God took 6 days to create the world in the Old Testament Book of Genesis. Humankind was created on Day 6. And then, humankind created a 6 letter word that could impact them severely – in the short term as well as the long term.
C H A N G E
Now that I have your attention, I want to bring your focus on to a more pertinent agenda. Has real estate embraced change? Was the industry ready to embrace change? Was it even prepared to? More ‘change’ has happened in Real Estate in the last three years than the last few decades. And it has steered its way into multiple dimensions:
The 6 stark changes in the real estate landscape:
- A cyclical sector, real estate has seen a plateau of poor market conditions to the tune of developers going bankrupt – a first in India resulting in quite a few roll backs or postponed project launches
- Regulatory side has undergone a metamorphosis. RERA has come into existence (finally!) for streamlining the approval system, to add transparency and to encourage customer empowerment
- Entry of affordable housing (increase in FSI and dwelling units in any land parcel) and interest rate taking a dive
- A continuous construction inflation in the last decade was replaced by stagnation of sorts in costing
- Corporate Developers rising up at the horizon
- Digital taking the lead – from communication to CRM to project management
If I attempt to dive deeper, there will be an unending trail of such occurrences with lasting impacts. Some may have fizzled out immediately. Some are here to stay. The disturbing aspect is the utter lack of preparation and adaptability by most concerned parties in this sector.
The 6 things which I feel some parties could have done to ensure a smooth improvement are:
- Government authorities need to support
We have been snail-pacing at the cost of the speeding-up cost. Admit it or not, it exists. While it is a sweetener for some working in the Government Authority, the imperative need was to not kill the golden goose but to nurture it with support and healthy diet of prompt action. Time is money. Promptness could have reduced overheads and helped in reducing the construction time and the cost – benefits of which could have been passed on to the customers
- Developers need to accept and adapt
High interest rates can get you the money. This money is often picked up on assumptions of high gross margins. And when this phase does not occur, the interest rate kills. Accepting that such phases may, may not occur and then evaluating your options to work within the possibilities is key
- Developers need to look beyond the obvious
- Land is what all developers seek. But the key to all successful businesses lies in diversity – in product, location and offerings. This is the lone way to survive a bad situation. Look beyond the obvious.
- Competition kills competition. And in case of real state, competition is killing competence. We are all mirror images of one another. The huge price war, undercutting of prices in the same location, and lack of unity in thought and action is becoming the bane of this industry.
- Sales funnel is squeezed at the input end. We have all known this for long. And yet, attempting to sustain with the ‘live today, live in the now’ principle to manage cash flows has got the industry cornered.
- Retail and Commercial are for Investors and Residential for End Users – This analogy should have been accepted and all strategies and operations should have followed accordingly.
- Financial Institutions need to support and change their module
Heard of No risk, No gain? Real estate is a living manifestation of this. It may be risky. But the books reveal that the highest returns to financial institutions have steered through this channel. How have they contributed to help the sector sail through this situation – done nothing! They could have eased the burden through allocating funds at lower interest rates to complete projects. Customers could have paid with more comfort. Developers have often mortgaged read-to-move-in units for this purely to reduce the bank’s risk.
- Consolidate and stand together
Infrastructure once was saved by PPP model so we could have envisaged “BGDC” model wherein Banks, Government, Developer and Customers would have worked in an arrangement where we blend the quality of a private developer, assurance of Government, funding of banks and an end user in customer. May be the margin would not have been good for any party but stability would have certainly been there.
- Reduce overheads by outsourcing
Rather than looking at developers as cheaters, vendors, channel partners, consultants, architects should have reduced their cost. Spoken the truth and supported the truth. They were required to reduce their overheads as right now all added up they are between 12-15% of the top line of revenue which is a huge number. No sector can sustain this all along if the same is not service driven.
The GAP – Though I have only touched the topics we can very well see gaps in almost all sections and the most important being the lack of a team which can organize the sector and correct the current relationships into more effective ones.
Indian Real Estate with huge affordable housing requirements needs to work in a format which is mix of private and government led. Definition of LIG, MIG and HIG needs to worked on and all projects can then be brought under “BGDC” model as mentioned earlier.
Commercial and Retail can still go as per the current model but residential sector needs to be more regulated and better syncing of all parties is required. In such a scenario there is a requirement of an outsourced team with know-hows which will work with all the above parties to come up with an executable model towards resurrection and then constantly work to ensure that we are well prepared when change comes around.