Bottom Line: Track2Realty evaluates the contrasting case studies in geographical footprint of developers. While some of the realtors have gone berserk with expansion to collapse, others who are focused on core markets are today clueless as to how to escape when the market of proven expertise is under-performing.
In India, when the going was smooth a number of leading developers tried to foray into multi-city operations. Most of them had to exit the expansion strategy sooner than later. It rather proved to be the first nail in the coffin for some of these market leaders by size.
The developers learnt it the hard way that real estate is a localised business and each market has its own dynamics, in terms of consumer preferences & choices, their psychograph, local laws & approvals and overall operating mechanism.
There were other reasons why most of the developers did not succeed beyond their core market. One, many of them went for large expansions through excessive borrowings. And then these developers did not have counter strategy to deal with the challenge of local players who were competing with low cost & lesser margins. Of course, the failure to maintain uniform & standardized quality made a dent to their brand reputation as well.
With this background it is convenient to give a final verdict that real estate is a localized business and one should not expand to multi city. However, the news of some of the large developers collapsing because the market where they have heavy concentration is under-performing has yet again raked up a fresh debate.
Several developers expanded geographically when the real estate market was its peak
Market expansion proved to be disastrous for most of the large developers
Heavy concentration in core market is also risky when the given market underperforms
Over-leveraging for expansion is a recipe for business disaster
Catch 22 of market presence
Take the case of DLF, for instance. Its heavy concentration in Gurgaon has today proved to be its undoing since the market is under performing. The analysts may differ over the assumption that Gurgaon’s poor transaction is the only reason why DLF’s performance has been below average. But the fact can not be disputed that DLF is a classic case study in having taken a beating with expansion as well as market contraction.
As a matter of fact, the developer first burnt its fingers in expanding the geographical footprint. And now when they have exited many of the non-core markets, the performance of their core market is one of the critical reasons of poor sales velocity.
When the given market underperforms the market performance of the developer naturally gets affected. Any business analyst would in such a scenario advise to mitigate the risk by portfolio diversification in other markets. Is it a wise decision for a developer to have too much concentration in only the core market?
In defence of expansion
JC Sharma, MD & VC of Sobha Ltd strongly advocates that the developers should always be on the lookout for new and emerging markets instead of restricting themselves to one particular market. This will evenly distribute the inventory and create inroads in the markets which have greater potential to develop. A well-balanced land parcel spread across the country will definitely provide developers the first mover advantage in a market. It will further help to expand business and brand recall across the country.
“Going forward, like other industries, consolidation in real estate sector through joint developments with landowners will become common. Strong players will seek out emerging markets to tap latent potentialities. With the government’s focus on creating 100 new smart cities, better guidelines for REITs and favourable FDI terms, we are hopeful that there will be enough opportunities for developers to grow pan-India,” says Sharma.
Ashish R Puravankara, Managing Director, Puravankara Limited feels that keeping in account the current growth of the industry in India the sector is expected to cross US$ 180 billion by 2020. In recent years, we have observed that Tier II markets are equally growing and developing as against the core micro business markets. As the housing sector contributes around 5-6 per cent to the national GDP, the concentration of the industry especially under affordable housing is being widely spread across developing cities.
“Due to the growing retail, e-commerce, start-ups and IT industries, Tier I cities like Delhi, Mumbai, Bangalore have seen tremendous growth in the real estate. This trend is more visible in those areas which have easy access to better civic and social infrastructure around its periphery. Keeping in mind the ongoing economic transformation in these emerging markets, there is no harm in exploring the business potential in these areas,” says Puravankara.
Bijay Agarwal, Managing Director of Salarpuria Sattva maintains that there are only a handful brands that have a pan-India presence in the real estate market, and not necessarily are they performing well in all the cities. A brand that has evolved in a particular city will obviously have a strong presence in that region. But nothing should stop such brands from exploring other regions where they can disrupt the market through their innovative housing models and sales strategy.
“There is no doubt that core markets offer the best ROI to developers, but like any business there should be a good spread of projects across important markets to de-risk. Having said that, we should not have a situation where occupancy levels are poor in those non-core markets, because it will automatically impact the bottom line. The demand for quality housing is picking in the non-core markets, but active involvement of the stakeholders, including the government and policy makers should be encouraged to make housing affordable to all,” says Agarwal.
The Indian experience suggests that small-time players, who may not offer the same level of quality and construction technology, rule the non-core markets. There is definitely scope for exploring non-core Tier II and Tier III markets for larger developers. But the risks are higher when compared to the core markets simply because of a lack of ecosystem, basic infrastructure and support to the prospective homebuyers.
In a nutshell, there is always a catch 22 when it comes to decision making about the geographical footprint of the developer. As the case study of DLF suggests, one can take a beating at any of the two extreme ends if the market expansion is just about exploring the greener pastures.
A thorough assessment of the new market with methodological market feasibility test is critical. Unfortunately, there are hardly any feasibility reports available today that have invested into gauging the real demand of the end users.