The real estate sector is susceptible to business cycles and disruptive black swan events.
The real estate sector is susceptible to business cycles and disruptive black swan events. In short, VUCA (Volatility, Uncertainty, Complexity and Ambiguity) is inherent to the thriving sector.
‘Volatility’ in real estate refers to the speed of change originating from the supply side factors. Parameters which can potentially contribute towards volatility are mentioned below in a sequential order.
I. Need for consumption led to demand
II. Increase in demand pushed the need for increased Capacity
III. Increased Capacity pushed the need for Capital
IV. Capital deployment chased those opportunities where the possibility of generating return was higher
V. Higher return meant higher efficiency/ higher output by using finite resource (for instance availability land). This mimics the law of scarcity in economics
Any degree of oscillation in any of the above parameters would impact supply and thus usage of land. Volatility would be witnessed at a macro as well as micro level, depending on the level of exposure/dependency on land. For instance, advent of e-commerce led to increased demand for smaller (hub and spoke) warehouses as compared to a traditional large warehouses. Similarly, experimenting on the size of dwelling units, specifications, amenities etc. to make it pro customer is also expected to have a bearing on land.
Thus, the probability of witnessing volatility in real estate is like the probability of not falling during a tight rope walk. Volatility is good as it would make the sector resilient when pushed through realignment process.
‘Uncertainty’ is the extent to which one can confidently predict the future and this originates mostly from the demand side. Demand side shift may happen due to the following attributes.
I. Product becoming less affordable for mass consumption
II. Product becoming obsolete or a more efficient product being made available
III. Adaptable asset use and emergence of alternative real estate
IV. Mismatch in the customers’ expectations and perceived value of the product
V. Snob value attached to a product
VI. Interpretation of regulations
Better experience (BETEX) always leads to better demand (BETEM) is largely witnessed across sectors from automobile to FMCG, and real estate is increasingly adopting to this doctrine. In line, real estate stakeholders would innovate and offer experience wherever possible and reliance on technology would be very high. In short, the real estate industry may transform to a high-tech industry from a high-touch industry in the future.
‘Complexity’ refers to the number of factors coming mostly from the operational factors. ‘Roti-Kapda-Makaan’ (basic necessities) influence the organised real estate in the following ways:
Influence of the food industry in real estate is not as significant as other sectors wherein the demand-supply gap is huge and thus the scope to innovate and design the real estate product is very high. Real estate touch point in the organised food industry would be mainly in the supply chain and would also include retail footprint of F&B outlets in malls and high streets.
In the retail sector, there is always an apprehension whether online retail will eclipse the brick and mortar stores. Retailers are now trying to adapt models to increase their customer base and market share. For instance, many online brands such as Lenskart, Urban Ladder, Pepperfry, Myntra, Zivame have opted for Omni channel marketing as ‘Direct to Consumer’ became more prevalent.
In the housing sector, ‘Built to Rent’ (BTR) model is expected to gain traction which is attributable to the preference amongst millennials. In the commercial office sector, the co-working model has made a strong presence across metro cities. Co-working operators are analysing the user behaviour to redesign the layout of spaces which is also induced by a demographic shift.
Successful companies/brands transcend and they don’t get complacent with their current model, even if it appears to be working. Therefore, continuous evaluation of processes, products and business models is what will keep the real estate sector relevant amid dynamic demand pattern from customers.
‘Ambiguity’ originates mostly from the process, technology and also regulations. Customer expectations continue to rise as they expect a ‘service experience’ from their space providers. Increasingly, real estate developers will adapt to building relationships and focus on delivering service as compared to selling brick and mortar based product. In this context, it is noteworthy to mention how tech giant ‘Apple’ has implemented a subtle yet effective strategy which puts emphasis on its human capital as the main product of the company. It believes in the art of selling more products by building strong relationship with its customers through its people.
Finally, the stakeholders of real estate must strive for developing VUCA leaders whose reliance on past success is peripheral, potential to promote a shared reality is supreme and who can set a boundary for failure. In spite of ambiguity, customer want is paramount which must be met with the desired degree of tolerance.
(By Digbijay Das, General Manager-Valuation & Advisory Services at Colliers International India)