Real estate’s success storeys:: Business Line

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Focus, prudent financial management and the ability to avoid herd mentality help companies cope with tough times.

The real estate business is often painted in shades of grey — due to its poor reputation for ethics, transparency and governance. However, the industry contributed to 6.5 per cent of the country’s GDP in 2012 (10.5 per cent in 2010-11) and is the second largest employment generator in the country after agriculture.

The total revenue of the real estate sector was $66.8 billion during 2010-11. By 2020, the sector is expected to earn a revenue of $180 billion.

The fact that today almost every individual/couple considers real-estate investment as the first form of investment after securing a job/getting married says something about how far the industry has fared compared to a few decades back, when buying a home was usually the last investment before retirement.

BRIGHT PROSPECTS

The good news is: Short-term pressures induced by high interest rates notwithstanding, large industrial houses such as Tata and Godrej are planning to expand their foray into the sector. In fact, Adi Godrej has gone on record stating that real estate is likely to become the largest business division for the group in the next 10 years. In addition, large well-reputed Indian and international fund houses are increasing their exposure to the real-estate industry.

Last week, Kohlberg Kravis Roberts and Co. LP (KKR) — one of the world’s largest private equity (PE) firms — announced that it is joining hands with Singapore’s sovereign wealth fund to set up a non-banking financial company (NBFC) with a corpus of around $150 million that will lend funds to property developers in India.

Lately, the Government has also been talking about setting up a new regulatory authority for the sector. All these developments point in one direction — the increasing importance of the sector to the economy, more professionalisation and bright prospects that lie ahead for genuine businesses and investors in this sector.

One of the advantages of the property business, as pointed out by Adi Godrej, is that one does not have to be concerned about market share or size of the opportunities for one to make profits. There are other characteristics that lie behind generating extraordinary profits in this sector. In this article, I’d like to provide an insight into the success strategies that lie behind three firms that have recorded industry-beating profitability amidst tough external conditions. The firms are Oberoi Realty, Sobha Developers and Ashiana Housing.

OBEROI REALTY

Oberoi Realty is a debt-free real estate firm (a laudable achievement for an industry drowning in debt). The company is built on a model similar to Trump Luxury Real Estate (minus the recklessness of the swashbuckling Donald Trump of course), with the aim of developing signature properties in return for a hefty premium.

The firm has carved a niche for itself in the Mumbai market.

Although the company has a diversified portfolio across commercial and residential, the predominant focus has been on the residential side and the aim is to target the upper end of the market segment. Integrating retail, office space, social infrastructure and hospitality projects, has been one way in which it has been able to create an aspiration value for residences in mixed use developments.

The company extensively out-sources work to leading international and domestic consultants in the areas of architecture, design, engineering and construction to achieve international quality and styling as well as to attain the scalability required to undertake large developments. Yet, it is able to clock a high margin due to the target segment and premium branding.

SOBHA DEVELOPERS

Sobha Developers is known for building a good portion of the Infosys campuses. It focuses primarily on residential projects for families and contractual projects for corporate, especially in the south market. Backward integration model is one of the key competitive strengths of Sobha.

This means that the company has in-house possession of most of the competencies and resources required to deliver a project from conceptualisation to completion. Backward integration includes an interiors division with one of the country’s largest wood working factory, a metal works and glazing factory, and a concrete products factory. These help it to lock in higher margins end-to-end by achieving cost efficiencies.

ASHIANA HOUSING

Ashiana Housing is another near debt-free firm in the real estate sector that records high return ratios. The company mainly focuses on group housing for the middle-income group and retirement communities for senior citizens in Tier-2 and Tier-3 cities such as Jamshedpur, Jaipur, Bhiwadi and Ghaziabad.

The company’s business model is based on five strategies — low capital employed, land is raw material, in-house construction capabilities, direct sales team and facilities management.

By operating in regions where land is a smaller portion of total costs and using the JV model with land owners, the company is able to keep its capital requirements low. Focusing on an execution-based model as against land banking further frees up capital. In-house construction allows better cost and quality control.

In-house sales team allows sale to actual users and long-term investors instead of a broker selling to speculative investors. Lastly, facilities management provides annuity revenues even after project completion.

COMMON THREAD

What distinguish these companies from the rest of the players in the sector is their focus, prudent financial management and ability to avoid the herd mentality that did many others in during the 2008 crisis.

The typical real estate developer diluted equity and loaded up on debt to accumulate large land banks in the hope of high valuation — what they missed was a key component of the financial equation — cash flows.

Another common denominator for the companies discussed above is the strong web of trust that they share with their customers.

These characteristics, along with their unique business models, are likely to hold them in relatively better shape when it comes to coping with the volatilities that the industry is bound to witness along the way in its long-term growth journey ahead.