Bain Report India Real Estate

8/15/2019 Bain Report India Real Estate

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Residential real estate in IndiaA new paradigm for success


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Net Promoter System® and Net Promoter Score® are trademarks of Bain & Company, Inc., Fred Reichheldand Satmetrix Systems, Inc.


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Residential real estate in India | Bain & Company, Inc.

Page i

Contents

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg.1

1. The residential real estate market: Gaps between demand and supply . . . . . pg. 5

2. Selecting the right business model: Aiming for local scale . . . . . . . . . . . . . pg. 11

3. Driving excellence in process execution: Running a tight ship . . . . . . . . . . pg. 17

4. Focusing on tight cash management: Choosing the right success metrics . . . pg. 23

5. Using an integrated go-to-market strategy and tailoring your brand:Building a customer mindset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 29


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Page ii


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Page 1

Executive summary

India’s residential real estate market hasn’t had it easy in recent years. Short-term demand factors have stalledgrowth, and low consumer demand at current prices has accentuated the problem. Absorption rates have stagnated,causing high levels of overhang across all major cities, with Gurgaon and Mumbai among the worst hit. Developers,especially those with holding capacity, remain largely in “wait and watch” mode without lowering prices. Customersseem intent on waiting out the slowdown. On the other hand, developers who are cash-crunched or who havebeen unable to sell their products have either closed up shop or are borrowing money at high costs to survive.

Yet there are signs of light at the end of the tunnel. The Reserve Bank of India (RBI) is leading the way in initiatinga virtuous cycle of consumption and growth. The Real Estate (Regulation and Development) Bill is expected toincrease transparency, customer-centricity and process adherence. Required approvals have historically put extreme

pressure on developers. Greater transparency should reduce approval charges and help lower construction costs.It will also help accelerate the construction process and reduce overall costs for consumers.

In addition, ination rates appear to have stabilized and lending rates have started to come down. While quotedproperty prices have yet to correct for the overhang in supply, discounts (both up front and discreet) and innovativepricing schemes, such as possession-linked payment plans and subvention schemes, have increased.

And so, beyond the short-term demand factors, there is immense potential in residential real estate in India.Organised Indian real estate demand is estimated at roughly 880 million square feet. It is forecast to reachapproximately 1.35 billion square feet by 2020, a 9% annual growth rate. Residential real estate is responsible for85% of the demand. This growth is supported by robust underlying market drivers such as favourable macro-

economic conditions, increasing affordability and urbanization, improved access to credit and the gradual shiftfrom unorganised real estate construction to organised development.

Due to the conuence of these factors, the Indian real estate market is starting to witness a substantial shift. Whatit used to take to win in this space is very different from what it will take in the future. In this environment, webelieve that real estate developers must understand ve fundamental dynamics in order to succeed. Each dynam-ic carries a specic implication for businesses. We will discuss all ve dynamics and their implications in thisreport. They are:

• Emerging competitive forces giving rise to distinct business models. New business models are rapidly evolving.Focusing on land acquisition and effective management of regulatory bodies is no longer sufcient; devel-opers must also focus on becoming strong local market leaders in order to build a platform for sustainablegrowth. They are doing this by being more thoughtful about the operating models they use to compete indifferent marketplaces.

The main implication for developers hoping to successfully weather changing competitive dynamics is toselect the right business model. Due to the low overlap of costs and customers across disparate locations,real estate projects across markets are truly distinct businesses. Within each local market, there are a multitudeof developer types. The key to building a sustainable business is to achieve local scale rst, as most traditionalplayers, such as Sobha and the Prestige Group, have done. Another increasingly common option for developersis to forge joint development agreements (JDAs), in which they partner with land owners and share prots. In

addition to reduced upfront land costs, developers tend to benet from land owners’ deep local knowledge.


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Page 2

Furthermore, developers must define the key priorities for their business models and assess their corecompetencies across the value chain. Developers can build strong businesses by focusing on certain coreelements of their value chains and building effective outsourcing models for other activities. They must alsobe “intelligent customers”—possessing enough knowledge about outsourced activities to avoid getting takenadvantage of by vendors.

There are certain activities across the value chain that help create value—typically these include businessdevelopment, land acquisition and design. Other activities, such as planning, budgeting and projectmanagement, protect value. Businesses should focus on building critical capabilities when deciding whichof these activities to undertake themselves and which to outsource. It is important to note that there aresegments of businesses in which some of the value-preservation activities could be a competitive advantage.For example, a developer adept at strategic procurement will have a sustained competitive advantage overcompetitors in the affordable housing segment.

• Complex market and regulatory environment. The new regulatory bill, combined with region-specificregulations across the country, means that real estate developers face higher levels of scrutiny and greatercomplexity than ever before. To stay aoat, businesses must actively manage risk through both internal andexternal processes.

The implication for developers is to drive excellence in process execution in the preconstruction phase, duringconstruction and post-handover. Customers expect a level of maintenance and upkeep of the property post-handover. Indeed, the brand image of some developers has taken a hit due to suboptimal property upkeepand maintenance or because of consistent delays during construction.

To a signicant extent, companies can drive improvement merely by focusing on processes and running atight ship. Key processes to optimise include those related to change management, risk mitigation, cross-functional processes, key performance indicators and incentives, organizational setup, IT setup, optimalmanagement information systems (MIS) and governance.

Developers can use tools such as project trackers to view and manage the many interlinked processes thatmake up a construction project. Trackers can alert companies to critical bottlenecks before constructioninitiation, allowing teams to take corrective actions before problems occur.

• Shifting prot pools. There has been a tectonic shift in the Indian real estate market in the last 10 years. Costsof both land and key inputs (primarily steel and ready-mix concrete) have skyrocketed. Raw material priceshave grown by a factor of 2 to 3 times since 2005. Land prices have increased even more dramatically. Thismeans that while sales numbers may have increased, developer margins are lower than before.

This leaves developers with no choice but to focus on tight cash management by project and cash ow returnon investment (CFROI). Fundamentally, a real estate business is the sum of its projects plus overhead andcorporate expenditures. Cash is king in this project-based business, and it will remain so. The unique natureof the real estate business, which includes high peak investment levels, a long cash ow break-even cycle andinows skewed toward the end of projects, lends itself to particular nancial challenges. Yet traditional prof-itability metrics, such as EBITDA and PAT, can vary based on accounting methodologies. CFROI, in contrast,reects the true cash generation ability of a project and, ultimately, of a developer. A critical way businesses

can maintain a CFROI focus is by organizing around projects and empowering project heads to lead.


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• Increase in customer awareness and rapid changes in customer expectations. Buying real estate is often thelargest, most signicant purchase people make in their lifetimes. As such, customers have high degrees ofinvolvement and investment in their decisions. There is greater emphasis than ever on word-of-mouthinformation, including online reviews. Currently, Indian residential real estate developers do not have acustomer mindset. This has resulted in poor advocacy, with few customers saying they would recommend adeveloper’s projects to a friend or colleague.

Customers’ expectations of residential apartments have also changed rapidly. What was considered top of theline in 2010 is a base expectation in 2015. We expect this trend of fast-changing demands to accelerate overthe coming years. Given that many residential projects take more than ve years from conceptualization tohandover, developers must anticipate what customers will want 3 to 5 years in the future—and then beginbuilding that today.

There is a major opportunity for developers to tailor their brands to key purchase criteria, both current andprojected. Creating strong product and brand strategies to match target customer preferences is moreimportant than ever. Delivering key attributes, from pricing and payment to clear communication, requiresmanaging key touchpoints with customers before, during and after purchase. Developers should also considersegmenting their customers and building their brands to position themselves for various customer types.Each of these changes requires developers to transition from a transaction-based approach to a relationship-based one.

• Innovative selling approaches and channels. As inventory levels remain high, selling properties has becomeincreasingly challenging, particularly in the post-launch phase. Once developers have their internal processesin order, they must turn their focus outward.

To best reach customers, developers have begun to employ integrated, multichannel go-to-market (GTM)strategies that include multiple channel pipelines. These channels could include direct sales, customer referrals,international initiatives, collaboration with channel partners, corporate sales and more. Indeed, majordevelopers are already focusing on building this multichannel sales strategy and creating “excellence niches”where they can excel.

Many changes have taken place in the residential real estate market in India, with further changes still to come.While it is still too early to predict the outcome of new regulations and the impact of short-term factors, with theserecommendations in mind, developers can better prepare themselves for whatever lies ahead.


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• Residential projects make up 85% of the Indian realestate market. Between 2015 and 2020, we expect

demand to grow from approximately 880 millionsquare feet to 1.35 billion square feet. While we alsoexpect demand for hospitality, retail and commercialreal estate to increase, residential real estate willcontinue to represent the bulk of the demand.

• Reasons for high demand for residential real estateinclude a continuing urbanization trend and reducedhousehold sizes due to the rise of nuclear families.

• However, after a long period of growth, the Indianeconomy dipped in 2012. The GDP growth rate hasstagnated (but is expected to begin trending upward),and gross fixed capital formation (GFCF) andindustrial production have slowed.

• The downturn has contributed to inventory “overhang,”in which supply exceeds demand but prices remainhigh. The situation seems to have worsened in the lastfew quarters.

• The RBI has encouraged developers to lower prices,but pricing has yet to correct. To compensate, developershave been using innovative pricing schemes to attractbuyers. For example, under the 20:80 scheme, homebuyers pay only 20% of the cost upfront, with therest funded by banks.

• Cash-crunched developers have either closed shopor are borrowing money at extremely high costs. In

some of the pricing schemes, developers are actuallyborrowing money from people.

• Early indicators suggest that the residential realestate market may be on the road to improvement.During 2015, interest rates decreased by 0.75% andination leveled off. Major developers are continuingto expand in developable areas and consumercondence is rising.

1.Residential realestate market: Gaps betweendemand andsupply


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Figur : However, there has been a dip in the economy in recent years after a long period of robust growth

Note: $1USD=64.93 INRSource: Euromonitor

Real GDP growth rate is expected to trend upwards in mid term Gross fixed capital formation slowdown is expected to continue

Industrial production slowed in 2012–14; improvement expected in 2015–16 Economic slowdown has also impacted the equity market in recent years

03

5

8

10

13%Real GDP YOY growth rate

2 0 0 0

2 0 0 2

2 0 0 1

2 0 0 3

2 0 0 4

2 0 0 6

2 0 0 5

2 0 0 7

2 0 0 8

2 0 1 0

2 0 0 9

2 0 1 1

2 0 1 2

2 0 1 4

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2 0 1 5 E

2 0 1 6 E

2 0 0 0

2 0 0 2

2 0 0 1

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2 0 0 6

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2 0 0 7

2 0 0 8

2 0 1 0

2 0 0 9

2 0 1 1

2 0 1 2

2 0 1 4

2 0 1 3

2 0 1 5 E

1 9 9 9

GFCF YOY growth rate (current prices)

10

20

30

40%

0

0

5

10

15

20%

Uptick observedin 2014

Industrial production index YOY growth rate(IPI indexed to 2010)

500

0

1,000

1,500

Market capitalization of listed companies($B at current prices)

2 0 0 0

2 0 0 2

2 0 0 1

2 0 0 3

2 0 0 4

2 0 0 6

2 0 0 5

2 0 0 7

2 0 0 8

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2 0 0 9

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2 0 1 6 E

2 0 0 0

2 0 0 2

2 0 0 1

2 0 0 3

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2 0 0 5

2 0 0 7

2 0 0 8

2 0 1 0

2 0 0 9

2 0 1 1

2 0 1 2

2 0 1 4

2 0 1 3

1 9 9 9

Figur : Organised Indian real estate demand is estimated to be ~880M square feet and is forecast toreach ~1.35 billion square feet in 2020

Notes: Other includes hospitals, special economic zones and education; residential segment includes only the organised portion of residential real estateSources: India Brand Equity Foundation report; Bain analysis

Residential

Commercial

Retail

Hospitality

0

500

1,000

1,500

2015

~880M

2020

Residential(organised)

~1,350M

Indian real estate demand• Growth in all segments of hospitality demand:

foreign and domestic tourism, andbusiness travel

• Strong urbanisation trend will continue• Reducing household size due to rise of

nuclear families• Organised sector growing faster than

unorganised sector

• Stable growth expected for services sector,which drives demand for commercial real estate

• High growth expected in retail sector overall

• Increase in overall consumer spending andshare of organised retail will drive retailreal estate growth

(Square feet in millions, 2015–2020)

CommercialRetail

HospitalityOther

8–10%

9–10%

8–10%

7–8%

~25%

(2015–20)CAGR

Fundamental factors for each segment are expected to drive growthResidential (~85% of Indian real estate market)to grow at 8%−10% CAGR by volume


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Figur 3: Demand factors accentuated the problem as absorption rates have stagnated, causing highinventory levels

*Mumbai, National Capital Region, Bengaluru, Pune, Chennai, HyderabadSources: Bain Analysis; Knight Frank

Residential absorption has stagnated in the past two years The situation seems to have worsened considerably in recent quartersNumber of units (top 5 cities + NCR) India: organised residential inventory overhang (months)

H12012

H22012

H22013

H12013

H12014

H22014

H12015E

Q2FY2012

Q3FY2012

Q1FY2013

Q4FY2012

Q2FY2013

Q3FY2013

Q4FY2013

Q1FY2014

Q2FY2014

Q3FY2014

100,000

120,000

140,000

160,000

180,000

200,000

220,000220,000

LaunchesAbsorption

0

20

40

60

City 3

City 6City 5City 4

City 2City 1

Uptick observedin recent months

Figur 4: Initial indicators suggest that the real estate market may be showing some signs of improvement

27.1%

Prestige

59

27.4%

Sobha

38

28.8%

Oberoi

8

29.5%

Brigade

25

Godrej

108

13.3%

CAGR FY13–15

Sources: CEIC database; IndiaStat; RBI; Inflation.eu; company reports

Interest rates are starting to decrease Inflation is showing signs of improvement

Developers are continuing to expand Consumer confidence levels are increasing

Bank interest rate (%) Inflation (based on consumer price index)

Growth in developable area Consumer confidence survey: RBI: current situation index

7.5

8.0

8.5

9.0

9.5

Nov2014

Jan2015

Mar2015

May2015

July2015

0

2

4

6

8%

Aug2014

Oct2014

Dec2014

Feb2015

Apr2015

Jun2015

Aug2015

0

10

20

30%

FY15, areain sq. ft.,

millions

75

85

95

105

115

May2013

Aug2013

Nov2013

Feb2014

May2014

Aug2014

Nov2014

Feb2015

May2015

Aug2015


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Figur 5: Real estate developers in India need to contend with signicant evolution across external forces

Source: Bain analysis

E Selling approach

A Competitive dynamics

• Selling, especially large inventory, hasbecome challenging

• Particularly true in the post-launch period withsignificant inventory overhang

• Nontraditional channels are emerging fast,whether digital or wealth management networks

• Business models are rapidly evolving• Ability to acquire land, managing regulatory

bodies effectively are emerging as competitivestrengths

• Local market leaders have very strong positions toenable growth

D Customer demand

C Input dynamics

• Urbanisation and income levels on the rise will fuel demand• Consumer activism on the rise, with specific preferences• Intelligent and aware customers• Greater-than-ever emphasis on word of mouth, including online

• Land prices have skyrocketed• Owners are more aware; aggregation has

become difficult• Input (material and labour) costs have risen by

two to three times in past five to eight years• Labour issues have added complexity

B Complex market environment

• Increased scrutiny on designs, approvals, transac-tions across space

• Regulations more stringent, increasingly in favour ofthe customer

• Complexity due to regional regulations• Call for greater transparency due to organised

funding and customer activism

Real estatedeveloper

Figur 6: Five key topics matter differentially regarding what these ecosystem forces imply for realestate developers

Note: REIT refers to Real Estate Investment TrustSource: Bain analysis

Competitivedynamics

Complexmarket

environment

Inputdynamics

Customerdemand

Sellingapproach

Due diligence to identify& execute appropriate

land development models

Customise customer-centric design process

& offering

Integrated go-to-market approachacross channels

Tailoring the brandto key customerpurchase criteria

Frequency of customerupdates during

construction

Create cost-efficientdesigns & aggressive

value engineering

Tight program managementoffice process to track

in-cost, on-time delivery

Strategic sourcingpartnership

model

Optimisation ofcost-effective

construction methods

Identify & implement requirements &access opportunities for organisedexternal funding, e.g., REITs, PE

Identify & buildstrategic capabili-ties in local market

Codify rigorousapproval tracking

processes

Third-party contractor &supplier risk identification

& management

Detailed launchplanning &execution

Process disclosure& communication

strategy

Identify strengths &weaknesses in brand &product differentiation

Businessdevelopment

Landacquisition

Design Approvals Planning &budgeting

Contracts &purchase

Sales &marketing

Project management & construction

Propertymanagement

Selecting the right business model

Excellence in process execution

Tight cash management and focus on cash flow return on investment (CFROI)

A

B

C

D

E

1

2

34

5

Standardisepost-handover

CRM


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Figur 7: Adapting to these ve business implications is critical to successfully building a protable realestate business


Key industry trend Business implication

Business models have evolved and new ones have emerged

Regulatory environment is becoming more complex; fund sourcesare becoming organised

Profit centres are shifting due to steep rise in land and input costs

Customers have evolved and are more intelligent and aware

Selling (especially large inventory) has become challenging, particularly after launch

Selecting the right business modelNeed for increased focus on core capabilities, as well as theimportance of local scale

Driving excellence in process executionEnsuring tight internal and external processes to offset anenvironment of complexity

Tailoring the brand to key purchase criteriaDeliver across touchpoints on what customers value most tobuild advocacy for the brand

Focus on tight cash management by project Project-centric cash flows will be the cornerstone fordefending and expanding margins

Building a multichannel GMT strategy Go to market with an integrated and coordinated strategyacross multiple channel pipelines

A

B

C

D

E

Competitive dynamics

Complex market environment

Input dynamics

Customer demand

Selling approach


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• Distinct markets can be described by the extent towhich they share capabilities and customers. The

markets for shampoo and conditioner, for example,share both capabilities and customers. Video ondemand and video rental, in contrast, compete forcustomers but do not share capabilities. Real estateprojects across two different cities share few capabilitiesand customers. Local regulations and customerpreferences are different enough that developersshould consider them completely separate businesses.

• Real estate in India is a local business. To be relevant

to customers and build a local brand, it is critical tocreate local scale. This should be the goal of developersin all markets.

• Prestige in Bangalore is a good example of acompany that is building local scale. Prestige had10 to 15 million square feet of property underdevelopment in Bengaluru alone in 2007. In 2013,Prestige had 47 million square feet under develop-ment, and a signicant presence in southern cities.

• To succeed, developers must assess competenciesacross the value chain that both create and protectnancial value. Companies should evaluate the relativeimportance of various activities for their businesses,then determine which activities they want to controlin-house and which they want to outsource.

• This self-assessment has led developers to differentoperating models. Some conduct most activities

in-house, while others outsource some activities fora leaner approach. Some developers use a hybridmodel of the two.

• Joint venture (JV) models and JDAs have becomecommonplace. JVs occur between two developerswho share risks and access one another’s capitaland expertise. JDAs, in contrast, tend to be agree-ments with land owners. The land owner contributesland, while the developer oversees approvals,construction and marketing.

2.Selecting the rightbusiness model: Aiming for localscale


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Figur 9: There are a multitude of developer types within each local market


Business model

Description

Key capabilities

Examples

Small local players New and upcominglocal players gaining scaleEstablished playershaving local scale National players

• Focus on smaller stand-alone developments withina particular city

• Limited access to capital

• Focus on specific locationand local expertise toscale up

• Limited access to capitalfor expansion

• Rapid growth and scaleachieved through focus onspecific location andharnessing local expertise

• Decentralised operationalmodel

• Growth and scaleachieved by harnessingbrand and capability

• Strong relationships withlocal authorities

• Small but loyal localinvestor and customer base

• Track record of successfullycompleting few projects

• Strong relationships withlocal authorities

• Growing local investorand customer base

• Proven track recordacross several projects

• Deep relationships with localauthorities

• Strong local investor andcustomer base

• Large capital pool and localproduct portfolio

• Established track recordacross multiple projects

• Nationally recognisedbrand and reputation

• Streamlined processes anddecision roles

• Strong organisationcapability with multipleleaders within organisation

Savvy

Sanjeevani

Akshaya

Omkar

Emaar

M3M

The 3C Company

VGN

SobhaAdani

HiranandaniDLF Prestige

LodhaGodrej

PropertiesTata

Housing

Striving to achieve local scale Desired end state Striving to achievescale in all markets

Achieving local scale in real estate development business is key to building a sustainable and scalable business

Figur 8: Real estate projects across two markets are different businesses altogether due to low costand customer sharing


Customer sharing

High

LowHighLow

Separate markets withpotential for cost

leadership shifts, e.g.,oil and refinery

byproducts

One market withpotential for differentia-tion or niche position,

e.g., Ray-Ban andordinary sunglasses

Separate

markets,e.g.,books and cars

Low costand

capabilitysharing

Lowcustomersharing

Separatemarkets with

potentialfor

bundling, e.g., computer

hardwareand software

One market withpotential forsubstitution, e.g., videorental andvideo ondemand

• Varied local approval and regulatory require-ments add to the complexity

• Variation in contractor capability across regions• Potentially low economies of scale in materials

procurement• Marketing initiatives lack scale and, hence, will

need to be activated at a local level (newspapers,hoardings, below-the-line activities)

• Channel partner network to be reestablished at alocal level

• Fundamental differences in customer expectationsand requirements

- Different vastu requirements across regions- Different aspects given premium (top floor highly

desired in Mumbai but last to sell in Ahmedabad)• Low overlap of customers across cities

- Few customers from one city looking to buy aproperty from the same developer in another city

• Customer reach-out channels need to bereestablished in each location

Real estateprojects

across twodifferent cities

Cost(and

capability)sharing

One market, e.g., shampooand conditioner


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Figur 1: Most traditional players have focused on one city and then expanded to other cities (Prestige)

Sources: Company annual reports; analyst presentations; Bain analysis

Prestige Group

2007

2010

2013

Percentage of area under development Example No. 2

• Completed ~4M square feet and ~11M square feet under developmentin Bengaluru in 2007

• Started expanding in Kochi and Goa

Focused on Bengaluru with slow expansion in South India

• Further expansion in Bengaluru with ~42M square feet underdevelopment

• At the same time, started expanding primarily in Chennai along withKochi, Hyderabad

Market leader in Bengaluru and focused on Chennai

• Further expansion with primary focus on Bengaluru and Chennai market;~41M square feet under development

• Significant presence in Southern Indian cities

Market leader in Bengaluru and Chennai market

20

40

60

80

100%

0 1 2 3 4 Rest

Portfolio in cities

F Y 1 0 P r e s t i g

e

F Y 0

7 P r e s t i g

e

F Y 1 3 P r e s t i g e

50% ofportfolio

Figur 0: Most traditional players have focused on one city and then expanded to other cities (Godrej)

Sources: company annual reports; analyst presentations; Bain analysis

Godrej Properties

2007

2010

2013

Percentage of area under development Example No.1

• Modest scale of area under development overall (~3.5M square feet)• Spread across Mumbai, Bengaluru and Kolkata• No significant local scale in either cityEqual focus on three different cities; lack of local scale

• Mega township project shifted focus to Ahmedabad• Ahmedabad, Pune, Hyderabad were leading cities for areas under

development• Live projects in eight other citiesFocus on three new cities implying Pan-India focus in the long run

2015• Local scale in Ahmedabad• Live projects in 11 other citiesPan-India focus; local scale in Ahmedabad and Mumbai

20

40

60

80

100%

0 1 2 3 4 RestPortfolio in cities

F Y 1 0 G o d

r e j

F Y 0 7

G o d

r e j

F Y 1 3 G o d r e j

F Y 1 5 G o d r

e j 50% ofportfolio

• Continued focus in Ahmedabad; significant local scale in Ahmedabad(among top two players)

• Live projects in nine other cities• Large number of upcoming projects in MumbaiPan-India focus ongoing but starting to strategically achieve local scale inselect cities


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Figur 3: Unique models have emerged within the Indian real estate landscape as developers focus onkey strengths across value chain…

In-house Partially outsourced OutsourcedSources: Annual reports; company websites; news reports; Bain analysis

Developer1

Developer3

Developer

2

Developer4

Developer5

Developer6

Businessdevelop-

ment

Landacquisition

Design Approvals Sales&

marketing

Planning&

budgeting Integratedcontracting

Strategicpurchasing

Contracts & purchase Construc-tion

Projectmanage-

ment

Propertymanage-

mentArchitectural& structural

Concept& product

Create financial value Protect financial value

Internally focused business model, capabilities built in-house across entire value chain

Notavailable

Notavailable

Notavailable

Notavailable

Notavailable

Notavailable

Notavailable

Notavailable

Notavailable

Hybrid model

Lean business model, outsourcing all but noncore capabilities

Notavailable

Notavailable

Notavailable

Figur : It is important to dene the business model priorities and to assess core competencies acrossthe value chain


Create financial value Protect financial value

Businessdevelop-

ment

Landacquisition

Design

Typical value creators

Approvals Sales&

marketing

Planning&

budgeting Integratedcontracting

Strategicprocure-

ment

Contracts & purchase Construc-tion

Projectmanage-

ment

Propertymanage-

mentTechnicaldesign

Concept& designmanage-

ment

Why is eachreal estate

activity valuable?

What shouldbe our focusfor in-houseoperations?

How bestdo we useexternal

partners?

When do we initiate

change?

Who shouldplay keyroles for

each activity?

1 542 3

• Valuecreators vs.valueprotectors

• Relativeimportanceof eachactivity forthe business

• Three to fivekey activitiesthat we wantto controlin-house

• Degree ofcontrol toretain

• Optimaloutsourcingmodel forchosenactivities

• Which activitiesand whichprojects areimmediatepriorities forthe businessrather than long-term goals?

• Internal vs.externalmandates

• Roles ofpromoter,leadership team,execution team

• Implicationson capabilitybuildingTypical value protectors


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Figur 4: …including joint development models


Nontra i tiona mo e s

Land bank model

Developer1

Developer2

Developer3

Developer4

Developer5

Developer6

Developer7

Developer8

Developer9

Developer10

Joint venturemodel

Joint developmentagreement model

Joint venture model• Joint venture for:

- Access to partner’s expertise or capital- Gain access to a project or asset that would have been

inaccessible otherwise- Share risks- Strategic reasons

• Example: 50:50 joint venture between DLF & NakheelProperties (Dubai-based real estate developer)

Joint development agreement model• Tie up with land owner for developing projects

- Land owner contributes land- Developer responsible for approvals, construction and

marketing• Asset light model• Financial agreements with land owners

- Revenue share- Area share- Profit share

• Example: Godrej Properties’ joint development agreementwith Ador Group to develop a project in Mumbai


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• There are six key enablers real estate companiesshould focus on to promote excellence. Underlying

all six is a focus on process. Well-dened processesrunning throughout the value chain, from pre-construction through the construction cycle, handoverand beyond, can create alignment and increasecompanies’ ROI.

• Companies can also apply disciplined processexecution throughout their internal operations,developing clear procedures for organisationalsetup, governance, IT setup and risk management.

For example, real estate companies can optimisehow they collect payments from customers. Ratherthan waiting until after a due date to request pay-ment, companies can send reminders to customersat scheduled times before the due date.

• Similarly, companies can use a detailed MIS to raisekey issues across the firm. A robust governancesystem can help leaders make timely decisions,keeping projects on schedule and improving or-ganisational productivity and performance.

• Many interlinked and overlapping processes runthrough the construction value chain. Developers canimprove their processes by using a detailed trackerto monitor all construction steps. A tracker is a visualaid that provides visibility into project tasks; it helpsidentify the critical path and proactively alerts teamsto potential conicts. Use of these tools reduces timeto launch and thus increases return on capitalemployed (ROCE).

• Finally, the right set of key performance indicators(KPI) and incentives can ensure targeted efforts byemployees. This in turn also improves productivityand results. For example, sales heads should alsobe responsible for collections. Leadership share inthe company’s fortunes should be based on rigorouslydened metrics and indicators.

3.Driving excellencein process execu-tion: Running atight ship


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Figur 5: Six key enablers that lead to success in real estate


Process optimisation Key performance indicators (KPIs)and incentives

Organisational setup

Management information

systems and governance Change and risk management IT setup

Seamless cross-functional alignmentacross all key processes

Well-defined processes runningthroughout the duration of the value

chain, before and during construction

Project-centric organisation structure thatcreates empowered project heads

End-to-end accountability with authorityto project heads to deliver on time, on

cost, with quality

Focus on controllable operational,financial, people, strategic goals

Leadership share in company’sfortunes based on rigorously defined,

periodic metrics and indicators

Project and overall governance acrossall key business elements

Cross-functional reviews and reportsfocusing on the few outcomes and

metrics that differentially matter

Governance, KPI measurement, keytransactions fully IT enabled

IT functioning as a differentiator,providing live, accurate and

actionable inputs to management

Mitigating risks actively throughappropriateinterventions

Handling volatility throughappropriate measurement and

control of business or people risk,including fixing talent gaps

Figur 6: Following a robust preconstruction tracking process helps identify the critical path and raiseags proactively, thus reducing time to launch and increasing ROCE

Illustrative residential project under different cash flow and NPV scenarios

Potential overall increase in EBIT of 10−20%; NPV by 20−30%

Inventory management- Genetic algorithms could be used to model optimal NPV, EBIT scenario

Defined timelines & boundary conditions for all preconstructionprocesses (design, contracting, marketing) helps limit theexpectations and targets

3−5 years

Time

Cumulativeproject

cashflow

Potential time tolaunch reduction

by 10–20%


15–20% potentialincrease in EBIT

Value engineering across - Shell & core - Finishes- MEP - Waterproofing

NPV=Rs. 115NPV=Rs. 105

NPV=Rs. 100

NPV=Rs. 90


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Page 20

Source: Bain analysis Project launch Property handover

Pre-construction(1–1.5 years)

Business development (~2 months)

Construction(1.5-5 years, dependent on project size)

Post-construction

Businessdevelopment

Technical duediligence

RA

Land acquisition DA

Approvals

Preconstruction approvals Construction-related approvalsLandand JDA

Sales &marketing

Branding & marketing

Launch planning Customer-centric sales

Customer relationship management

Sales & collections

Design

Concept & design

management

Technicaldesign

Value engineering

Concept & schematics

Market research

Product planning

Planning & budgeting

Property management

Integratedcontracting

Strategicpurchasing

Project construction Quality & safety

Project management

Contract monitoring & vendor performance monitoring

Strategic procurement relationships

Contracts &purchasestrategy

Tendering & integrated contracting

Propertymanagement

Integrated project planning and monitoring (milestone reviews and revisions)

Design linked costing & budgeting Payments, capital & cash management

Contracts&

purchase

Figur 9: Multiple interlinked processes run through the duration of the value chain


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• The price of key construction inputs, including land andmaterials, has increased dramatically over the past

decade. Raw materials have doubled or tripled inprice, while land prices have increased even further.In Mumbai in 2015, land cost has increased to manytimes that of the 2005 levels. Delhi, Bengaluru andChennai saw similarly rapid increases.

• Whereas typical developer prots were once 20% to 25%of the cost of a project, they made up only 8% to 10% ofprice realisation currently. In 2005, land costs comprisedan average of 20% to 25% of the total price of a project;

currently, they comprised roughly 40% on average.• Squeezed margins, combined with elongated

construction cycles and the unique nature ofstaggered cash inows in the real estate business,present challenges for developers. The fact thattraditional protability metrics depend on completionof work further complicates this matter. Becausedevelopers often do not see signicant cash inowsuntil the later stages of projects, common revenue andprot metrics (such as EBIT, EBITDA, and PAT) do notprovide a complete picture of rm performance.

• However, solvency and access to cash are moreimportant for developers than accounting prots.Instead of traditional metrics, developers should useCFROI to judge their returns and business health.CFROI logically measures returns against investedcash in a project-based, capital-intensive industrythat often faces capital crunch.

• To maintain focus on CFROI, companies should orga-nize around projects and empower project headsto maximise returns. They should give project headsfull, end-to-end responsibility for the time, cost andquality of their projects. They should also plan tomeasure cash ow and other milestone metrics ona monthly or quarterly basis. Specic initiatives,such as upfront project inventory managementand project phasing and pricing strategy, couldrelease signicant value in terms of overall project netpresent values (NPV), rather than just end-of-projectaccounting metrics such as EBIT and PAT.

4.Focusing on tightcash manage-ment: Choosingthe right successmetrics


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Figur : The land and materials price increases have eaten into the prot margins of developers

Note: All values indexed to 2005 total price realisation

Illustrative breakup of price realisationfor residential project

Price realisation Rs. 100 psft. Price realisation Rs. 250 psft.Illustrative breakup of price realisationfor residential project

Land costs Labor Other Profit0

20

40

60

80

100%

0

20

40

60

80

100%23

Material Land costs Labor Other ProfitMaterial

17–18 23–25 15–17 21–24

2005 Developer profit=20−25% of price realisation Current developer profit=8−10% of price realisation

Landcosts

Profitto

developer

Profitto

devel-oper

Labor Labor

Other

Reinforce-mentsteel

Reinforce-mentsteel

CementCement

ElevatorsElevators

UPVC doors & windowsElectrical materials

CP & sanitary fittings

Other Other

Architects & consultantsfee+CM fee

Liasioning charges

Market-ing

Market-ing

Interest cost

Over-head

Over-head

Prelim-inaries

Prelim-inaries

UPVC doors & windowsElectrical materials

CP & sanitary fittings

Architects & consultantsfee+CM fee

Liasioning chargesInterest cost

117 36–40 43–4740–44

23–27

Landcosts

Other

Figur 0: The price of land and materials has increased signicantly over the past decade

2008100

2008100

Raw material prices have increased substantially

Overall, raw material costs increased by a factor of 2-3x since 2005

However, land prices have seen a multifold increase

0

100

200

300

400

Steel(rebar)

Concrete

Elevators

Tiles

UPVC doors& windows

StoneElectrical materials

CP &sanitary

Woodendoors

2005indexed

price

level

Ironmongery

DG set

2.5–3.25x

2.5–3x

3–3.75x

1.8–2x

1.8–2x

1.8–2x

1.8–2x

2–2.5x

2–2.5x

2–2.5x

3–3.75x

Notes: Land price appreciation estimated from actual deals conducted or circle rates where available; FSI-adjusted range accounts for higher floor area ratio; raw material priceincreases weighted by percentage age of total cost for each inputSources: Bain analysis; interviews with 20 property dealers across four cities and four industry experts across three sectors

Bengaluru Chennai

3–15x

7–15x4–10x

10–20x

FSI-adjusted

range

FSI-adjusted

range

FSI-adjusted

range

FSI-adjusted

range

0

500

1,000

1,500

2,000

2008100

2013

1,500

0

500

1,000

1,500

2,000

2013

2,000

0

500

1,000

1,500

2,000

2013

1,500

0

500

1,000

1,500

2,000

2008100

2013

1,000

Delhi NCR Mumbai


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Page 25

Figur 3: Fundamentally, a real estate business is the sum of its projects; CFROI is the best metric tomeasure business health


Any actions to improve returns must be taken at the project level

Project 1

Project 2

Project n

Miscellaneous spending(Corporate overhead, etc.)

CFROI (Cash flow return on investment) is the best metric to judge returns in the real estate business

Traditional profitability metrics(EBIT, EBITDA, PAT, etc.)

• Income statement line items are skewed due to theirdependence on work completion accounting methodologyin real estate

• Both revenue and profit metrics are mere accounting lineitems and don’t reflect real state of affairs

Cash flow return on investment

• Reflects true cash generation ability of the project andeventually of the developer

• Logically measures returns against invested cash in acapital-intensive industry that often faces capital crunch

Time

Project Miscellaneous EnterpriseCumulative cash position of individual projects

CumulativecashflowReal estate developer

Figur 2: The unique nature of the business lends itself to very peculiar nancial challenges

3 Long cash flow break-even cycle


Spora ic an ac -oa e in ows aong wit imme iate out ows

Business development (~2 months)

Preconstruction(1 to 1.5 years)

Q17Q16Q15Q14Q13Q12Q11Q10Q9Q8Q7Q6Q5Q4Q3Q2Q1 Q18

Illustrative project lifecycle cash flows1 Inflows skewed toward end of project

4 Actual profit realisation at end of project

Cumulative

Construction(1.5 to 5 years, dependent on project size) Post-construction

Need razor-sharp focus on managing cash flows to build a scalable, profitable business

0

10

20

30

–20

−100

50

100

150

−50

2 High peak investment levels


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Page 26

Figur 4: Organising around projects and empowering project leaders is critical


Executive chairman ormanaging director

Externalpartners

Project team

Sales & marketing

leader

Customerrelationship

management leader

Marketingleader

Salesleader

CEO

Business development,land acquisition and strategy

• Project heads responsiblethrough the preconstructionand construction phases

- Including businessdevelopment, designand contracting

• End-to-end project

responsibility: on time, oncost and of the right quality

- Cash flow and milestonemetrics measured on amonthly or quarterlybasis

Function mapsin project

teams basedout of head

office

Site teamunder project

leader

Project leader A Project leader B Project leader X

Businesssupport

(e.g., HR, IT)

Corefunctions

(e.g., design,contracts)


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Page 27


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• Brand building is critical to real estate developers’ long-term success. Few developers have the luxury of an

existing parent brand. As Lodha Group and Prestigehave demonstrated, creating a scalable, local businesscan help create sustained and protable business growth.

• In real estate, customers are highly invested and involvedin the buying process. Developers therefore must createbrand awareness and anticipate customers’ needs duringproduct conceptualization and design. Because projectscan take more than ve years to complete, developersmust design products and amenities their customers are

likely to want when the products launches—not currently.• Customer segmentation, product conceptualization

and design are critical for project success. Often, projectdesigns change close to the project launch basedon poor responses from customers. This increasestime to launch and signicantly increases overall costs.

• In our surveys and interviews, customers in Mumbaiand Bengaluru listed on-time delivery, luxury interiors,

nancial strength, track record, premium location andtrust, among other factors, as the attributes that drivetheir purchase decisions. But when customers ratedtheir perceptions of 17 major real estate developers,fewer than half received a positive Net Promoter Score®,a well-established measure of customer loyalty.

• Developers have opportunities to differentiate them-selves and their engagement with potential customers.We found seven key attributes that matter most,

and they fall into two categories: those that driveconsideration and those that drive advocacy.

• On the front end, customers can increase customersatisfaction by matching customers with a single pointof contact and collecting all feedback over the courseof a sale. On the back end, developers can givecustomers a choice of location and project features.

• Elements of customer-centricity should be just one piece

of a developer’s overall GTM strategy. To scale up rapidly,businesses need integrated, multichannel strategies thathelp them grow on multiple fronts. Developers havealready begun to build “excellence niches” based ontheir strategic priorities.

5.Using an integratedgo-to-marketstrategy andtailoring yourbrand: Building acustomer mindset


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Page 30

Figur 6: There is signicant room to demonstrate greater customer centricity in most attributes thatcontribute to purchasing decisions

Ease of financing

Smart project Design Architect

Religious complianceDesign efficiency

Vastu complianceConvenience of access

Value for money

Timely approvalsBroker network

Sample flat Quality of collateral

Financial strength

Word of mouthSustainability

Safety and security

Redevelopment

Maintenance

Luxury exteriorsPremium location

Community

Luxury interiors

Perceived resale value

On-time delivery

Trust Track record

Contractor brand

Construction quality Parking area

Goods

Fair pricing

Service level

Notes: Word size indicates frequency of mentions by survey respondentsSources: Field survey; focus group discussions; detailed primary interviews

Figur 5: In real estate, the customer journey requires the highest involvement and investment

Source: Bain analysis Consideration shortlist Project purchase Property handover

Pre-sa es Sa es Post-sa es6–9 months 3–4 months 36–60 months

1 Need & brandawareness

Description

Focus areafor

developer

2 Initial enquiryor outreach

3 Directengagement

4 Salesprocess

5 Projectconstruction

6 Post-handoversupport

• Begin customer journey—identify needs andconstraints

• Initiate initial enquiry—through a variety of models

• Get updateson ongoingprogress

• Havepropertyhanded over

• Monitor ongoingactivities, getcomplaintsresolved

• Short-list property, engage andnegotiate with sales team

• Apply, complete paperwork andregistration, make payments

• Appoint relationship manager assingle point of contact

Attributes thatconvert a

potential buyer

Outcomes in projects alreadydelivered, such as quality and

timely handover

Attributes thatcontinue to

build advocacy

Delivering those outcomes in theproject a customer invests in

Attributes that attract apotential buyer initially

The developer brand,location, etc.


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Figur 7: Indian residential real estate industry does not have a customer mindset, with poor advocacyas a result

Notes: Focused on Mumbai and Bengaluru respondents; Net Promoter Score corresponds to “On a scale from 0-10, how l ikely are you to recommend projects from the followinggroups to a friend or colleague for purchase of a new residential apartment?;” Net Promoter Score is the percentage of promoters (score 9/10) minus the percentage of detractors(score 0-6); Net Promoter Score is a trademark of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.Sources: Field survey; Bain analysis

The stars The middle bunch The strugglers

Mumbai and Bengaluru focus

Net Promoter Score® for real estate brands (n=236)

0

50%

–50

–100 Developer16

Developer15

Developer14

Developer13

Developer12

Developer11

Developer10

Developer9

Developer8

Developer7

Developer6

Developer5

Developer4

Developer3

Developer2

Developer1

Developer17

Figur 8: Across these attributes, seven key attributes differentially matter; brand both inuences andis inuenced by them

*Mumbai, National Capital Region, Bengaluru, Pune, Chennai, HyderabadSources: PropEquity; Knight Frank

Project purchaseConsideration shortlist

Attributes thatattract a potential

buyer initially

Attributes thatconvert a

potential buyer

Attributes thatcontinue to

build advocacy

Pre-sa es Sa es Post-sa es6–9 months 3–4 months 36–60 months

Need & brandawareness

Initial enquiry oroutreach

Directengagement

Sales process Projectconstruction

Post-handoversupport

Driving consideration Driving advocacy

1 Location

2 Product specs

3 Pricing & payment

(encompasses word of mouth, reputation, ranking inpublications or websites, perceived track record, etc.)

Back-endproject

imperatives

Front-endsales & CRMimperatives

4 On-time delivery

5 Quality delivered

6 Communication

7 Service delivery

Brand is strengthenedthrough increased

advocacy, weakenedthrough detraction

Brand plays a keyimplicit role in drivingconsideration in the

first place

Real estate brand name


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Page 33

Figur 3 : To scale up rapidly and maximise their reach, developers need a structured go-to-market strategyacross multiple channels

Source: Bain anal sis

2 Channel partner

3 International

• Strength of relationships among CPs

• Competitive brokerage terms

• Brokerage payout time andtransparency

• Brand perception among CPs

Examples:

• Majority sales done through channelpartners (>60%)

• Pre-launches done through channelpartners

• Volume-based brokerage slabs

• Rewards and recognition foron-the-ground channel partnerssalesforce

Prestige Group, DLF

• International marketing initiatives

• Direct or indirect overseas presencefor lead follow-up and conversion

• Strength of relationships amonginternational channel partners

Examples:

• Special pre-launches in internationalmarkets and expos

• International offices and significanttime and effort spent on the ground

• Large nonresident Indian basedeveloped in GCC, US, UK andAustralia

• Sobha: 25%–30% of sales comingfrom nonresident Indian customers

Lodha, Sobha

6 Emerging channels

• Online

• Wealth management networks, banks,NBFCs

Examples:

• Strong focus on online platforms:

– Tata Housing: tie-up with GoogleOnline Shopping Festival 2013

– Unitech: 14% of sales generated fromdigital platform (FY13)

• Strong tie-ups with wealth networks andNBFCs

Unitech, Tata Housing

1 Direct sales

4 Corporate

• Brand awareness and perception

• Extent of reach via marketing initiatives

• Direct sales force effectiveness

• Sales force motivation and incentives

Examples:

• Aggressive and skilled sales force

• Attractive incentive programs

• Structured cross-sales teams and initiatives

• National-level events with pan-India portfolioon offer

Godrej Properties, Sobha

• Structured reach-out program forcorporates

• Exclusive value proposition

• Trustworthy brand image forcorporate interest

• Structured follow-up process

Examples:

• Top-level corporate tie-ups

• Structured corporate reach-out andfollow-up processes

• Exclusive corporate deals onspecific projects

Godrej Properties, Tata Housing

5 Customer referrals

• Strength of relationships andloyalty of customers

• Structured and attractivecustomer loyalty program

Examples:

• Exclusive tiered customerrewards programs

• Rewards ranging from cashpayouts to gifts

• Exclusive events and launchesfor loyal customers

Hiranandani, Lodha

Channels


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Authors and acknowledgments

About the authors

Gopal Sarma is a Partner in Bain’s New Delhi office and leads the firm’s Infrastructure, Real Estate andOrganization practice areas for the region. To contact Gopal, email him at [email protected].

Parijat Jain is a Principal in Bain’s New Delhi ofce and a member of the rm’s Infrastructure, Real Estate, Strategyand Performance Improvement practices. To contact Parijat, email him at [email protected].

Srikrishnan Srinivasan is a Manager in Bain’s Mumbai office and a member of the firm’s Real Estate andOrganization practices. To contact Srikrishnan, email him at [email protected].

Acknowledgments

The authors thank Sitanshu Shah, Hemant Chhabra, and Amrutayan Pati from the Bain India ofces for their support.


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Documents

Bain Report India Real Estate