Demand for organised real estate in India will reach around 1.35 billion sq ft by 2020, up from around 880 million sq ft currently, and 85 per cent of this will be for residential real estate, according to a report by consulting firm Bain & Company.
The report finds that while home sales have slowed in recent years because of low consumer demand at current prices, leading to inventory overhang in major cities, upfront and discreet discounts by builders have increased, indicating some improvement in the condition of the sector.
However, going forward, businesses in the real estate sector will have to do things very differently to be successful.
“The business model of real estate itself has seen a change and will continue to change more rapidly over the next few years. Traditionally, all the value that was attributable to a real estate firm was in land acquisition, agglomeration and managing approvals,” said Parijat Jain, Principal-Infrastructure and Real Estate Practice at Bain’s and co-author of the report.
The industry is seeing a shift in dynamics with competitive forces giving rise to distinct business models, the market and regulatory environment becoming more complex, a shift in profit pools and increasing awareness among consumers and customer activism. And with high levels of inventory, selling properties has become increasingly challenging.
While there are challenges in selling older inventory, a lot of the newer inventory is coming into the market but those projects are doing reasonably well.
“It is a combination: there is a part of the sector that is doing extremely badly and there are pockets which are actually doing well,” said Gopal Sarma, head of Bain India’s real estate and infrastructure practice .
Sarma said to be successful in the current market, builders should keep three key aspects in mind. Firstly, they should decide on the markets they want to play in, both geographically as well as market segment wise. “Ultimately real estate is a business of local scale. It is not a business of national or regional scale. When a customer wants to buy, you need to be able to give options in that market,” he said.
Secondly, the builder needs to choose his business model and then get the right processes in place to deliver on that choice.
“Well-defined processes running throughout the value chain, from pre-construction through the construction cycle, handover and beyond, can create alignment and increase companies’ ROI ( returns on investment),” said the report.
The third important aspect Sarma wants builders to keep in mind is the customer. “Currently, for most businesses, the customer is not front and centre. We believe developers need to start thinking about customer as being at the centre of the business,” he said.
“There is a lot more that a builder can do to become more customer centric, including listening to the customer and it doesn’t end at handover.”