PORTERS FIVE FORCES ANALYSIS

REAL ESTATE SECTOR IN INDIA

Compiled by:
Abhinav Srivastava
Akash Sen
Atish Mukherjee
Samarth Upadhyaya

Bargaining Power of Buyers

Residential buyers
o India's urban population is estimated to touch 590 million by 2030, from 340 million
in 2008, according to McKinsey Global Institute. This increase at an annual growth
rate of 11.36 per cent will directly result in increase in demand of residential realestate in the country.
o Moreover, the economic condition of the country is improving, resulting in higher
savings with the people. They are intending to go for improved housing facilities
adding on the demand of Residential real-estate in the country.
o As demand is much more, Buyers are having less and less bargaining power and the
prices are expected to rise by 10-15 per cent in India in the next five years.
According to RBIs Housing Price Index, Prices of residential real estates in nine
major cities increased by more than 20 per cent y-o-y in Q4 of 2012-13. On an
average, the index of house prices increased annually by around 21 per cent during
the past four years as per the index.

Source: RBIs Housing Price Index

o Housing slump in 2013

Year 2013 was mired in a housing slump caused by subdued sales and piles of unsold
inventory. According to a research by property research firm Liasas Foras shows that
Mumbai saw the maximum inventory of unsold homes at 155.27 million square feet
or 48 months of unsold inventory during the first quarter of FY14. For NCR, the
inventory has more than doubled to 31 months in the first quarter of FY14.
According to the Residex, an index by National Housing Bank to track the movement
of prices of residential properties on a quarterly basis, during the period between
April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall
in prices.

This correction in the market due to the slump improved the bargaining capacity of
residential house buyers and the sellers struggling to raise funds in the sluggish
market started coming out with assured buyback/return schemes to attract buyers.
They also started coming with schemes like 20-80 payment option in which a
property buyer has to pay just 20 per cent of the price upfront while the rest can be
paid at the time of possession.

Commercial buyers
o

Sluggish economy had a direct effect on the prices of the commercial real estate in
the country and due to low demand, buyers had an upper hand in bargaining with
the developers as the sales was down. In the NCR, the supply of Offices was much
more than the demand and vacant estates were high.

Source : Business Today

Between 2008 and 2012, the office stock in Mumbai doubled from 47.4 million
square feet to 95.1 million square feet, according to real estate consultancy Knight
Frank. Vacancy, as a result, went up sharply from 4.3% in 2008 to 23.2% in 2012;
rentals fell 10-40% during the period shifting the market in buyers favour.

Source: Business Today

Bargaining power of the suppliers

The Real Estate sector exudes a large influence over a number of suppliers including
Financial Services, Steel, Cement, Glass, Paints, Furniture, etc.
o Financial Services
The source of funding for real estate funding is through a mix of internal
accruals, customer advances, and debt. Debt forms the major chunk of
funding. The total exposure of banks calculated as percentage increase in
lending towards the real estate sector has also followed a decreasing
trend. Bank loans to real estate sector have increased only by around 12%
in FY12 against FY11 whereas, the same increased by around 23% in FY11
against FY10 indicating the cautious outlook of the banks towards the
sector. And even when the debt is extended, the terms are inclined in
Bankss favour.
Thus the bargaining power of financial services as a supplier to the real
estate industry is pretty high.
o Cement
As per the Aranca Research, 64% of cement demand was from the
Housing Sector, followed by other sectors. Moreover, the production and
domestic consumption of cement are almost at the same level. Due to
presence of large number of cement suppliers and real estate being the
growth driver of the cement industry, the bargaining power of the
cement suppliers is less.

Source: Aranca Research

o Steel
The construction sector accounts for around 60 per cent of the country's
total steel demand. As the consumption of steel is dependent on realestate and infrastructure industry, these industries have an upper hand
and the bargaining power of steel suppliers is less.

Source: JSPL May 2013 presentation, Aranca Research

Threat of new entrants

Economies of scale
o The economies of scale allow the existing players in the market to build more
and more apartments at a reducing cost. This effect is quite prominent in real
estate sector, wherein, established players produce more output at reduced
making it substantially difficult for the new players to enter the market and
succeed. Thus, the competitiveness of new entrants is less as and when they
try to enter the market.
Absolute Cost Advantages
o The already existing companies have huge advantage in terms of cost. As the
land on which the construction has to be done as well as the technological
advantage that they have allows them to have a sufficient cost advantage
especially over new entrants. The cost advantage, thus, might act as a
discouraging factor for new entrants into the market.
Product Differentiation
o The bigger players have moved on to creating smart cities rather than just
developing apartments in order to differentiate their offerings from the
smaller rivals. The prominent examples include Jaypee Greens on NoidaGreater Noida Highway, Lodha Group in Hyderabad and Mumbai etc. These
bigger players came out with niche and high end products catering to
esteemed needs of rich buyers.

 Technological Advancements
o With established players using more and more advanced technologies
especially in the shuttering equipments, ready to use concrete mix etc., make
it harder for the newer entrants to compete in terms of technology which
influence their pricing competitiveness.
High switching costs for customers
o Real Estate sector especially in residential sector involves high switching costs
for the customers. This forces the customers to stick to the present real
estate suppliers, even though the new entrants might provide a better deal
to the customers.
Government and Legal Barriers
o

A real estate developer needs to follow a number of laws even before entering the
market. The major laws that govern the sector include
Registration Act, 1908
Special Relief Act, 1963
Urban Land (Ceiling and Regulation) Act (ULCRA), 1976.
The Indian Evidence Act, 1872
Rent Control Acts
The Town & Country Planning Acts
Land Acquisition, Rehabilitation and Resettlement Act, 2013

o Union Government will be introducing the Real Estate Development

Regulatory Bill in the winter session of the Parliament, in order to put a check
on the unscrupulous builders who try and escape responsibility of providing
promised facilities to the property buyers.
o These rules and regulations make it harder for the new entrants to enter the
market.
Existing Internal Rivalry
Diversity of Competition
o The residential real estate market is largely localised and there are several
small players that run mainly as family businesses and lack any professional
structure.
o The localization gives a strategic advantage to these small players forcing the
bigger players to go for either product differentiation or reduced prices.
Product Differentiation
o The rivalry and competition between the firms compels them to keep costs
under limit and cut down on their offerings in residential real estate sector.
As the bigger players cannot match the prices, their presence is limited in the
space.
o Big corporates like Tata Housing, Adani Housing and Mahindra Lifespace are
the existing players in the sector. But many large players have left this space
as its tough to operate in the low-margin environment.

o The bigger players have moved on to creating small and smart cities rather
than just developing apartments in order to differentiate their offerings from
the smaller rivals. The prominent examples include Jaypee Greens on NoidaGreater Noida Highway, Lodha Group in Hyderabad and Mumbai etc. These
bigger players came out with niche and high end products catering to
esteemed needs of rich buyers.
Exit Barriers
o The exit barriers in terms of Government Regulations are relatively lower in
the real estate sector making it easier for them to relinquish the sector and
leave.

Threat of substitutes:
There are hardly any substitutes for Real Estate rendering the factor Threat of Substitutes
a little less effective to analyze the sector.
Conclusion:
Real estate industry continues to remain fragile in FY 14. As per the analysis, the bargaining
power of buyers and suppliers with the sector is weak and is in favour of the sector.
Moreover, there is no direct substitute of the sector. The internal rivalry is helping the
sector to be cost-effective and efficient. Government policies and plans are also in favour of
the sector. They are expected to bring a positive effect on the sector pushing it on the path
of high growth. Combination of the above factors and aggressive marketing and pricing of
inventory will help the real estate players to stride on smoother ground and help real-estate
to be a start performing sector of the Indian economy in the coming decade.