Real estate

Real Estate Industry&

Potters Five Forces

Real Estate Industry of India The Indian real estate sector has come a long way and is today one of the fastest

growing markets in the world. It comprises four sub-sectors – housing, retail, hospitality, and commercial. While housing contributes to five–six percent of India’s gross domestic product (GDP), the remaining three sub-sectors are also increasing at a fast pace. The total realty market in the country is expected to touch US$ 180 billion by 2020.

Real estate in India is being recognised as an infrastructure service that is driving the economic growth engine of the country. Growing infrastructure requirement in diverse sectors such as tourism, education, healthcare, etc., are offering several investment opportunities for both domestic as well as foreign investors. Total investment by private equity (PE) funds in the real estate sector from January–March 2014 was approximately Rs 28 billion (US$ 465.19 million). This is a substantial increase of 28 per cent compared to the previous quarter and close to 2.5 times the investments during January–March 2013.

The role of the Government of India has been instrumental in the development of the sector. With the government trying to introduce developer and buyer friendly policies, the outlook for the real estate sector does look promising.

MARKET SIZE OF INDIAN REAL ESTATE

2008 2009 2010 20110

10

20

30

40

50

60

70

US $ Billion

US $ Billion

Source: CCI Report on Real Estate in India Aug 2012

Porter’s Five Forces Porter's Five Forces of Competitive Position

Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into.

1. Threat of new entrants Profitable markets that yield high returns will

attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents (which in business refers to the largest company in a certain industry, for instance, in Real Estate in India, DLF Limited, typically called the "incumbent company"), the abnormal profit rate will trend towards zero.

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

Barrier To Entry-The existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing companies already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors. 

FACTOR BARRIER IN REAL ESTATE

LEGAL Ownership restrictions are clearly a very high barrier, but such restrictions can be overcome by JVProblems with tenants can be difficult to deal with in certain countries

TAXATION AND COSTS This is not a high barrier as long it is believed tax can be compensated for by high post-tax returns

POLITICAL RISK Low barrier if the country has a strong economy and acceptable legal framework, although infrastructure investment can be a very politicised area and a problem for developers

ECONOMIC STABILITY Medium Barrier

LIQUIDITY RISK High Barrier

CULTURAL BARRIERS Religion is not a high barrier; language and education are important; local partners are helpful

GOVRNMENT RESTRICTIONS

LICENSING IS A MAJOR ISSUE

FINANCE REAL ESTATE REQUIRES A LOT OF FUNDING SO FINANCE IS A HIGH BARRIER

2.SUPPLIERS POWER When your suppliers have increased

bargaining power, it affects ones ability to serve target market in a number of ways. Supplier power can impact the price the target market will pay for goods, the quantity and quality of items available for purchase, and even which companies will be able to remain in the marketplace. This potential business disruption may influence you to seek out substitute products or a new solution to the market's needs that avoids being held hostage by a critical supplier.

SUPPLIER CONCENTRATION-PRICE-PRODUCTIVITY OF ALTERNATIVE INPUTs RELATIONSHIP SPECIFIC INVESTMENTSSUPPLIER SWITCHING COSTS

Bargaining power of real estate suppliers is medium as the supplier concentration is quite high when it comes to supply of Raw Materials like Cement, Steel, etc.

However, supply of Land is limited in Real Estate and due to this the supplier of Land has a high bargaining power in Real Estate Industry.

An important category of suppliers in Real Estate is the bank as the Real Estate industry has a very high requirement of funds. Banks 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

ROLE OF BANK AS A SUPPLIER

3. Power of the BuyerPowerful 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.

4.Threat of the Substitute ProductRelative price of the substituteRelative quantity of the substituteSwitching Costs to Buyer

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.But as a whole Real Estate in itself has no substitute. Housing is a basic necessity that one has to fulfill in order to survive.

5.Rivalry among existing firms.Number of Competitors

(Concentration)- The number of competitors is increasing day by day in the industry which in turn is increasing the Competition and reducing the rate of profit of the industry.

Industry Growth- The Real Estate Industry is expanding day by day and the industry which in turn is also increasing the rivalry among the existing firms.

High fixed costs- Real estate is a special industry, and its 'product' is fixed at a cost of large risks. In general, this prevents access to the number of enterprises in this sector, making the industry a relatively small degree of competition in other industries. 

High exit costs- The particularity of the real estate industry has been decided, once into the industry, especially real estate development has already begun, if you want to retire halfway through, the cost is quite large, human, financial, material has been input, the true 'finished product' is also did not come out, this is a dilemma to the realm.

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.

Top 10 Indian Competitors •DLF Ltd.•Jaypee Infratech Ltd.•Oberoi Realty•Ansal Properties & Infrastructure Ltd.•Parsvnath Developers Ltd.•Unitech•Merlin Group•Godrej Properties•Omaxe Ltd.•Db Realty

AnalysisConsidering 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.