Should Builders Act Local When It Comes To Expansion?

Real estate is a micro-market business, and successful brands in this segment across the world have been firmly rooted in their core geographical regions. However, 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 or later. The developers learned it the hard way that real estate is a localised business and each market has its own dynamics, in terms of consumer preferences and choices, local laws and approvals and the overall operating mechanism.

There were other reasons, too, 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 could not counter the challenge of local players, who were competing with low cost and lesser margins. The failure to maintain uniformity and quality also dented their brand reputation.

With this background, it is convenient to give a final verdict that real estate is a localised business, and one should not expand to several 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.

When a market underperforms, the performance of the developer naturally gets affected. Any business analyst would in such a scenario advise you 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?

Home ground or fly around?

• Several developers expanded geographically when the real estate market was at its peak 
• Market expansion proved to be disastrous for most of the large developers
• Heavy concentration in core market is also risky when the market underperforms
• Over-leveraging for expansion is a recipe for business disaster

JC Sharma, managing director and vice-chairman of Sobha Ltd, says that developers should always be on the lookout for new and emerging markets instead of restricting themselves to a particular market. This will evenly distribute the inventory and create inroads in the markets which have greater potential to develop, he opines. A well-balanced land parcel spread across a country will definitely provide a developer 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 the 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 (real estate investment trusts) and favourable FDI (foreign direct investment) 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, the real estate sector in India sector is expected to cross $180- billion market size by 2020. In recent years, we have observed that Tier-II markets are equally growing and developing. As the housing sector contributes around five-six per cent to the national GDP (gross domestic product), 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. This trend is more visible in those areas which have easy access to better civic and social infrastructure. 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 they may not be performing well in all the markets they have a presence in. 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 (return on investment) 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 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 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.

The writer is CEO, Track2Realty. The views expressed are personal.