Project report on

Real Estate Industry in India

For the course

Competition & Strategy

(Term 2)

Under the guidance of

Prof. Pranav Garg

Indian Institute of Management, Bangalore

Submitted by: Group 11

Boga Swetha
[1411290]
Meenakshi Singh
[1411303]
Priya Chandramouli
[1411317]
Shrirang Chilapur
[1411330]
Vidur Kumar
[1411343]

COMPETITION & STRATEGY

Table of Contents
i. Table of Contents

1. Overview of the Industry

1.1. Industry definition
1.2. Key highlights
1.3. Stakeholders and business paradigm
2. Industry Analysis
2.1 Intra-industry rivalry
Number and size of competitors
Industry Growth
Exit Barriers
Price competition
2.2. Bargaining power of suppliers
Number of suppliers
Distinctiveness of suppliers products
Switching costs
Threat of forward integration
Government
2.3. Bargaining power of buyers
Concentration of Buyers
Switching cost for buyers
Threat of backward integration
Choice of differentiated products
2.4. Threat of new entrants
2.5. Threat of substitutes
3. Comments and future trends
3.1. Summary chart of Five Forces
3.2. Future expectations
4. Appendix

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1. Overview of the Industry

1.1 Industry definition
Real estate (RE) is a key industry that deals with land and its usage in terms of constructions and
resources. Growing at about 20% p.a. this industry contributed 6.3% to Indias GDP in 2013.[1]
The industry is broadly categorized into residential and commercial segments depending on the usage and
licensing pattern of the land and further sub-classified as per the construction (Fig.1). However, for the purposes
of this report, we shall keep our comments and analysis focussed on only the key elements pertaining to the
residential, office and retail segments which account for the majority of the projects launched in the past few
years.
(Fig. 1) Segments in Real Estate
Residential

Commercial
Office

Retail

Hotels

Hospital

Education

1.2 Key highlights

The recent introduction of the Real Estate (Regulation and Development) Bill [1] is evidence of the
significant governmental involvement this sector and also hints at the political influence is heavily involved
behind-the-scenes, in the workings of this industry.
Recent changes that are relevant to understanding the industry as it is today are:
1) Restrictions on advertising prior to complete project approval[1]
2) Introduction of REITs to assist fund-raising and exempting firms from double taxation[2]
3) Amendments to FDI regulations reducing minimum paid up capital to $5M instead of $10M and
project areas to 50,000m2 from 20,000m2 allowing entry into Tier 2 and other areas with smaller
projects[3]
4) Allocation of 7,060 Cr. for 100 smart cities in the Union Budget of 2014[2]
The implications of these aspects on the industry will be discussed further in the report.

1.
2.
3.

www.ficci.com; EY Brave new world for India real estate: Policies and trends that are altering Indian real estate
Union Budget 2014; http://www.indiabudget.nic.in/
KPMG Report : Indian real estate Opening Doors

COMPETITION & STRATEGY

1.3 Stakeholders and business paradigm

There are multiple stakeholders at various stages of real estate projects ranging from investors, land
owners and the government to developers, construction agencies, agents and final buyers. (Fig. 2)
(Fig. 2) Stakeholders in real estate industry

For further clarity the flow of activities as illustrated in Fig.2 is described in detail below:
Developers conceptualize a project and float the idea to investors to raise fund
Investors employ valuators and legal entities to ascertain the value of the project
Land is acquired by the developer from land owners (which could be the government or private entities)
this step would also involve changing the usage pattern of the land to commercial or residential, as per the
needs of the project
The developer employs designers/architects to draw up the detailed plans for the project
Permits and licences are obtained for the project, ranging from No Objection Certificates from the
Pollution Control Board, Tree Authority, Sewerage Department, Hydraulic Department, Storm Water and
Drain Department, Environmental Department, Traffic Department, Fire Clearance, Airport Authority of
India, etc. The final approval must then be obtained from the town planning board of the state where the
project is located. [4,5]
Contractors are employed for the actual construction either individually for different aspects like
plumbing, electricity, etc. or through an integrated contract to single turnkey contractors (such as L&T)
which deliver the completed project to the developer
Property Management Consultants (PMCs) are hired to overlook the execution of the project and liaison
between the architects, structural engineers and the contractors
Developers launch the project just after the permits are in place using various channels such as
newspapers, television, direct mailing and others to promote the sale of the properties
Buyers may be individual or institutional with intermediaries such as real estate agents involved in the
promotion and sale of the property
o Online portals have evolved as another channel for real estate sales in the last few years
o Developers often choose to rent out properties as in the case of retail and office projects
o Asset management companies are also brought in to handle unsold properties
This report shall focus on analyzing the industry from the point-of-view of real estate developers.

4.
5.

http://www.doingbusiness.org/data/exploreeconomies/india/dealing-with-construction-permits
National Building Code of India 2005 (http://www.bis.org.in/sf/nbc.htm)

COMPETITION & STRATEGY

2. Industry Analysis
Given the above background, we will now evaluate the attractiveness of this industry for incumbent real
estate developers and the future outlook for the same using the Porters Five Forces framework.
2.1 Intra-industry rivalry
The profitability of an incumbent developer due to competition is an outcome of the following factors:
1)

Number and size of competitors

There are over 133 developers in the Delhi, Mumbai and Bangalore regions and many more operating in the
country as a whole, each with varying sizes of operations ranging from large players like Tata Realty to smaller
firms like Bhumi Raj Homes P Ltd. [7]
However, despite a seemingly high concentration of firms most players are regionally localized such as the
Lodha Group in Maharashtra and DLF group in Haryana with the only exception being national players like Tata
Realty and Godrej Realty which have entered geographically diverse markets.
This would indicate low competition as operating markets for firms remain distinct from each other.

2)

Industry Growth

The industry is expected to grow at approximately the same rate as the GDP. Factors like slow economic growth,
rising inflation and a weakening rupee resulted in a slowdown up until 2013 with absorption in certain markets
falling at a high rate (NCR facing the slowest occupancy of standing inventory).[6]
However, current trends indicate that both residential and commercial spaces display a positive outlook over the
next few years. The union government has announced multiple incentives for the housing sector in the recently
presented union budget.[2] The governments encouraging stance is expected to revitalize the sector and has resulted in
an increased sales volume in the top six cities by ~26% in H2 2014 (as compared to H2 2013). However, given the
large number of unsold properties from earlier projects fewer launches are expected in the coming years.[6]
The industry has pushed towards rentals in this period and as a result, housing rentals have sharply increased in
the last couple of years. However, the rental prices in the office rental space have remained largely unchanged most
likely due to commercial projects having come up in the outskirts of major cities, where rentals are unlikely to rise till
further growth extends to the area.
In effect the industry growth is not expected to significantly increase competition in the industry.

3)

Exit Barriers

The real estate industry mandates very large financial commitments in terms of assets and also the equity and debt
raised for projects. Relationships with the political entities, the government, contractors, suppliers and labour unions
also take a long time to build and require long-term commitments by all players.
To support this fact, we have seen very little competition based on price, as it does not make sense to go into price
wars when most players have deep pockets and so heavily committed to different stakeholders. As a result, the larger
players in real estate industry have been present for over 30 years.
Hence, exit barriers in this industry are very high, making this industry a long-term game for profits.

6.
7.

Knight Frank Research India Real Estate Outlook (Residential and Office) January to June 2014
http://www.moneycontrol.com/mccode/property/top_developers.php

COMPETITION & STRATEGY

4)

Price competition
As mentioned earlier, price competition is rarely seen in this industry as residential, office and
retail spaces are largely commoditized at this stage. Real-estate developers do not have much differentiation
in terms of their product offering only playing a coordination role between various stakeholders.
Also, given the longevity of the products offered (land and buildings) there is little incentive to start
price wars for short-term gains, as the profits of projects of projects are reaped over long durations.
Hence, competition on pricing is also not a key influencer in this industry.
2.2 Bargaining power of suppliers
1) Number of suppliers
There are a large number of potential investors including national banks, foreign banks and venture
capitalists whom the real estate developers may approach. However, large and established developers have an
advantage as investors are likely to view them as more credible over the smaller players in the market.
Since there are numerous land owners, there is abundant supply of land for the developers. However, land
owners are usually backed by NGOs/public bodies and their power remains high.
Developers have the option of various contractors including turnkey contractors such as L&T or a host of
smaller contractors to carry out individual jobs. In many cases they choose to work with a few select parties that
they are familiar with.
The Indian construction industry has reached a value of $441.6 billion having grown by 13.8% in the year
2013. This trend in growth since 2009 (as seen in the table below), except for a slight decrease in 2013 compared
to the previous years, is expected to continue between 2015 and 2018. Some of the biggest players include L&T
with $14.6 billion annual revenue, Lanco Infratech with $1.7 billion annual revenue and Hindustan Construction
Company with $1.6 billion annual revenue in FY 2014.[9]
(Fig. 3) Growth of construction companies industry

8.

MarketLine Industry Profile; Construction in India; July 2014

COMPETITION & STRATEGY

2) Distinctiveness of suppliers products/services

Despite architects and contractors having specialized skills in themselves the distinctiveness of their
offering is very high across different architectural and contractual firms. A developer could choose to float a
project to any of multiple firms without significantly compromising on quality or price of the services rendered
thus reducing the bargaining power of these suppliers. Similarly for real estate agents, which have a key utility in
terms of their networks and buyer databases but do not have distinct offerings amongst each other.
A recent trend with regard to investment in real estate has been to approach foreign banks with lower
interest rates as the national banks are conservative and offer high interest rates. Thus, the funds raised vary
depending on the source such as various banks, venture capitalists and so on.[9]
The only exception to this distinct offering of suppliers is when the involvement of political alliances and
relationships with labour unions are considered which have very distinct and unique offerings critical to the
success of the developers projects.
As a result allowing for diplomatic alliances being maintained with unions and political entities
overall power of suppliers is relatively limited in light of their relatively non-distinct offering.

3) Switching costs
From the previous section, it is evident that each supplier do not have a highly distinct offering.
Therefore, it is highly inconvenient to search for parties with land of a certain size and location, investors willing
to offer flexible terms and agents or contractors with a specific area of specialization required for a particular
project to name a few. This makes the real estate developers incur huge switching costs in the case of shifting
from one supplier to another.

4) Threat of forward integration

Threat of forward integration from most parties is relatively low as it is a capital intensive industry.
However, some construction giants have the resources to enter the business of developing if they recruit or poach
the right management with adequate knowledge and experience in the industry. L&T has already stepped into this
domain with its L&T Realty arm. Similarly, certain brokers in Mumbai have entered into the development space
for small residential units.[11]
Another form of forward integration that has already occurred and is eating into the shares of real estate
developers are projects undertaken by the government. The Maharashtra Housing and Area Development
Authority (MHADA) is one such example.

5) Government
The key issue lies in dealing with the government. Several permits and no objection certificates are
required from the government and therefore real estate developers are bound by those laws and are required to
obtain the necessary approvals in place prior to the construction. Any change in government regulations also leads
to further delays and costs.
It typically takes 2-3 years to obtain all approvals and a lot of red-tape is involved. This enlarges the fact
that India ranks 181 among 183 countries to do business in [10] Therefore, the bargaining power clearly lies with
the government authorities.

9. http://articles.economictimes.indiatimes.com/2013-07-30/news/40895516_1_kotak-realty-s-sriniwasan-redfort-capital
10. CCI Report : A review of the competition issues in the real estate sector : An analysis of the position post DLF Case; Dec 2012
11. http://articles.economictimes.indiatimes.com/2013-06-14/news/39976725_1_propequity-brokerage-prestige-estate-projects

COMPETITION & STRATEGY

2.3 Bargaining power of buyers

1) Concentration of Buyers
The Indian real estate sector is in a state of flux with a continuously evolving economic and demographic
scenario. The trend of urbanization in India coupled with the growing purchasing power of buyers is creating an
empowered set of buyers who are driving the demand for real estate [12]. A McKinsey study reports that in order to
meet urban demand, the [Indian] economy will have to build between 700 million and 900 million square meters of
residential and commercial space a year. [13]
This suggests that the higher number of buyers will have a much higher bargaining power with regards to the real
estate industry. The collective strength of the buyers will force the developers to take their demands into consideration
or risk losing substantial set of prospective buyers to the competition.

2) Switching cost for buyers

A number of players compete for a pie of the market share in the real estate industry. Their value proposition is
aimed at wooing the customers with the best facilities and arrangements offered at affordable prices. In the midst of
this severe competition, the major point to note is that for the consumers, it is not difficult to switch from one service
provider to another based on their choices and preferences. The buyers, conscious of the investment, choose to go
ahead with a developer who keeps their demands in mind and plans accordingly.

3) Threat of backward integration

The threat of backward integration is very low as it is a capital intensive industry. It is highly unlikely that the
customers will get into the real estate business because of a lack of appropriate response from the developers! The
best they can do is switch from the current developer to one of its competitors.

4) Choice of differentiated products

Todays buyer is not content with the traditional apartments that the developers have to offer. They demand more
flexibility and control in terms of designing the layout and customizing their homes. [14] This concept of customisable
homes is both throwing a challenge as well as presenting an opportunity for the developers to differentiate themselves
from their competitors. The more differentiation they can build in terms of their offerings, the higher will they be
approached by the customers. This clearly indicates that the choice of differentiated products (flexi homes) is driving
the power in the hands of the buyers.

12. http://businesstoday.intoday.in/story/real-estate-property-market-new-deals-to-attract-home-buyers/1/19535.html
13. http://www.mckinsey.com/insights/urbanization/urban_awakening_in_india
14. http://businesstoday.intoday.in/story/real-estate-property-market-new-deals-to-attract-home-buyers/1/19535.html

COMPETITION & STRATEGY

2.4 Threat of new entrants
The real estate market has seen stable returns for decades. Major players have been entering since the
early 80s and have stayed fairly profitable over the years. However, this is an industry where growth in
operations needs fringe investments in stakeholders such as public offices, real estate agents, suppliers industries
and the sort. Hence to survive, all players, even if they operate in different regions, need to have deep connections
in these fields. This implies that a significant investment (financial and other) has to be devoted over a period of
time. This acts as a barrier to new entrants. However, players with financial and political resources have entered
the market previously and will continue to do so. The prerequisite for this entry being that the entity is prepared
for the long haul.
When we consider demand, consumer buying is attached to a careful balance between emotion and logic.
In addition to this, there are a lot of players with similar offerings and hence new entrants might face challenges in
selling their products. This will increase spending in the spheres of branding and marketing which further lead to
increase in costs, acting as a deterrent. Hence it not uncommon to see players leveraging existing brand images in
this industry. A recent example would be Tatas latest venture- Tata Housing.
As of 2014, FDI in real estate has been opened up and the latest union budget has relaxed norms for
foreign players. Major foreign players with far superior technology, design and financial capacities can enter the
market. The weakening rupee also makes it cheaper for conglomerates to enter. As India is a country where
people have an affinity foreign brands, it will only get more competitive for local players like DLF.
2.5 Threat of substitutes
The addition of capacity in terms of extra floors on buildings and modification/ renovation of existing facilities
instead of building new ones are substitutes for the real estate industry. The above substitutes have very less
impact on the profitability of the business and the threat of substitutes is low.

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3. Comments and future trends

3.1 Summary chart of Five Forces
Low
Threat of new entrants

Low
Bargaining power of suppliers
1
2
3

4
5

Low
Intra-Industry Rivalry

Number of suppliers
buyersDistinctiveness of
products
integrationSwitching costs

Competitors

Industry Growth

Exit Barriers

Price competition

High
Bargaining power of buyers
1

Concentration of buyers

Switching cost for

Threat of backward

Threat of forward integration

4 Choice of differentiated products

Government

Low
Threat of substitutes

3.2 Future expectations

Considering the time taken to get clearances, the ambiguity in terms of ways to deal with delays caused on
account of lapses by external agencies can result in unfair penalization of the developers. The Bill [2] is silent on the
routes that developers must follow if they fail to get clearance even after a substantial amount of time. The ban on
advertising by developers before receiving complete approval for their projects, might inadvertently lead to fewer
projects coming into the market. A reduced supply will lead to an increase in demand and, ultimately, a rise in prices.
The Bill, with its several proposed checks and restrictions may slow down the industry in the short run and may
challenge the existence of many non-serious players in the real estate industry. On the other hand, existence of only
serious players might make the sector more organized and credible in the long run. The novel aspect of this Bill will
make it interesting to note the outcome of its implementation on the real estate sector in India.
And with the allowance of 100% FDI in this sector, international players such as Emaar Properties, Portman
Holdings, Homex and many others have also stepped in alongside the more established domestic players such as DLF,
Tata Housing, Unitech, Godrej Realty, etc. How this will help tap the huge potential of the real estate market in India,
and change the dynamics of the industry is yet to be seen.

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4. Appendix
(Appendix 1) Market size of real estate in India (USD billion)

(Appendix 2a) City wise New Launches and Absorption during H1 2014

(Appendix 2b) City wise New Launches and Absorption forecasted for H1 2014

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(Appendix 2c) New Completion, Absorption and Vacancy (Top Six Cities)

(Appendix 3a) Sector Wise Absorption Trend (India

(Appendix 3b) City wise share of IT/ITES, BFSI and Manufacturing sectors absorption

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(Appendix 3c) Industry-wise split of Bengaluru, Chennai and Mumbai office space absorption

(Appendix 3d) Bengaluru, Chennai and Mumbai office market analysis

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(Appendix 3e) New supply and absorption of office space in Bengaluru, Chennai and Mumbai

(Appendix 4a) Demand projections and analysis of top seven cities in Residential sector (000 units)
2010-14

(Appendix 4b) Demand projections and analysis of top seven cities in Commercial sector (000 units)
2010-14

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(Appendix 4c) Demand projections and analysis of top seven cities in Retail sector (000 units) 2010-14

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