry analysis of the real estate sector

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

Page 7: Industry analysis of the real estate sector

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

Page 8: Industry analysis of the real estate sector

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

Page 9: Industry analysis of the real estate sector

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

Page 10: Industry analysis of the real estate sector

MARKET SIZE OF INDIAN REAL ESTATE

2008 2009 2010 20110

10203040506070

US $ Billion

US $ Billion

Source: CCI Report on Real Estate in India Aug 2012

Page 11: Industry analysis of the real estate sector

SEGMENTS OF REAL ESTATE SECTOR IN INDIA

Residential

Commercial

Retail

Hospitality

Page 12: Industry analysis of the real estate sector

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

Page 13: Industry analysis of the real estate sector

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

Page 14: Industry analysis of the real estate sector

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.

Page 15: Industry analysis of the real estate sector

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.

Page 16: Industry analysis of the real estate sector

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.

Page 17: Industry analysis of the real estate sector

2007-08 2009-2010 2012-2013

Total Retail Rs.15.5 trillion Rs.19.7 trillion Rs.27.9 trillion

Organized Retail

Rs.0.9 trillion Rs.1.1 trillion Rs.2.0 trillion

Organized Retail Penetration

5.5% 5.6% 7.3%

Source: CRISIL, India Real Estate Overview

Page 18: Industry analysis of the real estate sector

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.

Page 19: Industry analysis of the real estate sector

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.

Page 20: Industry analysis of the real estate sector

KEY PLAYERS IN THE INDIAN REAL ESTATE

DLF Ltd1. Presence across 30 cities in India

2. Residential, townships, commercial complexes, IT parks, hotels etc pan its project coverage

3. It is the only real estate company to be listed in BSE Sensex, NSE Nifty, MSCI India Index and MSCI Emerging Markets Asia Index

Page 21: Industry analysis of the real estate sector

UNITECH1. First developer to be certified ISO 9001

2. Offers diversified projects across residential, commercial and IT parks, retail, hotels etc.

3. First real estate company to be listed in NSE Nifty

4. Has ventured into infrastructure business as UNITECH Infra

Page 22: Industry analysis of the real estate sector

Ansal API1. Market leader in the NCR region

2. Project spectrum includes integrated townships, group housing, shopping complexes and malls, hotels, IT parks and SEZ segments, and Infrastructure and Utility services

3. Land reserves of about 9335 acres

Page 23: Industry analysis of the real estate sector

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

Page 24: Industry analysis of the real estate sector

TOP GAINERSCompany Start

Price End Price Difference % Change

HOUSING DEV

72.7 97.4 24.7 33.98

VASCON ENG

38.75 49.6 10.85 28

PENLAND LTD

37.2 47.15 9.95 26.75

BRIGADE 48.5 59.05 10.55 21.75

INDBUL REAL

49 57.65 8.65 17.65

Source: myiris.com, Sector Overview, Market Performance

Page 25: Industry analysis of the real estate sector

TOP LOSERSCompany Start

Price End Price Differenc

e% Change

D B REALTY

72.45 71.3 -1.15 -1.59

SUNTECK REAL

319.8 317.95 -1.85 -0.58

D S KULKARNI

67.85 67.65 -0.2 -0.29

TCI DEVELP 132.85 132.5 -0.35 -0.26

Source: myiris.com, Sector Overview, Market Performance

Page 26: Industry analysis of the real estate sector

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.

Page 27: Industry analysis of the real estate sector

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.

Page 28: Industry analysis of the real estate sector

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 .

Page 29: Industry analysis of the real estate sector
Page 30: Industry analysis of the real estate sector

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

Page 31: Industry analysis of the real estate sector

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

Page 32: Industry analysis of the real estate sector

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.

Page 33: Industry analysis of the real estate sector

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

Page 34: Industry analysis of the real estate sector

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.

Page 35: Industry analysis of the real estate sector

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.

Page 36: Industry analysis of the real estate sector

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.

Page 37: Industry analysis of the real estate sector

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_econ/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_Estate1.pdf

Page 38: Industry analysis of the real estate sector

Dr.V.Chandrasekhar, G. S. (2011). Indicators of Real Estate Cycle - Implication for India. ICREI, ISB , 20.

Page 39: Industry analysis of the real estate sector

THANK YOU