Equity Research Project

Retail Industry Analysis

Submitted By : Saurav Prakash PG 20125223 Shantanu Malviya PG 20125696 Sandeep panwar PG20125311
[T h e p r o j e c t R e a l E s t a t e i n d u s t r y i s b a s e d on the current industry trends of Real e s t a t e s e c t o r . The main objectives of the project are: Understanding the functioning of Real Estate Industry Analysing the industry Quantitative Basis. performance on Qualitative and

Forecasting the Future Investment in the Sector.. To study the fundamental factors affecting the real estate value. To examine the factors of real estate boom in 2008.

IILM Institute for Higher Education, Gurgaon

ACKNOWLEDGEMENT
Before we get into thick of things, We would like to add a few words of appreciation for the people who have been a part of this project right from its inception. The writing of this project has been one of the significant academic challenges We have faced and without the support, patience, and guidance of the people involved, this task would not have been completed. It is to them We owe Our deepest gratitude. It gives us Immense pleasure in presenting this project report on Real Estate Industry. It has been our privilege to have a team of project guide who have assisted me from the commencement of this project. The success of this project is a result of sheer hard work, and determination put in by us with the help of my project guide We convey our heart full thanks to the member faculties of IIlM, with their help and corporation. We are very thankful to our Prof. Mrs Saima Rizvi (IILM) for her full support in completing this project work. Last but not least, we would like to thank our families and Friends for their full cooperation & continuous support during the course of this assignment. The project is dedicated to all those people, who helped us while doing this project.

Real Estate Sector

Page 1 of 48

Table of Contents
1. Executive Summery

1.1. 1.2. 19 1.3. 20

Industry size and Growth of Construction Industry ................................................................ 7 Industry Segmentation ............................................................................................................ Real Estate Sector ...................................................................................................................

1. Analysis 1.1 1.2 1.3 1.4 1.5 PEST Analysis.. 19 Swot Analysis 30

Porters Five Forces Model21 Ratio Analysis.25 CAGR26

2. Research 2.1 2.2 2.3 2.4 Hypotheses Of the Study.28 Research Methodology28 Discussion....29 Conclusion and Suggestions....30

3. Biblography

Executive Summary

The project Real Estate industry is based on the current industry t r e n d s o f R e a l e s t a t e s e c t o r . The main objectives of the project are: Understanding the functioning of Real Estate Industry Analysing the industry performance on Qualitative and Quantitative Basis. Forecasting the Future Investment in the Sector..

To study the fundamental factors affecting the real estate value. To examine the factors of real estate boom in 2008. To present the future constraints of real estate investment in India.

For this pr oje ct the financ ial per form ance of the maj or pl aye rs of the i ndustr y wa s st udi ed and int erpr etati ons were dra wn. We lear nt Cum ulati ve Aver age Gr owth Ra te a nd Compound Avera ge Gr owth rate to c onduct Qua ntita tive ana lysi s of the Indust ry.

The Report Is Divided Into Various Sections: Industry Overview

T h i s p a r t d e s c r i b e s t h e I n d u s t r y p r of i l e . T h i s p a r t r e c o g ni z e s t he C h a r a c t e r i s t i c s of R e a l E s t a t e , Driving Forces, it also gives little insights into Real Estate Investment Banking . This section also describes the Major Players Of the Sector.

Analysis
Quantitative and Qualitative analysis are conducted in this sector and Recommendation are the output .

Research
This Part Contains the Study Conducted in year 2008. The factors in the present paper are the

Macro Economic factors for which the secondary data is more suitable and reliable. The collected in the aforesaid manner have been tabulated in condensed form to draw the meaningful results. To analyze the data tables, percentage and graphs were used.

Findings
A Detailed Analysis Of the industry Shows that Growth Rate of The industry has declined since last five years , showing the effect of Global Recessions in India. Although Indias Real estates situation is very much healthy against over countries of the World. But Developers did face the Drop in demand of the properties which has decreased the prices of Properties indirectly. As companies are trying to achieve large number but lower margin sales these day.

Industry Overview

Current Scenario of the Real Estate Market in India Commercial real estate sector is in boom in India. In the last fifteen years, post liberalization of the economy, Indian real estate business has taken an upturn and is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. This growth can be attributed to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors Characteristics of the Real Estate Market in India

Growing Market Demand

Realization of large commercial projects IPOs by developers Gradual organization of the markets in the Tier I cities

Greater availabi lity of informa tion

Emergence of transparency and liquidity Entry of international real estate consultancies Governing legal framework relaxed Competitive pricing

Cause-Effect scenario leading to emergence of organized real estate market in India The property market in India has traditionally been unorganized and fragmented. However, the recent past has seen a consolidation of positions in the market as developers are stretching their capacities to the maximum in order to meet the growing market demand, which in turn has encouraged large projects with sourced financing. The IPOs by large real estate developers like Sobha, Raheja and DLF have led to organization of the market in the Tier I cities, but the Tier II and Tier III cities still demonstrate the traits of an unorganized market. Whilst the Indian real estate market still lacks transparency and liquidity compared to more mature real estate markets, the increasing requirements of multi national occupiers, as well as the influx of international property consultancies has led to the introduction of greater availability of market information, both in published and private form pushing the sector to an organized market form. Driving Forces Stated below are the reasons that have led to the real estate boom in the country Booming economy; accelerated GDP to 8% p.a. Indias emergence as an attractive offshoring destination and availability of pool of highly skilled technicians and engineers ; Development of largecaptive units of major players include GE, Prudential, HSBC, Bank of America, Standard Chartered and American Express Rise in disposable income and growing middle class, increasing the demand for quality residential real estate and real estate as an investment option. Entry of professional players equipped with expertise in real estate development; Relaxation of legal rulings and processes by the governing bodies encouraging investments in real estate Improvement in infrastructure facilities Categorizatio n The demand for new office space in India has grown from an estimated 3.9 million sq. ft in 1998 to over 16 million sq. ft in 2004-05. 70% of the demand for office space in India is driven by over 7,000 Indian IT and ITES firms and 15% by financial service providers and the pharmaceutical sector. In 2005 alone, IT/ITES sector absorbed a total of approx 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft. of space across major cities by 2010. This data clearly demonstrates the growth of the real estate sector in the country.

With reference to the availability of infrastructure facilities, following cities are currently attracting MNCs/corporate/real estate developers: Tier I cities, Mumbai (Commercial hub), Delhi (Political hub) and Bangalore (Technological hub): Preferred option for many new market entrants Command the highest international profiles and significant proportion of FDI Offer qualified labor pool and the best infrastructure facilities Exhibit development of sub-urban commercial real estate Yield of 9.5 10% Tier II cities, notably Hyderabad, Chennai, Chandigarh, Kochi, Mangalore, Mysore, Thiruvananthapuram, Goa, Bhubaneshwar, Ahmedabad and Pune Yield of 10.5-11.5% Offer competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure, Attract high value IT, ITES and biotech corporate houses Tier III cities, like Cuttack and Jaipur Low liquidity and still highly unorganized. Special Zones: Economic 28 operational SEZs in the country, including those converted from Export Processing Zones (EPZ) to SEZ. Development of SEZs in various segments such as multi-product, Information Technology, Biotechnology, Gems and Jewellery, Textiles and technology intensive industries Attract both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs) Corporate Location Reliance Industries Gurgaon, Mumbai/Navi Mumbai Adani Group Mundra TCG Refineries Haldia Suzlon Coimbatore, Udipi, Vadodara Hindalco Sambalpur Genpact Bhubaneshwar, Jaipur, Bhopal Vedanta Orissa Corporate interested in development of SEZs in India and the location of interest Apart for the corporate clientele, the SEZs also attract a number of real estate developers, including DLF, Ansals, Omaxe, Parsvnath, Shipra Estate to name a few.

As per utilization, the real estate space can be classified as follows:

Real Estate Utilization

Residential

Commercial

Office

Hospitality

Retail

Malls Multiple xes

R eal estate utilization Listed below are the salient features of each category: Commercial Real Estate Office Space Backed by strong infrastructure Promoted by increasing demand from IT industry Shift of focus from the traditional CBDs towards secondary centers owing sharply higher land prices in the city centers. Retail Space Growth of 25- 30% expected in the organized retail sector (malls and multiplexes) leading to an increased demand in real estate Affected by government policies for foreign retailers

Pronounced in the Tier I, Tier II and Tier III cities.

Hospitality Space Criteria Annual growth rate of the industry Number of foreign tourists in 2005 Total number of five star rooms (2005) Total number of five star rooms needed by 2010 Growing demand of real industry

Statistics 8% 4000000 96000 150000 estate in the hospitality

Increasing demand of lodging in commercial cities such as Bangalore, Mumbai, Delhi etc. from business travelers. Established brands in this sector include Asian Hotels, Indian Hotels, ITC, Le Meridien etc are in expansion mode with many new players such as Accor Group, Marriot, Choice, IHG Group

Residential Real Estate Development triggered by: o Low per capita housing stock o Rising disposable income o Easy availability of finance Currently growing at 30-35% per annum Driven by retail investors who view real estate as an attractive investment option as compared to mutual funds and stocks Geographically widespread with townships being built in both the metros and the tier II and III cities Real Estate Investment Banking Real Estate Investment Banking is an approach to real estate financing providing the client a host of sector including the structuring of real estate projects, legal advice, operative management of real estate projects and support in marketing properties. The banking focus in Real Estate Investment Banking is on structured financing products and structuring of entire portfolios. Extending on similar lines is the importance of syndication that forms the base line of larger-sized transactions. Real estate investment banking focuses on the following target market as prospective client base: Real Estate Consultants The increase in transparency and liquidity in the real estate market in India is attracting international real estate consultants to India. These consultants offer end to end solutions for their clients real estate needs. These sector include strategic

consulting to developers, investors, advisors and lenders seeking assistance with existing assets, potential acquisitions, new development projects and properties slated for disposition, feasibility studies, concept testing, business planning exercises, investment advice, market research and analysis, demand forecasting, financial modeling and project structuring exercises, portfolio optimization and re-engineering strategies, expansion and occupancy, location and entry, brokerage sector, legal documentation review, valuations etc. Real estate consultants also ensure that the financing needs of the client are well taken care of by liaising with banking/non banking institutions and providing them with investment and structured finance solutions including securitization and sale & leasebacks, structured finance facilitating equity/debt into development projects on behalf of private and government sector clients, structuring development financing, public - private - partnerships, joint ventures, portfolio transactions and privatization exercises. The recent players in the Indian market are Jones Lang Lasalle, Colliers, CBRichard Ellis, Frank Knight and Trammell Crow Meghraj. Developers and Construction Companies With the opening up of the real estate sector in the country, the construction houses are scaling up the commercial and residential constructions. An increasing number of developers are offering IPOs for fund raising. AIM too is a sought after solution to meet the fund requirements for these developers. Group Parsvanath Sobha Pyramid Saimira DLF Universal K Raheja Corp Unitech Hiranandani Construction Route/Market IPO IPO IPO IPO AIM AIM AIM

Fund raising options by developers Domestic Corporate Houses As the land prices in the Tier I cities have always moved upward, land was regarded as a safe investment which, regardless of how it was used, would produce capital gains far above the inflation rate. It was thus common for companies in the manufacturing and service industries to acquire real estate even though they themselves were completely unrelated to property rental or real estate investment, seeking collateral value and tax benefits from depreciated assets, and expecting unrealized gains to absorb business risk. Acquisition of real estate as an asset was further encouraged as part of a diversification strategy in the investment portfolio of these corporate houses.. As these real estate possessions are classified as fixed assets held for the companys own business purposes, it becomes feasible recent moves to increase real estate liquidity often involve the conversion of corporate real estate into commercial use. The corporate

houses in India are also demonstrating a shift from ownership to leasing. With the advent of MNCs into the country, a growing number of companies no longer see real estate ownership as an absolute necessity. From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. This has been greatly encouraged by corporate restructuring and a return to focusing on core competencies. Thus, there seems an opportunity to tap the corporate houses who have a large corpus of real estate and are willing to trade this asset for want liquidity. FDIs/FII s Post liberalization, the investment opportunities in real estate for the FDIs and FIIs have greatly opened up. Foreign investors can now purchase commercial development projects (under construction) over 50,000 sq m (540,000 sq ft), or plotted residential developments with a minimum size of 10 hectares. Foreign investors may purchase an equity stake in an unlisted real estate company and thereby partner in its growth plans across asset classes and cities. Listed real estate companies also offer good liquid investment opportunities routed into designated special purpose vehicles that hold the asset(s) being developed, thereby reducing risk. These investors look for innovative financial products to suit their investing needs. Financial Institutions Real Estate Mutual Funds Major financial institutions such as ICICI, HDFC, IL&FS and Kotak Mahindra have all launched real estate funds, either as joint ventures or sole investors. Most institutional funds operate on a pan-Indian basis, and are increasingly looking at opportunities in Tier III cities, in order to gain "first mover advantage". Private Equity/Venture Capital Funds As per the Securities and Exchange Board of India (SEBI), Foreign Venture Capital Investors (FVCIs) may invest in real estate assets, within the framework of SEBI. This has paved the way for capital infusion into the market and a significant weight of foreign capital is now chasing Indian real estate. Indirect real estate investments are made into a pooled investment fund; such funds are usually created in partnership with domestic developers or financial institutions. Such VC firms, partnered with developers form a potential client base, keen to invest in the real estate sector.

Real Estate and Financing Trends in India Securitization and CMBS From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. Securitization is primarily used by the corporate houses to convert the corporate real estate to commercial real estate. Realty Funds/ Realty Mutual Funds in India Initiated by SEBI, the REMFs true potential would be tapped only after the setting up of REITs, as they infuse confidence among investors by serving as custodians of title deeds. (REITs pool various real estate assets, including warehouses, buildings, industrial estates and parks, malls, commercial and residential premises and get listed on the stock exchange to enable investors to buy and sell. They afford an opportunity to diversify the portfolio within that limited sense as well. However, SEBI has not allowed the creation of REITs in India as yet, though REITs are well established in the more mature real estate markets. ) Currently the REMFs in the Indian market are targeted at the HNIS and corporate investors. Risks involved in the Real Estate Investment Market Liquidity risk The real estate investment market is still in its infant stage. The time required for liquidity of real estate property can vary depending on the quality and location of the property. Regulatory risks In terms of property ownership, permission from the Reserve Bank of India is required for foreign investors. For capital repatriation, investors need to apply for approval from the RBI, and foreign direct investment is limited to a limited set of opportunities (e.g. townships). The REMFs work within the SEBI framework. Being a developing and growing sector, the rules, regulations and legalities demonstrate frequent changes, making it seem as a cumbersome investment option to the investors. Property market transparency risk The Indian property market has low transparency when compared to the more mature and developed real estate markets. Although market transparency has improved, reliable and consistent information on the Indian property market is still not easily available. There are also more professional due diligence and valuation institutions needed. This holds true even for the Tier I cities. Macroeconomic risks Interest rates, inflation and exchange rate risks are amongst the important macroeconomic indicators and have shown decreased volatility. The provision of facilities, is in many regions, still inadequate (education, transport infrastructure). These risk factors are not likely to disappear in the near future, impeding the development of the real estate sector. Ownership and Land Title Issues Lack of information and low transparency in the real estate segment in India, coupled with the age old property related issues discourages the investment of the large players in the semi urban and rural areas thus slacking an overall growth of the real estate sector.

Conclusion The Indian real estate sector promises to be a lucrative destination for foreign investors into the country. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages. However, there are potential constraints for domestic as well as foreign investments in India. Absence of a single regulator to monitor business practices prevailing in Indian real estate market is perceived to be a risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained. Maturity of the real estate markets will lead to infusion of foreign investment and adoption of international best practices by real estate players. Developers will get more organized, and become more transparent to avail opportunities emerging in the market. With the Indian securities market regulator SEBI allowing real estate mutual funds (REMFs) in India, equity investors will have an exit option available to them. All these factors will contribute in making the Indian real estate market more organized and structured, thus providing better investment opportunities.
All involved in the murky environment of Real Estate in India.The most recent scam related to bribing of top public banks officials in the LIC Housing Finance Scandal has again put question mark on the fundamentals of the industry.Valuing the industry and making a real estate investment remains one of the most difficult investing tasks in the Indian Stock Market.Even Fund Managers are staying away from the Sector due to lack of trust in the Financial Statement given by the industry.That said modern India presents a booming picture of tall buildings and huge office areas & shopping malls. A list of the chief players in Indian market is given below:

DLF: DLFs chief business is to develop housing, marketable and retail properties. Currently it has undertaken the development of 70 million sq ft of housing projects which it intends to finish in the next three years. DLF has joined hands with Delhi Development Authority to develop townships in Amritsar, Pune, Gurgaon, Mumbai, Chennai and Goa. DLF has been the construction company behind different malls in the major cities in India. The company is also developing 50-75 hotels along with Hilton Hotels and infrastructure and SEZ in India in collaboration with Laing ORourke (UK).The current market cap is around Rs.51,832.22 crore.

Tata Projects: Tata Projects registered an annual turnover of Rs 2,300 crore on July 1, 2007. With more than 1,500 professionals the company has emerged as one of the chief player in EPC projects. Over the last four years, it has attained a CAGR of 50 per cent which quadrupled its annual turnover of 2006-07. Tata Projects functions in concentrated divisions like broadcast and distribution, steel, power production, oil, gas and hydrocarbons and industrial infrastructure.

Sobha Developers Ltd: With an annual turnover of Rs 1,189 crore, Sobha Developers Ltd was initiated by the now chairman PNC Menon in the year 1995. On June 30, 2007, the company has 3,706 skilled professionals working for it. At present it owns Rs 3,500-acre land in eight Indian cities namely Coimbatore, Bangalore, Mysore, Chennai, Thrissur, Kochi, Pune and Hosur. The companys clientele include some of the top players in IT, hotel and construction sector such as Hewlett Packard, Mico, Infosys, Ramaraju Developers, Dell, Timken, etc.

Shapoorji Pallonji & Co: The Company has more than 3,500 professionals working for it and is largely driven by its loyalty to consumer satisfaction. Some of the major projects undertaken by Shapoorji Pallonji & Co are World Trade Centre, Mumbai; TELCO industrial complex, Pune; Bhabha Atomic Research Centre, Kalpakkam; HSBC Bank, Mumbai; Hotel Taj Intercontinental, Mumbai; Bank of India, Mumbai; Indira Gandhi International Airport, New Delhi, etc. the company has created magnum opus of construction and has been a consistent executer of challenging projects. Unitech: Recently Ramesh Chandra, Unitechs Chairman has declared the investment of $ 720 million by his company in the coming four years to develop 28 hotels along with Marriott International. The market capitalisation of the company is Rs.16,867.40 crore.Its chief activities Include construction, expansion of real-estate, consultancy in associated sectors, hotels, electrical broadcast and information technology. India Bulls Real Estate: One of Indias largest listed developers developing residential and commercial real estate. Being a focused regional player, more than 90% of IBRELs portfolio by value is in the three major markets of Mumbai, NCR and Chennai. Established in 2000, the company has grown into one of the leading Indian business houses with its companies being listed on Indian and overseas financial markets having a combined net worth in excess of Rs. 18,000 crores. the current market cap being Rs.6,545.17 crore.

HDIL: Ranked as Indias fastest growing real estate company by Construction World-NICMAR in October 2007 & with a current market cap of Rs.8,567.76 crore, Housing Development & Infrastructure Limited has established itself as one of Indias premier real estate development companies, with significant operations in the Mumbai Metropolitan Region. HDIL is a public listed real estate company in India with shares traded on the BSE & NSE Stock Exchanges. With operations spanning every aspect of the real estate business, from residential apartment complexes to towers & townships, commercial premium office spaces and retail projects like world-class shopping malls. it is Indias largest slum rehabilitation company, & was given the Mumbai International Airport Slum Rehabilitation project in October 2007,one of the largest urban rehabilitation projects in India..

Emaarr-MGF: One of the worlds leading real estate developers company in India and Development of properties in the residential flats, Commercial Properties, premium apartments etc. The Commonwealth Games Village builder is still trying to get listed on NSE. Currently not listed.

Analysis

Analysis Quantitaive
Pest Analysis of Indian Real Estate Sector
The various factors which influenced the Real Estate segment were Political, Technological, Social and Economical factors. POLITICAL FACTORS:

Governments regulations and policies in favour of real estate sector. Heaviest tax imposed on the construction industry. FDI experience in Indian real estate market.

ECONOMIC FACTORS:

Controlled Inflation levels. Low Interest Rates. Provides further Liquidity

SOCIAL FACTORS:

Increase in consumption. Urbanization. Increase in per capita income (current prices). Rise in Demand for Quality Housing Projects.

TECHNOLOGICAL FACTORS:

Internet revolution Media

SWOT analysis
Strength

employment and training opportunities in the field of construction Private sector housing boom and commercial building demands Construction of the multi building projects on the feasible locations in the country. Good structured national network facilitates the boom of construction industry. Low cost well- educated and skilled labour force is now widely available across the country. Sufficient availability of raw material and natural resources in the country is supportive for the industry. Real estate development is on high and it is attracting the focus of the industry towards construction.

Weakness

Chances of Natural disadvantage are there. Distance between construction projects reduces business efficiency. Training itself has become a challenge. Changing skills requirements and an ageing workforce may accentuate the skills gap. Improve in long-term career prospects is highly required to encourage staff retention and new entrants. External allocation of large contracts becomes difficult. Lack of clearly define processes and procedures for construction and its management. Huge amount of money need to be invested in this industry and inefficiency may lead to high level of risk.

Opportunity
continuous private sector housing boom will create more construction opportunities. Public sector projects through Public Private Partnerships will bring further opportunities. Developing supply chain through involvement in large projects is likely to enhance the chances in construction.

Renewable energy projects will offer opportunities to develop skills and capacity in new markets. More flexible training delivery techniques are now available. Financial supports like loan and insurance and growth in income of people is in support of construction industry. Historical cultural heritages like the TAZ MAHAL encourage and provide a creative platform for the industry. Remote areas in the country are easily accessible and plenty of land is available in the country.

Threat
Long term market instability and uncertainty may damage the opportunities and prevent the expansion of training and development facilities. Current economic situation may have an adverse impact on construction industry. Political and security conditions in the region and Late legislative enforcement measures are always threats to any industry in India. Infrastructure safety is a challenging task in construction industry.

Porters five forces Model

1. Intensity of Industry Rivalry (Neutral to Favorable)
Compared to many other industries, the intensity of rivalry among developers in residential development is relatively low. The area where it is felt most is in competition for development land. When it comes to selling end units, developers typically try to avoid competing directly by 1) developing products in different markets / locations; 2) launching products at different time periods; 3) differentiating product types. The key factor is that residential property is sufficiently differentiable and not subject to any sort of perishibility or technological obsolescence such that developers have much more flexibility with the timing of producing and selling their end product.

2. Threat of new entrants (Neutral to Unfavorable) When an industry has over 60,000 registered participants, it is hard to conclude that barriers to entry are high. Although the number of entrants varies over time and according to market condition, they are sufficiently low relative to other industries that new entrants can continue to enter and eventually push above average returns back to historical means. Generally speaking, the potential barriers to entry to any industry fall into several broad categories: 1) capital; 2) technology; 3) legal authorization; and 4) expertise and know-how.

Legal authorization is necessary for certain types of industries such as telecoms and utilities. The number of participants in these industries is limited due to the nature of the businesses (natural monopolies) or the return profiles (massive upfront investments which can only be recovered through limited operating competition). For most real estate development, no special legal authority is needed to enter the industry. That is why many non-property companies find it relatively easy to migrate into this industry as and when returns become attractive or simply out of interest. 3. Capital can be considered a barrier but mostly to larger scale projects. The gross amount of capital needed to enter the industry is paltry compared to the likes of steel mills or chip fabs. In addition to the above factors, the wide range of different types and scales of development each entail different barriers to entry. Obviously larger, more specialized developments in top tier cities would have much higher barriers to entry than a small residential project3. Threat of substitutes (Favorable for End Use; Neutral for Investment) Real estate development involves different types of products - residential, office, retail and industrial being the most common. To narrow the scope of discussion, we will just consider private residential real estate. Currently in China, residential real estate is in high demand both for its utilitarian value as accommodation and also for its investment value as a stable, inflation- proof store of wealth. As such we need to consider the substitutability on both fronts. The threat from the secondary market varies by city. In T1 and large T2 cities, a sufficiently large stock of housing exists for the secondary market to be a viable choice for potential homebuyers. In many T3 and T4 cities, there are either not enough secondary units for sale or the market is simply is too illiquid. The threat from social housing exists but not significant. Usually, those allowed to buy or rent social housing would only be able to enter the low end of the private housing market anyway - if at all. Moreover, resale and other restrictions make it a far less liquid asset class. For that reason, the threat is only to the lower end of the private housing market. Given Chinas current state of negative real interest rates and capital controls, most individuals have limited channels for savings and investment. Real estate has helped fill this void. If investors were given more alternatives and if other asset classes such as equities start to perform better, investment demand for real estate would quite likely cool.

4. Bargaining power of suppliers (Favorable) Overall, developers are in a favorable bargaining position relative to the key suppliers in the industry. The 3 key suppliers to any residential developer are 1) land sellers (usually cities or other developers); 2) construction contractors; 3) building materials and home furnishing / equipment manufacturers; 4) capital providers. This situation is more or less reflected in that the typical cost of sales for any developer is made up of roughly 1/3 land, 1/3 construction and 1/3 financing costs. A typical developers bargaining position relative to a land seller varies according to 1) nature of sale and 2) location of sale. Developers typically prefer to buy land through direct bilateral negotiations with the government or 3rd party rather than be involved in a multi-party bidding ware. Auctions are the least desired channel for land acquisition but sometimes a necessity. For land bought in smaller cities or newer areas of larger cities, developers wield a lot more bargaining power. Smaller cities are generally eager to entice well known national developers. For example, if Vanke or COLI buys into a smaller T3/4 city, it would signal to other developers that this city is worthy of investment. In such cases, local officials are willing to give a discount to entire desired players.

Lastly, capital providers, be they banks, shareholders or bondholders, may have different investment appetite for this industry at different times but whether investors or bankers demand a specific risk premium to provide capital is more dependent on the perceived risks at any point in the property cycle and not any kind of structural risk premium. 5. Bargaining Power of Buyers (Neutral) Of all the five forces, this is perhaps the most dependent on 1) the stage in the industry cycle; 2) regulations to protect consumer interests and 3) financial state of individual developers. Given this wide variance, it is very difficult to conclude definitively that buyer power is always strong or always weak. The truth is buyer power will fluctuate greatly. Thus developers that have a larger proportion of their business in markets with weaker buyer bargaining power will obviously realize higher returns. Near the peak of a property cycle, the combination of investment and end user demand generally outstrip available supply. This gives developers tremendous pricing power and leads to outsized returns. Conversely, near the bottom of the cycle, developers are usually overstocked and must cut prices to move units.

In the transaction of any large sized purchases, information is the key to knowing what a reasonabl\price to pay is. Figure 1 Property Cycle In the absence of rules and regulations developers often maximize revenue by trying to extract the maximum possible price for each unit. They can do this by: 1) not publishing any standard price lists. 2) not reporting critical information such as how many units have been sold and at what price. This situation is generally known as asymmetric information and gives the developer tremendous power. However, in most large markets, regulators are aware of this and have enacted laws to protect consumer interests by making information more transparent and readily available. In general, all else being equal, consumers in T1/2 cities or those with consumer protection laws have more bargaining power than cities without protection. Lastly, developers that are on solid financial footing (larger resulting from a more prudent management of working capital) would generally have greater pricing and operational flexibility than those that are financially overstretched heading into a cyclical trough.

Quantitative
Real Estate Industry: A Financial Analysis
I have attempted to capture the current trends in the Indian real estate industry through financial analysis of a sample of listed companies. This section provides a brief overview of the performance of the sample of listed real estate companies. The sample selected for this analysis comprised listed real estate companies that had total income of 750 mn and above. We then narrowed down its choice to a fair representative list of 30 companies for which financial information was available for the past five years. It further categorised the 30 real estate companies into large-size, mid-size, and small-size companies based on their total income, by using the 80:15:5 principle. Based on this categorisation, 12, 10, and 8 large-size, mid-size, and small-size companies respectively were chosen. This classification primarily aims to study the dynamics and operating efficiencies of the chosen companies in the real estate industry. Of the 30 companies under study, in FY10, large companies contributed 80% of total income and had 40% representation.

Debt- equity Ratio

Real estate companies require significant resources to fund their projects. Thus, they went on an equity capital raising spree during FY06FY08 to scale their operations aggressively. These companies also procured considerably high debt to finance their capital-intensive projects. However in FY09 and FY10, growth in equity and debt declined due to decreased demand, a downtrend in sales, stoppage in execution of projects, rising interest expenses and the credit crunch arising out of the global financial crisis. The global financial crisis, volatile capital markets, slowdown in FII flows made it difficult for companies to raise funds through equity markets. Further, in FY10, the focus of companies was to enhance cash flows, release cash blocked in non-core assets, increase process improvements and cost cutting, and achieve better working capital management along with real estate development. This resulted in renewal and progress of certain stalled projects and new launch announcements.

ROCE
The return on capital employed (ROCE) is a measure of returns that a company is realising from capital employed. ROCE is defined as the ratio of profit before interest and taxes (PBIT) to capital employed.

Another factor that led to a sharp decline in ROCE of real estate players is increase in capital employed at a higher pace than PBIT growth. In fact, small and large companies registered a sharp decline in PBIT as against a positive growth in capital employed, which had a double effect on ROCE. In FY10, PBIT of mid-size companies grew at a lesser rate of 19.7% compared with 27.8% growth in capital employed. However, large and small companies saw a decline in PBIT of 20% and 30.2% compared with 25.3% and 8.6% growth in capital employed.

Fixed Asset Turnover Ratio

Fixed Asset Turnover ratio shows that 12.32% . FATR is mostly modest leaving one firm, which tell that most of the companies were able to sail out with much fixed asset harm.

Compound Annual Growth Rate - CAGR ( Revenues )

Company Name DLF March 2012 10,207.88 Mar11 10,091.54 Mar10 7,791.31 Mar 09 10,392.55 Mar 08 14,655.01 -6.98% 90.77 544.30 6.41 78.12 CAGR

Omaxe UNITECH ANSAL API Parsvnath Developers Ltd. GODREJ PROPERTIES LTD Real Estate Where, Formula

62.90 326.71 10.32 25.53

62.51 510.08 10.55 75.48

398.80 1030.68 7.24 408.74

-30.88% -20.53% 7.39% -42.57%

739.66 10.06

133.85

113.04 74.74

81.36

106.24

121.84

75.89

1.47%

10714.7

10856.4

8688.48

10668.51

16276.36

-8.02%

: start value,

: finish value,

: number of years.

Actual or normalized values may be used for calculation as long as they retain the same mathematical proportion. The CAGR can also be calculated as the geometric mean of 1 plus each year's return (i.e. +3% becomes 1.03 and -2% becomes 0.98), minus 1

Analysis: CAGR of Real Estate industry has Been -8.02, which clearly signifies that industry has been
Building, Construction Industry and Real Estate Sector

suffering from low earning capability over 5 years or so. The main reason for such Drastic fall is recession , which has made consumer reluctant to invest. It was backed by Raising interest Rates.

Cumulative Average Growth Rate

Interpretation

Real Estate is suffering from down turn of cumulative average growth rate.

A -340 % of decrease show that industry is not healthy right now.

Recession has had adverse effect on Indian real estate industry.

Suggestion

Real estate companies has to inject money to start new projects. Companies have to formulate effeicient policies to skip florclosures.

Objectives of The Study

Following are the objectives of the study: 1. To study the impact of Global recession on Indias real estate sectors foreign direct investment flows, rate of growth, sales and profit after tax (PAT) and 2. To analyse various strategic initiatives by companies to combat the existing times and sustain their businesses through future turbulent times. 3. To give suitable conclusion & suggestion.

Hypotheses of The Study

1. There is no significant impact of recession on Indian real estate market (Ho) 2. Global recession has a definite impact on development of Indian real estate market (Ha)

Research Methodology
The study is primarily periodicals, Websites and newspapers based on secondary data collected through journals,

Results and Discussions

The real estate market in India remains unorganized, fragmented and characterized by small players with a local presence. The growth of the real estate sector is attributed to various factors such as growing economy, growing business needs etc. However, this boom is restricted to areas such as commercial office space, retail and housing sectors. The major concerns of this sector namely are skill shortage, non-availability of statistics, lack of low cost-affordable housing, lack of sustainability and to meet a future that might have downturn due to oversupply. The industry is presently facing a major resource crunch an obvious lack of qualified and skilled people. Coupled with this manpower shortage is the shortage of availability of relevant statistics, which has created an ambiguity as to how much construction activity is actually taking place and one cant gauge the demand and supply trends accurately. The major issues that plague this industry is tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing. So, there is a dearth of low cost affordable units. Recession in US economy has caused great impact on Indian real estate business. The real estate industry was a booming industry in pace with information technology (IT) industry. Demand for it space and from high net worth individuals had created opportunities for the this sector.

Strategies To Cope Up With The Above Situation

Challenging times present an opportunity for Companies to capture market share by outperforming competitors. A quick analysis of the market conditions and quicker response to mitigate existing risks differentiates companies. There can be multiple reasons why some companies continue to tread well while some companies falter badly, when faced by serious challenges. But, invariably, the most significant role here is played by the strategic decisions taken by the company. When the global economic crisis, compounded by the local economy issues, started hitting real estate demand in India, different companies reacted in different ways.

1) Financial Decisions
Initially, developers were reluctant to reducing real estate prices in order to revive demand. However, with no immediate respite and growing pressure to cut down losses, a gradual slash down in prices was introduced. The worsening situation of credit availability led developers into liquidity crunch. Many developers succumbed to borrowing at a very high cost, Private Equity which was once easily available became a very distant option.

2) Diversification of Business
Recognizing the need of developing multiple streams of revenue, some cash-rich developers vertically diversified (or attempted to diversify) their businesses into telecommunications, financial sector, insurance, etc. Horizontal diversification into sector related to property management and leasing also surfaced up as a preferred strategy for dealing with the downturn. Owing to increased competition in metropolitan cities, developers opted to diversify geographically as well. Tier II and Tier III cities thus came under their radar. Interestingly, one can easily find developers cheering their strategy of foraying in smaller cities, which are relatively less-affected of the ongoing economic

turbulence. Maintenance of high equity As part of long term strategy, instead of selling off properties, developers began to enter onto lease agreements with larger companies for commercial space. The long term rental arrangement, though at reduced rates, guaranteed a steady stream of income.

3) Cost Control
In the wake of controlling cost like most other sectors of the economy, Indian real estate companies also embarked upon various cost cutting strategies. Capital intensive projects that had no impact on companys revenues in the short term were either put on hold or scaled down, and even cancelled. IT related projects were among major ones in this case. However, some significant projects such as those including the use of IT to improve investor access to information are important, and most developers appear to agree on this. Therefore, projects meant for maintaining a fair interface between the company, investors and customers hold water, especially during the turbulent times. A number of companies also downsized their extra manpower. However, in many instances, this was not done in a thoughtful manner, thereby putting companies on the risk of losing essential talent in exchange of short term cost savings. A number of real estate companies in countries such as the US and the United Kingdom (UK) dont hesitate in outsourcing their marketing activities after carrying out the necessary due diligence. This acts as a measure to infuse efficiency and cut unnecessary costs involved in many of the related processes.

4) Focus On Customer satisfaction

The ongoing condition of economic contraction has also resulted in improved sector to the customer. In order to shed off an image of being non-transparent and unorganised, a number of developers increased their focus on customer satisfaction. A customer was provided the facility of checking the status of construction of his property by logging on to a website. Earlier, this was possible only after visiting the site and following up with the concerned officials. With such initiatives, developers are fast changing their image as professionally managed corporate houses, committed for meeting customer expectations and empathetic in resolving the concerned issues.

Conclusions & Suggestions

Owing to the correction in real estate prices and re-aligning of business strategy, as per the ongoing business environment, has resulted in some signs of revival in the Indian real estate sector, in the recent past. A stable political scenario has also boosted confidence in the Indian capital markets, and the overall business environment. This was further complemented with the Indian economy managing to achieve a growth rate of 6.7% during 2008-09, despite recession in the global economy. At the first instance, such positive indicators reinforced the potential of Indian domestic economy, while uplifting sentiments otherwise enshrouded by negative movements on the front of employment and deepening financial crisis in the global economy.

These small packs of positive developments slowly flowing into the economy have also started generating interest amongst customers, and some developers have experienced improving situation in terms of demand of real estate in select pockets. The recent situation, however, has sent the message home. The Indian real estate companies are urged to focus on customer satisfaction. The industry is no more dominated by a developer, putting customer expectations at the backstage and carrying on operations at his own sweet will. More significantly, the ongoing correction in the real estate market has indicated towards its fundamental strength wherein it tends to correct itself with any excesses on the front of prices, and other demand relating factors. Nevertheless, real estate companies are fast-learning to lay emphasis on retention of existing customers and acquire new customers. The present times have been calling for a fair level of flexibility, which even the real estate companies have been expecting from their suppliers and service providers. At the same time, many developers have found a viable strategy in forging collaborations leading to cost benefits, synergies, and mutual strength. The potential areas of collaboration include supply chain, procurement, production and brand promotion. Nevertheless, this phase of market consolidation is a real opportunity where weaker players will be defragged and stronger ones will increase their market share through well-thought business strategies, and further tighten their belts for high growth in the future. The Budget 2010 presented a mixed bag for real estate sector in India. However, it has failed to address some of the key demands of the real estate developers, including infrastructure status to the real estate sector, relaxation of external commercial borrowings to fund projects, provision of separate deduction of Rs. 1 lakh for housing loan repayment or increasing the overall 80C deduction to Rs. 2 lakhs etc.the key to growth of this sector lies in growth of disposable income with the population and willingness of property developers to build affordable homes for middle class.

It is said, that success is not about how high you rise, but about how high you bounce back when you hit rock-bottom. Real Estate companies today are at that strategic inflection point, where they must define new imperatives to be successful once again. Bridging the gap between the customers and themselves, taking a harder look at resource-sapping processes, and above all gaining agility and flexibility as organizations, will be the stepping stones to success. -Vinamra Shastri Head Strategic Sector & Partner, Grant Thornton India

Biblography

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