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PLEASE USE SLIDE SHOW MODE
1
QU
ES
TIO
NSCHALLENGES
•Calculate project feasibility for L&T Realty based on different project scenarios (extremityperspective, which is general phenomenon in real life situation) likea. Most Adverse – cost (15% more), revenue (15% less), occupancy (70%)b. Adverse – cost (10% more), revenue (10% less), occupancy (75%)c. Moderate Adverse – cost (5% more), revenue (5% less), occupancy (80%)d. Minimum Favorable– cost (5% less), revenue (5% more), occupancy (100%)
• calculate and consider revenue mix from residential property sales and commercial space lease/rental income and allied sources
Calculate and consider the revenue mix from residential and commercial sales
Conduct financial feasibility analysis for different conditions and comparison
Identify and quantify the risks associated with the project and infer critical risks
Analyze and quantify the local competitors’ performance against the company
Analyze feasibility of project by site analysis, TELOS and SWOT Analysis
Analyze the threats and opportunities in real estate sector and how to leverage
Analyze the supply and demand drivers of the real estate industry
Analyze Indian real estate industry and how it affects the project decision
Analyze the effect of interest rates on prices of real estate
Analyze macroeconomic factors affecting real estate market
Action Plan
Executive Summary
Detailed analysis of present economic conditions of India coupled with the current scenario of Real Estate sector showcases that economic conditions are highly favorable for growth of the sector in coming years
Current state of real estate as well as real estate funding coupled with supply and demand drivers help predict the situation of the real estate sector in future and helps in deciding the execution of the project.
PESTLE Analysis, Porter Five Forces Analysis and Market Analysis give a detailed overview and the result is that the project is feasible for the prospective residents(senior citizens) and will have good occupancy
A thorough site selection analysis is undertaken to determine the locational feasibility of the project, taking into consideration factors like proximity to important utilities and the prices which are obtained by secondary survey.
TELOS and SWOT Analysis give a detailed overview of the project in all areas, helps in inferring the threats and opportunities that the project will face and this can be used to take appropriate measures for mitigation/leverage
A detailed and quantitative competition analysis is undertaken with respect to local competitors on various factors from price to product value and the analysis indicates that L&T Realty is doing fairly well in competition
A detailed risk analysis for the project is performed, entailing eight risks in total and it is found that the Occupancy or Rising Prices Risk is the most critical and measures are to be taken for mitigation
Detailed financial analysis for all the four scenarios is conducted and NPV of ten years and twenty years is calculated and it is found that the negative cash flows scenarios are less than 5%
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
MACROECONOMIC VARIABLES
The liberal economic policies, aimed at improving privateparticipation, adopted by Indian Government has helped incapitalizing the strong fundamentals of the Indian economy whichinclude young population, rising urbanization and a growing middleclass population. Since the year 2000, Indian GDP has quadrupled toreach USD 1.8 trillion in 2012 and is expected to become the thirdlargest economy worth USD 6.6 trillion by 2028.
India and developing Economies GDP Growth India’s infrastructure investment (USD billion)India and developing economies FDI inflows
India’s strong economic performance behind the success in real estate
The real estate and construction industry has significant
linkages (both direct and indirect) with nearly 300
sectors like cement, steel, paints, and building hardware
which not only contribute to capital formation and
generation of employment and income opportunities,
but also catalyze and stimulate economic growth.
Therefore, investment in housing and real estate
activities can be considered a barometer of growth of
the entire economy
India’s strong economic performance behind the success in real estate
With strong economic performance, strong government policies like “housing for all” and large shifts towardsmetro cities in search of employments has created a huge demand of real estate in urban tier 1 cities. Withyoung population moving towards the urban cities in search of employments, the real estate market has hugedemand to meet both in commercial and residential segment. The nominal per capita GDP has risen and thedisposable income of the house holds has also increased. Major part of this disposable income is invested in fixedinvestments like real estate.
GDP Deflator
Source: Reserve Bank of India
Source: Reserve Bank of India
Source: Reserve Bank of India
Source: World Bank
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
India's office space absorption stood at 35 million sqft during 2015, at which is the second highest figure in the India's history after 2011, and was driven by corporates implementing their growth plans.
The Indian real estate market is expected to touch US$ 180 billion by 2020. The housingsector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP).In the period FY08-20, the market size of this sector is expected to increase at a CompoundAnnual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate
are also growing significantly, providing the much-needed infrastructure for India's needs.
Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years
REAL ESTATE SCENARIO
Housing Index in India decreased to 238 Index Points in the first quarter of 2015from 240 Index Points in the fourth quarter of 2014. Housing Index in Indiaaveraged 214.69 Index Points from 2011 until 2015, reaching an all time highof 240 Index Points in the fourth quarter of 2014 and a record low of 181 IndexPoints in the second quarter of 2011. Housing Index in India is reported by theNational Housing Bank, India.
Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years
Demand of Mumbai City
Data compiled using secondary survey
India NHB ResidexNHB RESIDEX is an index for tracking prices of residential properties in India
Increasing trends indicates growth in real estate sectorIncreasing trends indicates growth in real estate sector
0
50000
100000
2011-12 2012-13 2013-14 2014-15 2015-16
NDP/Capita (Current Price) in Rs.
Source: RBI, data is for Maharashtra State
As we can see that per capita income of Maharashtra is rising. This will create spiral effect in the economy. More Jobs will be created and hence more real estate infrastructure is required. More and more people will move to metros like Mumbai, in search of jobs and investment
Source: National Housing Bank, India 4
Economic Analysis Industry Analysis Market Analysis Site SelectionCompetitive market
analysisFinancial Feasibility Recommendations
Due to misuse of BPLR, RBI introduced base rate forbanks in 2010.
× Home Finance Cos are exempted from mandatoryusage of base rates and continue to use BPLR, therebycharging higher interest rates to customers.
Efficacy of using MIBOR to calculate interest rates ishigher than using BPLR or base rate as interest rateare more sticky with respect to MIBOR
Looking at data, two things can happen; reducing thecorridor in rates and removing the push for a cut inbase rates or MIBOR rates would stay the same,forcing banks to slash base rates.
The RBI cut its policy interest rate by 25 basis points to 6.5% in
April 2016. Interest rates are now at the lowest level since 2011.
Recent changes in monetary policy and regulation for banks have
brought down interest rates of banks significantly and this
decreasing trend would continue in the coming period as the
effects of the changes in monetary policy have not been fully
realized yet.
The combined portfolios of banks and specialized housing finance
companies catering to the housing market have increased 20%
CAGR over the last decade. Banks’ have made USD 142 billion of
real estate loans and Housing Finance Companies have an
exposure of USD 68 billion to the real estate sector.
Interest rates affect the following drivers of real estate prices: Mortgage rates Availability of Capital Demand for Investment
Capitalization Rate = risk free rate + risk premium – Anticipated growth in income
If returns on competing/substitute investment due to in interest rates, real estate values fall.Conversely, when interest rates , real estate values increase.
INTEREST RATES AND TRENDS
Source: Bloomberg
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Economic Analysis Industry Analysis Market Analysis Site SelectionCompetitive market
analysisFinancial Feasibility Recommendations
× Housing prices continue to decline ashouseholds are deferring purchases inanticipation of further price cuts.
× Many buyers do not take out mortgage loans(ratio of housing loans to GDP < 5%) and henceif a project is charging by means of lump sumpayment mode, people are more unwilling topurchase as he has to foot almost 95% of costof the unit.
× Previously, loan to value(LTV) of most homeloans is 85%, and LIC recently reduced LTV to75% and HDFC to 80%.
× In Mumbai, house price rises weakened to 10.8% (5.8% inflation-adjusted) from 11.0% in Q1 and 11.1% in Q2.
× Since January 2015, the central bank has reduced its policy rate by 125basis points. But while the cuts have helped improve sentiment, bankshave been very reluctant to lower rates for borrowers, complaining oftight cash conditions.
To make policy rate cuts more effective, the RBI has taken steps toincrease liquidity by reducing banks’ reserve requirements, raising thereverse repo rate – the rates lenders charge to the central bankpledging to inject more long-term liquidity over the next 12 months
× Despite the festive season, sales in Mumbai have fallen 6% y-o-y to34,135 units in the last six months of 2015
The RBI also eased liquidity through a reduction in the marginalstanding facility (MSF) rate, at which banks borrow from the centralbank, by 0.75% to 9.5% and reduced the minimum daily maintenanceof Cash Reserve Ratio (CRR) from 99% of the requirement to 95%, amove aimed at inducing liquidity into the system.
INTEREST RATES AND TRENDS
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
CURRENT SCENARIO OF INDIAN REAL ESTATE SECTOR CURRENT STATE OF REAL ESTATE FUNDNG
PPP framework has been modified for more robust infrastructure development. In recent union budget, the private sector contribution limit has been proposed to increase from 30% to 50%.
The housing loan rebate has been increased from Rs. 150,000 to Rs. 200,000 in an attempt to revive the housing and other related segments
Real Estate Sector is the second major contributor to the GDP. Segment is expected to generate 7.6 million jobs this year
In the commercial segment, NCR, Mumbai and Bengaluru continue to be the leading cities accounting for more than 75% of the entire space getting absorbed in the country in the last two to three years’ time frame
Estimates show that for every rupee that is invested in housing and construction, 0.78 gets added to GDP
Housing ranks fourth in terms of the multiplier effect on the economy and third amongst 14 major industries in terms of total linkage effect
With the introduction of Real Estate Investment trust (REITs) and Infrastructure Investment Trusts (InvITs), a huge capital inflow is expected in this sector
According to World Bank’s Doing Business 2012 report, India is one of the top countries in housing & workspace needs, but ranks 181 in terms of construction permission processes
Banks’ credit exposure to the real estate and housing sector declined from 10% (as a percentage of Gross Bank Credit) in FY10 to 7.9% in FY13
Mezzanine and structured equity instruments have become the instrument of choice for foreign investors
There has been an increasing dependence on non-banking finance companies (NBFCs) for funding in the real estate sector
Divestment of non-core assets and leased assets is another very strong theme that has been visible
Raising funds from the capital markets continues to remain an unviable option for the sector
Recent changes to the SEZ policy, in terms of reduced area requirements, easing of external commercial borrowing (ECB) norms for affordable housing and enhancement of limits for listed NCDs for all are positive steps for the sector
REITs are expected to have a positive impact on the real estate industry and open another avenue for investment in the real estate sector
Growth in the Reserve Bank of India’s nationwide housing price index slowed to 13.7% (8.7% inflation-adjusted) during the quarter ended September 2015 compared to the same period in 2014 – down from a 17.5% rise in Q1 2015 and 14.5% in Q2 2015.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
DEMAND DRIVERS SUPPLY DRIVERS
Foreign Direct Investment 3
Lending patterns of banks/NBFCs 3
Plan Outlay & Gross Domestic Capital Formation 2
Govt. Schemes like PMGSY and IAY 2
Overall supply drivers
Urbanization 3
Demographic Dividend 1
Middle Income Group 3
Growth of services sector 1
Growth of retail and SEZs 2
Foreign Direct Investment
Lending Patterns ofBanks/NBFCs
Gross Domestic Capital Formation
Government SchemesGrowth of Retail
SectorGrowth of Services
Sector
Middle Income Group
Urbanization DemographicDividend
Overall demand drivers
• The number of Indians living in urban areas will increase from the 434 million in 2015 to about 600million by 2031 About 10 million people migrate to cities every year
• Increase in exemption limit from USD3317 to USD4147 will help in household savings• For FY15, estimated housing shortage for urban area was 18.78 million houses• Of a total supply of 445 million sq ft of office space planned in 10 major cities, around 167 million
sq ft would come up during 2013 - 15 with the demand being 66 million sq ft during the sameperiod. The government has formally approved 416 SEZs, of which 199 are in operation.
• Of a total planned supply of retail space of 67 million sq ft across major cities, around 38 million sqft would come up during 2013 -15
• The urban housing shortage is estimated at 18.78 million in FY ‘15.• Organised retail sector growing 25-30 per cent annually
• The government has allowed FDI of up to 100 per cent for real estate. FDI in constructiondevelopment of USD24.156 billion between April 2000 and September 2015. In 2000–2015, thereal estate sector accounted for 9 per cent of total FDI inflows into India
• Govt’s plan to build 100 smart cities would reduce the migration of people to metro and otherdeveloped cities. Lending of Banks have significantly reduced due to high NPAs and low capitalformation in the system.
• Govt initiatives to promote tourism in Tier 2 and Tier 3 cities is generating significant demand forhotels in such cities, especially for budget hotels
• Govt initiatives such as various urban development policies and programs (e.g., JNNURM) areexpected to contribute to enhanced urbanization.
• Boosting up of National Investment and Infrastructure Fund(NIIF) by providing a fund of USD3.31billion GFCF reached its peak of 9091.17 INR billion in Jul ‘15 but has been on a decline since thenreaching a low of 8639.56 in Jul ’16.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
PORTER FIVE FORCES ANALYSIS
Government policy
Absolute cost
Capital…
Economies of scale
Switching costs
Product…
Threats of new entrantsBuyer pricesensitivity
Force down prices
Bargaining leverageDifferentialadvantage
Buyer switchingcosts
Buyer's Power
3
2
33
30
2
4
Threats of newentrants
Buyer's Power
Supplier'sPower
CompetitionRivalry
Threats ofsubstitute
Porter 5 forcesDifferentiation of
Inputs
Presence ofsubstitute inputs
Supplier switchingcosts relative
Employee solidarity
Supplier competition
Supplier's Power
Buyer switchingcosts
Availability of closesubstitute
Substandardproduct
Ease ofsubstitution
Buyer propensityto substitute
Threats of substitute
Sustainablecompetitive…
Firm concentrationratio
Level of advertisingexpense
Degree oftransparency
Powerfulcompetitive…
Competition Rivalry
Threats of substitutes Buyer's PowerThreats of new entrants Competition Rivalry Supplier's Power
• No specific substitutes available• Substitutes are mainly government-provided housing, mostly limited tothe economically backward class
• Large real estate firms have good bargaining power against customers • Unregulated and badly managed land banks make land acquisition difficult for realty companies
• An absence of competitiveneutrality due to unequalprovisioning of policy concessions
• Strong rivalry due to large numberof players operating in India
• Limits a seller’s ability to set theprices for goods and services
• Due to a large variety of quality players, the customers have many options to choose from • They are also becoming more discerning and demanding better quality
• Uncertain investment timelinedue to long gestation period• High cost of land and land userestrictions act as a natural barrier• Brand value of the incumbent
player for the consumers9
Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
PESTLE ANALYSIS
PoliticalMr. Narendra Modi led party is
considered to be the most stable government in Indian recent history.
The Government has laid down the roadmap for India, signifying a major
support to manufacturing and real estate sector.
Socio-political unrest in Iraq and Syria has posed a threat of high oil prices
across the globe.
EconomicNew investments have been
proposed by the government such as Rs. 7,060 crore to build 100 smart
satellite cities in India.
FDI norms have been modified to attract foreign players in Real Estate sector:
Reduction in built-up area requirement from 50,000 sqm to 20,000 sqm, and min
capitalization from $ 10 mil to $ 5 mil. Expected to see more than 100% increase in foreign investment flow, both via FDIs
and FIIs,
Better infrastructure and a healthy growth rate in IIP (Index of Industrial
Production) could solve import-export problem and hence a strong home
currency would ensure acceptable level of CAD (Current Account Deficit).
SociologicalIndia has one of the biggest markets with more than 65% of population
below 35 years of age.
The number of HNWIs in India is expected to double over next 10 years, growing by
137% in Mumbai alone.
India has a considerably huge pool of educated and cheap labor.
Technological
New construction techniques like ‘slip form construction’, ‘pre-fabricated
construction’, Mivan technology’ and ‘dry-wall technique’ have been
introduced to India from Malaysia, Thailand and China.
MIVAN Technology reduces the TAT (Turn around Time) by almost half as compared to the conventional technique and help
achieve a slab to slab cycle of 7 to 10 days.
India has become the 2nd largest Internet base in the world after China. The house hunting business has turned
‘digital’ as developers are keen on adopting modern technologies.
LegalThe draft Real Estate Regulation and
Development Bill, 2013 has increased transparency and protect customer
interest.
Real Estate Investment Trusts (REITs) have been introduced as an eligible financial
instrument / structure under the Foreign Exchange Management Act (FEMA) 1999.
REITs while attracting long term finance from foreign and domestic sources including NRIs would make available fresh equity to the sector.
EnvironmentalBig buildings and real estate projects
exempted from environmental clearance since April 2016 by
Environmental Ministry
Area-specific EIA and environmental clearance carried out by SEIAA has been scrapped and now building bye laws of
states are in effect
Setting up of National Green Tribunal by the center in 2010 has led to stricter action for builders and court has heard
nearly 2000 cases
Political
Economic
Sociological
Technological
Legal
Environmental
Factor Score (out of 5)
Political 3.5
Economic 4
Sociological 4
Technological 3
Legal 3
Environmental 2.5
1 Very Bad
2 Bad
3 Neutral/No Effect
4 Good
5 Very Good
Even though the real estate industryhas been plagued with the problem ofunused inventory in the recent past,the PESTLE analysis gives us a positiveoverview about the conditionsfacilitating the industry and thus theproject must be undertaken.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
MARTKET ANALYISIS
Objectives Key Considerations
Definition of the market
The market area for the project is estimated to be 17.2 Km^2 (5% of area of Navi Mumbai = 344 Km^2)
The size of the target market segment is found to be 600,000
The income of the potential residents is touted to be Rs. 800,000/ annum and their assets are estimated to be Rs.2,000,000
Marketability of the project
The location is highly appropriate for a seniors oriented development due to its proximity to hospitals and the airport.
The current and prospective competitors are those who have developed/are in the process of developing projects in the Navi Mumbai area. This project has nosignificant threat from local competition because of the strong backing of the parent company.
Navi mumbai is a relatively new area in Mumbai and has been the highlight of development over the past few years. Numerous shopping complexes, commercialtowers, residential projects and the new airport is also underway construction in close proximity to this area.
Yes, the neighbourhood possesses the amenities required by senior citizens who are our prospective residents.
Creation of the product
As our target is senior citizens, we must provide units which are 2BHKs and it is mandatory that these units be provided with a smaller unit of a room and a bathroomattached to it which would act as a servant quarters. Pricing should be done according to phasing as the lumpsum payment mode would not attract senior citizens. Interms of management, there must be an office in the area itself to address the problems of the residents.
The amenities the prospective citizens would need to be provided is a large lawn with walkways, required number of lifts for every building, 24x7 power supply andwheelchair access to every part of the project.
Identification and Assessment of the need for personal, health and medical services
The senior citizens, who are our prospective citizens, would require cab services to travel to dofferent parts of the city, a maintenance and cleaning staff, a bank/ATMin the premises, and a library.
The senior citizens would require a round-the-clock basic medical facility on the premises and an ambulance, a massage room, an acupuncture centre and a yoga andpranayam centre
The personal and health care/medical needs of the prospective residents is very high and critical and hence measures are to be taken to ensure the residents are welltaken care of.
The services can best be provided by handing out contracts to third party service providers which would ensure high quality of services rendered as well asminimization of cost.
Substantiation of the projectPartners, investors, lenders and regulatory authorities need to be shown projected cash flows for the project, a risk analysis and mitigation report, sources of funding,maximum occupancy rates and plans and scheduling of the project
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
SITE SELECTION AND ANALYSIS
Navi Mumbai (Source: Google Maps)
Site selection process is a very complex in itself. It consists of various considerations like Access, size and shape topography. We haveconsidered some of the factors for Navi Mumbai site selection. We have quantified the parameters and have used secondary research data toanalyze factors like child friendliness, prices etc. Because our target customers consists of varied ages and professions hence all the weightsare given accordingly
Satellite image of Navi Mumbaishows the amount of land that isavailable for construction whichcan be used for the sitedepending on other parameters.
Prices level of Navi Mumbai Region (Source: Secondary Research) Senior citizen friendliness of Navi Mumbai (Source: Secondary Research)
Navi Mumbai
Sports Education
Factors Score Key Description
Sports 83 DY Patil Stadium
Education 75 DPS, NIFT
Railway 83 4 Stations
Metro 42 New Metro Coming
Airport 56 New Airport Coming
Administration 78 Good Administration
Railway AdministrationAirportMetro
Low Prices, high senior citizen friendliness, goodgeographic conditions and factors like sports, education,metro, airport, railway and administration suggests thatNavi Mumbai is a good investment destination for realestate
Go for near beach area
Low Prices, high senior citizen friendliness, goodgeographic conditions and factors like sports, education,metro, airport, railway and administration suggests thatNavi Mumbai is a good investment destination for realestate Go for near beach area
More Senior citizen friendly
Less Senior citizen friendly
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
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TechnicalLargest fleet of highly specialized
and sophisticated equipment available at their disposal
24 heavy lift cranes with capacity ranging from 150 tons to 750 tons
Super heavy elements (up to 3000 t) are lifted through
specially built towers and strand jack systems together with heavy
skidding facility.
Economic
Interest rates are now at the lowest level since 2011 due to
cuts in the repo rate by RBI, making lending cheaper.
In case of unexpected, additional need of funds overshooting the debt
and equity funding availed, then excess funds would be supplied by
the parent company with ease.
78% increase of FDI inflows from June 2015 to June 2016 and
100% FDI in real estate indicate funding can be availed from NBFCs at cheaper rates with
minimal risk
Legal Documentation as per Section
373 of BMC Act
Verification from Survey Office and site inspection from the Building
Proposal Office
Mandated approvals from the required infrastructure
departments
OperationalAvailing of FMSPs to minimize
operational time and risk
Resources arrangement and construction execution as per
agreed parameters of time, cost and quality
Service level agreements based contracts for improved vendor
performance
SchedulingUse of MIS to ensure
connectivity among all verticals involved in the project
Provide inputs to PMCs for preparation of construction
schedule
Usage of new technologies such as BIM which result in improving coordination and design accuracy 0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Floor13-14
Floor15-16
Floor17-18
Floor19-20
Floor21-22
Floor23-24
Floor25-26
Floor27-28
Floor29-30
Floor31-32
Floor33
Year 1 & 2
Year 3 & 4
Year 5 & 6
0
100
200
1 2 3 4 5 6 7 8 9 10 11 12
In R
s. c
rore
Construction Costs(Comm Only) over the years
0
500
1 3 5 7 9 11In R
s. c
rore
Construction Costs(Res Only) over the years
0
100
200
300
1 4 7 10 13 16 19 22 25 28 31 34 37
In R
s. c
rore
Average Lease Rent Rs/sqft/month over the years
0
20000
40000
1 3 5 7 9 11 13
In R
s. c
rore
Average Apartment price over the years
TELOS ANALYSIS
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
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SWOT ANALYSIS FOR PROJECT
Weights Ratings Score Weights Ratings Score
STRENGTH OPPORTUNITY
Skillful Workforce 10% 4 0.4 Government’s investment initiative 15% 4 0.6
Disruptive growth in construction equipment 10% 3 0.3 Stable Government 15% 4 0.6
Market leadership 20% 5 1 real estate sentiments index showcase high demand 5% 2 0.1
Diversified revenues providing resilience 10% 3 0.3 Exemption limit on account of interest raised 5% 3 0.15
WEAKNESS THREATS
Increasing debt impacting financial flexibility 15% 2 0.3 Rising material cost 20% 4 0.8
rising manpower and material costs 10% 2 0.2 High inventory levels 10% 4 0.4
lack of adequate sources of finance 10% 3 0.3 Low R&D activities 10% 3 0.3
Insurance for project 15% 2 0.3 Approvals and procedural difficulties 20% 5 1
Total 100% 3.1 Total 100% 3.95
Range
3-4 2-3 1-2
High Medium Low
3-4 High 1 2 3
2-3 Medium 4 5 6
1-2 Low 7 8 9
Execute Hold Cancel
Recommendation: EXECUTE
The favorability of a project can best be decided by SWOT Analysis. The core strength of the project is thecompetence the company brings in real estate projects by being the market leader due to its excellence andsophistication in construction and over seven decades of expertise.
The weakness of this project can be mainly attributed to the lending patterns of banks and NBFCs, which inturn is dependent on the economic state of the country. In 2015, due to regulation of monetary policy by theRBI, interest rates have dropped down significantly. Indian Banks also have the added burden of clearing NPAs,and thus are more reluctant to issue loans for big projects.
The biggest opportunity that this project can avail is the inflow of foreign investment due to easing ofgovernment regulations and also missions like Housing 2020 which aims to close the gap of housing needs ofpeople.
The threat this project can face is not of approvals or inspections, but instead is the high amount of unusedinventory once the project is completed.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Phase Demonstration, (Courtesy: Autodesk)
Year
1PROJECT PHASING OF COST
Costs in Year 1 Total Capitalized Cost of Project
Approval and Sanctioning fees
Architectural Consultants Fees
Structural Consultants Fees
TIA and EIA
Administration, Supervision and PM Cost
Contingencies on other costs
Total Costs in Year 1 = Rs. 24 crores
12. 50%
6. 25%
2. 9%
1. 4%
2. 8%1. 4%
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Phase Demonstration, (Courtesy: Autodesk)
Year
2PROJECT PHASING OF COST
18%
45%
32%
1%1% 2% 2.1 %
Costs in Year 2 Total Capitalized Cost of Project
Commercial Part
Residential Part
Parking levels/Basement
Approvals and Sanctioning Fees (MCGM)
Architectural Consultant Fees
Administration, Supervision and PM Cost
Business Development Expenses
Total Costs in Year 2 = Rs. 261 crores
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Phase Demonstration, (Courtesy: Autodesk)
Year
3PROJECT PHASING OF COST
Costs in Year 3 Total Capitalized Cost of Project
Commercial Part
Residential Part
Parking levels/Basement
Approvals and Sanctioning Fees (MCGM)
Architectural Consultant Fees
Administration, Supervision and PM Cost
Marketing Cost
Bank Guarantee Fees
27.83%
55.66%
9.43%
0.94%
0.47%
2.83% 2.36%0.47%
Total Costs in Year 3 = Rs. 212 crores
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Phase Demonstration, (Courtesy: Autodesk)
Year
4PROJECT PHASING OF COST
Costs in Year 4 Total Capitalized Cost of Project
Commercial Part
Residential Part
Architectural Consultant Fees
Administration, Supervision and PM Cost
Marketing Costs
Bank Guarantee Fees
30%
65%
1%
2%
2% 0%
Total Costs in Year 4 = Rs. 271 crores
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Phase Demonstration, (Courtesy: Autodesk)
Year
5PROJECT PHASING OF COST
Costs in Year 5 Total Capitalized Cost of Project
Commercial Part
Residential Part
Infrastructure Development
Architectural Consultants fees
Administration, Supervision and PM Cost
Marketing Cost
Bank Guarantee Fees
Landscaping Consultant fees
19%
69%
5%
0%
2%3%1%
1%
Total Costs in Year 5 = Rs. 255 crores
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
Site Landscaping, (Courtesy: Google)
Year
6PROJECT PHASING OF COST
Costs in Year 6 Total Capitalized Cost of Project
Landscaping of the Recreational Garden
Approvals and Sanctioning Fees
Administration, Supervision and PM Cost
Marketing Costs
Bank Guarantee Fees
83%
3%3%
5%6%
Total Costs in Year 6 = Rs. 77 crores
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
LOCAL COMPETITION
Company Name L&T Realty
Competitor Factors Weighting
Price 25%
Quality 20%
Customer Service 20%
Locality 15%
Amenities 10%
Possession 5%
Product Range 5%
Total 100%
Competitors Price Quality
Customer
Service Locality Amenities Possession
Product
Range
Total
Score
L&T Realty 3 7 8 7 6 8 6 L&T Realty 45
Ruparel Realty 4 7 6 7 4 5 3 Ruparel Realty 36
Khalsa Builders 7 7 5 6 7 6 2 Khalsa Builders 40
Shah Group 7 5 4 4 3 5 3 Shah Group 31
Vishrut Construction 5 4 4 4 3 7 3
Vishrut Construction 30
Patil Developers 3 6 7 7 5 7 5 Patil Developers 40
Weighted Rating
Competitors Price Quality
Customer
Service Locality Amenities Possession
Product
Range
Total
Score
L&T Realty 0.75 1.4 1.6 1.05 0.6 0.4 0.3 L&T Realty 6.1
Ruparel Realty 1 1.4 1.2 1.05 0.4 0.25 0.15 Ruparel Realty 5.45
Khalsa Builders 1.75 1.4 1 0.9 0.7 0.3 0.1 Khalsa Builders 6.15
Shah Group 1.75 1 0.8 0.6 0.3 0.25 0.15 Shah Group 4.85
Vishrut Construction 1.25 0.8 0.8 0.6 0.3 0.35 0.15Vishrut
Construction 4.25
Patil Developers 0.75 1.2 1.4 1.05 0.5 0.35 0.25 Patil Developers 5.5
Competitor Rating Ruparel Realty is a relatively new company and
has launched only nine projects since its inception
L&T Realty has the entire gamut of technology, engineering, construction, manufacturing and financial services of the parent company at its disposal.
× Shah Group Builders Ltd. Illegally raised funds from funds and is now directed to pay a compensation of over Rs. 6 crores to the investors over one year.
Patil Developers is the largest real estate developer of Pune and has completed 1.3 crore sq. ft. of landmark developments.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
LOCAL COMPETITION
0
1
2
3
4
5
6
7
8
9
Price Quality CustomerService
Locality Amenities Possession ProductRange
Competitor Rating
L&T Realty Ruparel Realty Khalsa Builders
Shah Group Vishrut Construction Patil Developers
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Price Quality CustomerService
Locality Amenities Possession ProductRange
Weighted Rating
L&T Realty Ruparel Realty Khalsa Builders
Shah Group Vishrut Construction Patil Developers
45
36
40
31
30
40
L&T Realty
Ruparel Realty
Khalsa Builders
Shah Group
Vishrut Construction
Patil Developers
Total Score
6.1
5.45
6.154.85
4.25
5.5
L&T Realty
Ruparel Realty
Khalsa Builders
Shah Group
Vishrut Construction
Patil Developers
Weighted Rating
Price
Product Range
Possession
Amenities
Locality
Customer Service
Quality
In terms of prices, L&T Realty and Patil Developers are in close competition as they provide affordable housing
In today’s times, customer service has become an even more important offering than the product itself. L&T Realty ranks high in this regard.
On quality, three local players are offering the same valued housing. For quality conscious buyers, this would be an important point.
This is the most important component from the builder’s point of view as it would decide his profits over the entire project life.
The amenities not only include basic facilities, but also include added luxurious facilities like massage room, Jacuzzi and sauna baths.
As all players have projects in Navi Mumbai, this factor takes into account the proximity to various services like schools, hospitals and airports.
Product Range includes the features in the project apart from housing and its auxiliaries, like office spaces, malls and gaming zones.
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
RISK ANALYSIS AND MITIGATION
5
4
3 O1
2 M2 T1,D1
1 P1 M1,F1 S1
1 2 3 4 5
Probability Level
Very High > 70% 5
High 50-70% 4
Medium 30-50% 3
Low 10-30% 2
Very Low <10% 1
CONSEQUENCES
LEVEL 1 2 3 4 5
IMPACT Very Low Low Medium High Very High
Cost < Rs. 5 lacRs. 5 lac - Rs. 10
lac Rs. 10 lac - 50 lac Rs. 50 lac - 1 crore Rs. 1 crore - Rs. 10 crore
ScheduleUsage of < 5 days float of an activity Usage of > 15 days
float of an activity
< 1 day impact to critical path
1 day to 5 day impact to critical
path
> 5 day impact to critical path
Scope < 10 hrs 10 hrs to 100 hrs 100 hrs to 1000 hrs 1000 hrs to 5000 hrs > 5000 hrs
Health / Environment Negligible Impact
One minor injury or environment
impact remediated in
house
Multiple minor injuries or minor
remediation
Single major injury or major
environmental remediation
Single death or irreversible effect on
environment
Impact
Pro
bab
ility
Technical Risk
Disaster Risk
Rising Prices/Occupancy Risk
Fund Risk
Management Risk
Safety Risk
Material Risk
Personnel Risk
This risk includes inadequacy of design and existing errors aswell as unviability of the technical plan
Experts point out that floods, thunder and other natural disastercan severely affect the project and it is known that site of projectis very susceptible to floods.
This risk includes the change of key members of the verticals ofthe project and also lack of working ability of the personnel.
Prices and cost of capital may rise in the future, and due toinflation, costs of materials and labour would rise, leading toless cash flows.
Due to unforeseen circumstances, fund procured is insufficientto meet fund demand. Also, after procurement, funds might notbe available on time.
Inaccurate work decisions, inadequate contract items,unreasonable time schedule and supplier/subcontractor risk addup to this risk.
This risk includes industrial accidents, structure security risk andequipment safety risk
This risk includes the supply and quality problems of rawmaterials, finished products, semi finished materials and specialmaterials.
Occupancy risk is critical
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
VALUATION
Case Description Occupancy Cost factor Revenue factor NPV (20 years) WACC IRR
Given Given 85% 1 1 302 15% 19.40%
1a Most Adverse 70% 1.15 0.85 -350.4254639 15% 9%
1b Adverse 75% 1.1 0.9 -135.0146808 15% 13%
1c Moderate Adverse 80% 1.05 0.95 82.46047557 15% 17%
1d Minimum Favorable 100% 0.95 1.05 551.4021396 15% 24%
20 year AFFO Net present value for different scenarios
Case Description Occupancy Cost factor Revenue factor NPV (10 years) WACC IRR
1a Most Adverse 70% 1.15 0.85 -452 15% 5%
1b Adverse 75% 1.1 0.9 -250 15% 10%
1c Moderate Adverse 80% 1.05 0.95 -43 15% 14%
1d Minimum Favourable 100% 0.95 1.05 371 15% 23%
10 year AFFO Net present value for different scenarios-600
-400
-200
0
200
400
600
800
Most Adverse Adverse ModerateAdverse
MinimumFavourable
NP
V in
cro
res
Scenarios
NPV in crores
20 Years
10 years
Case Description Return on Equity Return on Investment Debt Service coverage Ratio
1a Most Adverse 5.84 0.87 7.3
1b Adverse 7.14 1.09 8.93
1c Moderate Adverse 8.47 1.32 10.59
1d Minimum Favourable 11.67 1.89 14.60
Financial Feasibility ratios
Comparison of cash flows
For most businesses, depreciation is an acceptable non-cash charge thatallocates the cost of an investment made in a prior period. But realestate is different than most fixed-plant or equipment investments:property rarely loses value and often appreciates. Net income, a measurereduced by depreciation, is therefore an inferior gauge of performance.Therefore, real estates are instead judged by funds from operation (FFO),which excludes depreciation and can be improved by using AFFO as itsincludes CAPEX in calculation.
10 year NPV Values for Most Adverse and Adverse cases are negative 20 year NPV Values for Most Adverse, Adverse and Moderate Adverse cases
are negative Financial ratios for Minimum favorable and Moderate favorable are above
accepted values
10 year NPV Values for Most Adverse and Adverse cases are negative 20 year NPV Values for Most Adverse, Adverse and Moderate Adverse cases
are negative Financial ratios for Minimum favorable and Moderate favorable are above
accepted values
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
REVENUE MIX FROM RESIDENTIAL PROPERTIES AND COMMERCIAL PROERTIES
• Revenue mix is a calculation that determines the proportion of eachproduct a business sells, it can be a service or a product, relative to totalsales.
• Sales mix is important, because some products or services may be moreprofitable than others, and if a company's sales mix changes, its profitsalso change.
• Managing sales mix is a tool to maximize company profit.
Residential properties gives different cash flows over time. Following points are considered while deciding the optimum revenue mix of the project:
Step 1: Analyzed of the process and eliminated any activities that do notadd value to the project. We have eliminated those activities whoserevenue contribution was less than 2 crore
Step2: Calculated the cost associated with the remaining process anddivisions. In our case it was commercial and residential which includesvarious services like leasing and renting
Step 3: Analyzed all possible constraints faced by the division ingenerating profit using risk matrix analysis
Step 4: Calculated total revenue and profit margins generated from thecommercial and residential segment to calculate the optimum mix
26%
74%
Revenue Mix
Commercial Residential
-500
0
500
1000
H1
H3
H5
H7
H9
H1
1
H1
3
H1
5
H1
7
H1
9
H2
1
H2
3
H2
5
H2
7
H2
9
H3
1
H3
3
H3
5
H3
7
H3
9
reve
nu
e in
cro
res
Phases
Revenue of mix
Residential Commercial
0
500
1000
1500
2000
2500
H1
H3
H5
H7
H9
H1
1
H1
3
H1
5
H1
7
H1
9
H2
1
H2
3
H2
5
H2
7
H2
9
H3
1
H3
3
H3
5
H3
7
H3
9
Revenue Breakup
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
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SENSITIVITY ANALYISIS
MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN REVENUE VARIES
MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN COST VARIES
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Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
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SENSITIVITY ANALYISIS
Monte Carlo simulation has been done to simulate the sensitivity of the project. Occupancy of 85%, 95% and 100% has been considered Occupancy does not have incremental change hence specific values are considered Cost and Revenue are susceptible to change Values of Cost and Revenue are considered to be normally distributed Mean and maximum-minimum range is calculated using different feasibility
scenarios given in the question Standard deviation is calculated using 6-sigma variation over the normal curve Over 2000 odd simulations were run
MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN BOTH REVENUE AND COST VARIES
Results: Less than 5% of the simulation has shown negative cash flowsOccupancy is an important risk factor in deciding cash flows At 85% occupancy, NPV of ~500 crore is more likely to be
achieved At 95% occupancy NPV of ~700 crore is more likely to be achieved At 100% occupancy NPV of ~730 crore is more likely to be
achieved27
Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market
analysisFinancial Feasibility Recommendations
SENSE ANTICIPATE
Factors Scores Factors Scores
Supply-Demand 4 Cost of building materials 5
Site Conditions 4 Cost of financing/Financing solutions 2
Land Use / Approvals 5 Turnover Rates 4
Site Selection 5 Services and Amenities 5
Timing / Sales Pace (Absorption) 4 Quality of Asset Base 4
Financing / Financial Returns 3 Revenues from rents and service fees 3
PRIORITIZE
Occupancy based revenue system
Increased rate of completion
Reduce vacancy rates
Optimize unit mix and size
Mitigation of construction risk
Focus on site preparation
Occupancy based revenue
system
Increased rate of completion
Reduce vacancy rates
Optimize unit mix and size
Mitigation of construction
risk
Focus on site prepation
Supply-Demand
Site Conditions
Land Use /Approvals
Site Selection
Timing / Sales Pace(Absorption)
Financing /Financial Returns
Cost of buildingmaterials
Cost offinancing/Financing solutions
Turnover Rates
Services andAmenities
Quality of AssetBase
Revenues fromrents and
service fees
Project Life
Twenty Years
6 Years
• Completion of construction on time• Use contract laborers to minimize costs• Smooth completion of approvals and
inspections
• Charge maintenance feesfor upkeep
• Service level agreementsbased contracts in order toreduce costs
• Advertise efficiently to maximizeoccupancy rates
• Desired occupancy to be achieved• Cash flows to be maintained to pay off
debt
SAPE CYCLE
6 Years Recommendation• Completion of construction on time• Use contract laborers to minimize costs• Smooth completion of approvals and inspections20 Years Recommendation• Advertise efficiently to maximize occupancy rates• Desired occupancy to be achieved• Cash flows to be maintained to pay off debtProject Life Recommendation• Charge maintenance fees for upkeep• Service level agreements based contracts in order to
reduce costs
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Thank You
Anupreet Choudhary
1st Year
Indian Institute of Management, Rohtak
B. Tech (Civil),
Indian Institute of Technology, Guwahati
Shubham Aggarwal
2nd Year
Indian Institute of Management, Rohtak
B.E. (Mech) PEC University of Technology
Swastika Singh
1st Year
Indian Institute of Management, Rohtak
B. Tech (Civil) National Institute of Technology Karnataka
TEAM: RadioActive
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