The new levers that can help a developer to ride on the next growth phase in the current market are business processes, product differentiation and adoption of newer technologies.
Let’s face it; Risk is something that inherently exists in every business. Traditionally, all business plans are more or less wedged by the change in the market dynamics, competition, uncertainties, fluctuating buyer preferences, evolving technology and so on. Real estate business is further a step ahead in being risky. Real estate faces a greater time lag in product initiation and completion than any other industry. It generally takes at least 3-5 years for a developer to study the market, acquire land, obtain all the approvals, and commence construction and finish the product. By the time the developer finishes the product, the market dynamics changes significantly.
Until some time back, investment in real estate was all about land, residential and office in India. Recently, the things have changed dramatically, and unconventional real estate assets sub-classes are making an entry in the market. Affordable housing, Co-working spaces and Organised Warehousing are some of the newer asset classes that are already making a lot of buzz in the market and already witnessed growth. Some of the other asset classes such as REITs, serviced apartments, student housing, assisted living houses, and data centers are slowly emerging as newer topology in the Indian market. There is more acceptance for such concepts and developers are also opening for experimenting in these areas. Not only the new asset classes have emerged, but the way of servicing the real estate has also changed significantly. The online platforms are growing and becoming the new and essential way to serve real estate. We are moving away from the traditional systems and relying more on data to make decisions. Although data availability is a concern in emerging markets like India in the past few years, there has been a marked improvement. It is expected that sophisticated tools and technology such as blockchain technology, which will lead to smart contracts, online transactions are about to make an entry into the sector.
All this shows that the real estate industry seems to be at the end of its ‘S’ curve, which needs a change in approach and further innovation to roll up again. It would not be an exaggeration that the market is in survival to the fittest mode and changes are coming from all directions, be it the business environment, demand dynamics or buyer preferences.
The strategy that is well-known for years and considered best for risk mitigation is portfolio diversification. They say you should not put all your eggs into one basket; it applies to real estate as well. One can diversify within various real estate asset classes like residential, commercial, logistics, IT-Parks, hospitality, retail malls, institutions, hospitals, etc. However, money and expertise are the two probable constraints in this strategy. To enter any new vertical of real estate, it requires a significant amount of money with a more prolonged lock-in period. Moreover, expertise plays a vital role when it comes to real estate development.
Nevertheless, this does not mean that one cannot diversify in this business. One can diversify within your asset class. For example, a residential developer might consider developing specialised housing like affordable housing, senior housing, studio apartment, student apartment, etc. In today’s world where the consumer is the king, the mantra is to know the market well. It is not about what one can build, it is about what one can sell. The new levers that can help a developer to ride on the next growth phase in the current market are business processes, product differentiation and adoption of newer technologies.
Business Processes: With RERA and GST becoming a reality in most of the markets, it is of prudent importance for any developer to take regulatory compliance seriously. It is essential for developers to prepare for the changes promptly since the Act applies to the existing as well as future projects. The improved project planning will help developers avoid delays and manage project funds efficiently. It would be wise to hire planning professionals to take all steps to ensure timely project completion. Making such preparations early should give developers an edge over rivals and boost buyers’ trust. Another area which has high potential is building people capabilities by involving them in your product vision, training and incentivising them.
Value Proposition and Product Differentiation: While compliance is one of the biggest worries in today’s time, the developer cannot ignore the changing buyer’s preferences. In my opinion, product differentiation allows the sale of the product in a crowded market and fetch a premium over the market rates. The superior quality product, corporate governance, transparency, excellent services and integrity build the trust quotient and bring more consumers without spending on marketing.
Technology: With millennial representing the largest generation in the workforce in the years to come, there will be a structural shift in the way business is done. Real estate needs to change itself to adapt to the preference of the technology savvy generation. Imagine a future wherein the real property site visits will be done in a closed room via virtual reality and builder will build a house as per buyer preference within a week or earlier and where one will no longer need to go to court to register the properties. Adopting innovative technologies like automation in construction, innovative designs, sustainability, use of prefabricated material and online marketing is where the developer can value engineer its product.
To conclude, this is survival of the fittest era, and we all need to adapt to survive in the changing environment. This is the right time to make that effort as the real estate business has still not reached that maturity level in India.
(By Surabhi Arora, Senior Associate Director-Research, Colliers International India)