In an exclusive interview with Housing News, Neeraj Bansal, partner – real estate and construction, KPMG India, maintains that the opening up of the Indian real estate sector to global investors, will usher greater professionalism and transparency, which are necessary for the industry to survive.
Q: What has been the impact of global investors and large corporates, on the Indian real estate market?
A: After the government opened up the sector to global investors, such as private equity (PE) funds, pension funds, etc., Indian developers are increasingly forming joint ventures and strategic alliances with such players. As a result, these global investors now have a greater say, not just in strategic decisions but at an operational level too, thereby, encouraging the adoption of best practices. Over the past decade, some of the major Indian companies and conglomerates, have also forayed into real estate. These companies have brought in professionalism and best practices that they followed in their other businesses.
Q: Do you feel that the Indian real estate sector is slowly adopting best practices?
A: The real estate industry has become fragmented and as competition increased, developers have started adopting best practices. Developers have become more organised, to remain competitive. Increased pressure on profit margins, owing to increased input cost and the slowdown in residential real estate, have also made it essential to adopt best practices.
Q: Where do Indian developers stand, vis-à-vis adopting the right strategic business model?
A: An appropriate business model, is critical for any company, to effectively leverage its strengths and build long-lasting value. For example, JVs and JDAs have gained prominence in the last couple of years. Developers involved in JVs, have access to each other’s resources such as a dedicated pool of capital and expertise and share a set of common goals and risks. JDAs, in contrast, are agreements between the developer and land owners. The land owner provides land, while the developer takes the responsibilities pertaining to approvals, development of land and sales and marketing.
Q: How can outsourcing of activities help Indian developers?
A: Companies have started defining priorities and assessing core competencies across the value chain, which can create value for stakeholders. They evaluate the activities that can be undertaken in-house and those that can be outsourced. Many companies that used to conduct most of the activities in-house, are now outsourcing a majority of their activities, to keep their operations leaner and focus on their core strengths. This trend is particularly evident, among the large established players, who engage all the concerned stakeholders at an early stage to realise the full potential of cost-conscious design and project planning.
Q: Has there been any change in project development, over the years?
A: Project owners, who control most of the engineering decisions in projects, need to engage the contractors for joint evaluation of project designs. Developers, as well as contractors, need to set up dedicated value engineering teams, comprising of experts in design, engineering and procurement. One model, which is evolving and is being adopted by several companies in the real estate sector, is the Target Value Design (TVD). It is a management strategy, which is designed to eliminate waste and deliver value by using a ‘design-to-cost’ approach (target costing).
Q: What future do you see, for the real estate sector?
A: For India to prosper and achieve double-digit economic growth, the real estate sector needs to realise its full potential. The sector is likely to undergo a significant transformation in the coming years, owing to the Real Estate (Regulation & Development) Act, 2016 becoming a reality and the increasing role of foreign investors. Moreover, the buyers/end-users of real estate are becoming more aware and are now taking informed decisions. Therefore, it becomes even more important for the companies involved in the real estate business, to assess the models and practices that they adopt, to make their business sustainable.
Q: Why are some larger developers losing out, while some new entrants are doing better?
A: Companies that invest capital and resources in technologies and encourage innovation, are likely to perform better and gain a competitive advantage over others. BIM (building information modelling) has emerged as one of the most fundamental changes that is rapidly transforming the Indian real estate and construction sector and the pace of its adoption is expected to increase.
Q: Do you have any suggestions?
A: Companies should assess the usage of modern technologies, materials and components, during the planning stage itself, to reap their potential benefits. Companies involved in collaborative business models, such as JVs and JDAs and those following lean business models, may emerge stronger and succeed in the long run. To boost productivity, streamline project management and procedures and enhance quality and safety, it is essential to exploit innovations and adopt best practices. Furthermore, it is important to identify, assess and manage various types of risks, to build a successful and sustainable business.
(The writer is CEO, Track2Realty)