Porters Five forces and Real Estate

2. Real Estate Industry of India
The Indian real estate sector has come a long way and is today one of the
fastest growing markets in the world. It comprises four sub-sectors – housing,
retail, hospitality, and commercial. While housing contributes to five–six
percent of India’s gross domestic product (GDP), the remaining three sub-
sectors are also increasing at a fast pace. The total realty market in the country
is expected to touch US$ 180 billion by 2020.
Real estate in India is being recognised as an infrastructure service that is
driving the economic growth engine of the country. Growing infrastructure
requirement in diverse sectors such as tourism, education, healthcare, etc., are
offering several investment opportunities for both domestic as well as foreign
investors. Total investment by private equity (PE) funds in the real estate sector
from January–March 2014 was approximately Rs 28 billion (US$ 465.19
million). This is a substantial increase of 28 per cent compared to the previous
quarter and close to 2.5 times the investments during January–March 2013.
The role of the Government of India has been instrumental in the development
of the sector. With the government trying to introduce developer and buyer
friendly policies, the outlook for the real estate sector does look promising.

3. MARKET SIZE OF INDIAN REAL ESTATE
0
10
20
30
40
50
60
70
2008 2009 2010 2011
US $ Billion
US $ Billion
Source: CCI Report on Real Estate in India Aug 2012

4. Porter’s Five Forces
Porter's Five Forces of Competitive Position
Analysis were developed in 1979 by Michael
E Porter of Harvard Business School as a
simple framework for assessing and
evaluating the competitive strength and
position of a business organisation.
This theory is based on the concept that there
are five forces that determine the competitive
intensity and attractiveness of a market.
Porter’s five forces help to identify where
power lies in a business situation. This is
useful both in understanding the strength of
an organisation’s current competitive
position, and the strength of a position that
an organisation may look to move into.

6. 1. Threat of new entrants
Profitable markets that yield high returns will attract
new firms. This results in many new entrants, which
eventually will decrease profitability for all firms in the
industry. Unless the entry of new firms can be blocked
by incumbents (which in business refers to the largest
company in a certain industry, for instance, in Real
Estate in India, DLF Limited, typically called the
"incumbent company"), the abnormal profit rate will
trend towards zero.

7. There will be decrease in profitability due to increase
in the number of entrants. As a result of the economic
downturn around the globe, it has been difficult for
the new entrants to get a hold because of cost
reduction in expansion plans by corporates in real
estate, little scope in commercial construction, and
strong rivalry between existing firms.
Result: Relatively weak threat of new entrants

8.  Barrier To Entry-The existence of high start-up costs or
other obstacles that prevent new competitors from
easily entering an industry or area of business. Barriers
to entry benefit existing companies already operating
in an industry because they protect an established
company's revenues and profits from being whittled
away by new competitors.

9. 
FACTOR BARRIER IN REAL ESTATE
LEGAL Ownership restrictions are clearly a very high barrier, but
such restrictions can be overcome by JV
Problems with tenants can be difficult to deal with in certain
countries
TAXATION AND COSTS This is not a high barrier as long it is believed tax can be
compensated for by high post-tax returns
POLITICAL RISK Low barrier if the country has a strong economy and
acceptable legal framework, although infrastructure
investment can be a very politicised area and a problem for
developers
ECONOMIC STABILITY Medium Barrier
LIQUIDITY RISK High Barrier
CULTURAL BARRIERS Religion is not a high barrier; language and education are
important; local partners are helpful
GOVRNMENT
RESTRICTIONS
LICENSING IS A MAJOR ISSUE
FINANCE REAL ESTATE REQUIRES A LOT OF FUNDING SO
FINANCE IS A HIGH BARRIER

10. 2.SUPPLIERS POWER
When your suppliers have increased bargaining power,
it affects ones ability to serve target market in a
number of ways. Supplier power can impact the price
the target market will pay for goods, the quantity and
quality of items available for purchase, and even which
companies will be able to remain in the marketplace.
This potential business disruption may influence you
to seek out substitute products or a new solution to the
market's needs that avoids being held hostage by a
critical supplier.

11.  SUPPLIER CONCENTRATION-
 PRICE-PRODUCTIVITY OF ALTERNATIVE INPUTs
 RELATIONSHIP SPECIFIC INVESTMENTS
 SUPPLIER SWITCHING COSTS
Bargaining power of real estate suppliers is medium as
the supplier concentration is quite high when it comes
to supply of Raw Materials like Cement, Steel, etc.
However, supply of Land is limited in Real Estate and
due to this the supplier of Land has a high bargaining
power in Real Estate Industry.

12.  An important category of suppliers in Real Estate is the
bank as the Real Estate industry has a very high
requirement of funds. Banks have the power to decide
whether to fund a venture or not and at what rate.
 Banks have now become highly conservative especially
after the economic downturn.
 Are significantly affected by the monetary regulations like
the Repo rate & CRR formulated by the Central Bank of the
country. This is in turn affects the real estate sector.
 Consequently the bargaining power of suppliers is very
strong
ROLE OF BANK AS A SUPPLIER

13. 3. Power of the Buyer
 Powerful customers are able to exert
pressure to drive down prices, or increase
the required quality for the same price,
and therefore reduce profits in an
industry.
 Customers significantly influence the
business operations in real estate.
 Customers do possess a threat of
integrating backwards.
 Consequently, the bargaining power of the
buyers is strong.

15. 4.Threat of the Substitute Product
 Relative price of the substitute
 Relative quantity of the substitute
 Switching Costs to Buyer

16. In real estate business, substitute might be some type
of totally new retail space, some new location for office
space or rehabilitation instead of new construction.
The threat of substitute in real estate business and its
impact on profitability of the industry is quite
ambiguous and difficult to establish given the
economic downturns and the recovery mode of the
real estate business cycle.But as a whole Real Estate in
itself has no substitute. Housing is a basic necessity
that one has to fulfill in order to survive.

17. 5.Rivalry among existing firms.
 Number of Competitors
(Concentration)- The number of
competitors is increasing day by
day in the industry which in turn
is increasing the Competition
and reducing the rate of profit of
the industry.
 Industry Growth- The Real
Estate Industry is expanding day
by day and the industry which in
turn is also increasing the rivalry
among the existing firms.

18.  High fixed costs- Real estate is a special industry, and its 'product' is
fixed at a cost of large risks. In general, this prevents access to the
number of enterprises in this sector, making the industry a relatively
small degree of competition in other industries.
 High exit costs- The particularity of the real estate industry has been
decided, once into the industry, especially real estate development
has already begun, if you want to retire halfway through, the cost is
quite large, human, financial, material has been input, the true
'finished product' is also did not come out, this is a dilemma to the
realm.

19.  Rivalry is strong due to the large no. of real estate firms
operating in India (65 in total) and the difficulty to
differentiate
 The services offered by real estate companies cannot be
differentiated because these firms don’t offer a product,
other than the facilities they lease and this itself is very
difficult to quantify.
 In the current economic crisis, there is minimal
profitability and only companies with large cash reserves
are likely to survive.

20. Top 10 Indian Competitors
•DLF Ltd.
•Jaypee Infratech Ltd.
•Oberoi Realty
•Ansal Properties & Infrastructure Ltd.
•Parsvnath Developers Ltd.
•Unitech
•Merlin Group
•Godrej Properties
•Omaxe Ltd.
•Db Realty

21. Analysis
 Considering all the 5 forces, it can be
said that the real estate industry is not
very profitable at this stage as it was
before the subprime crisis of US in 2008
 But considering the fact that the real
estate cycle is in the recovery stage
right now and given that the demand for
real estate is growing at a CAGR of 19%,
it can be said that there are still bright
prospects ahead in a country like India.