Current State Of The Real Estate Sector In India
India is the world's second most populated country and the world's 3rd largest economy in purchasing power parity terms. India's growth over the last couple of decades has brought it at the forefront of public discussion of most investors. This growth has come at the backdrop of a change in policy stance of the Indian State making India a clear frontrunner as an investment destination. The real estate sector in India despite the impressive growth of the economy faced severe challenges over the last couple of years. The challenges came due to overproduction and inventory accumulation. As prices did not adjust, the demand slowed and caused a severe crisis in the real estate sector. This crisis coincided with a slowdown in the Indian Economy due to back to back disruptive reforms such as demonetization, RERA and GST. However, as India's growth picks up, the need for housing would be instrumental in giving the sector a much-needed boost.
In that context, India's current Prime Minister Mr. Narendra Modi has also promised to provide everyone a house under a State Sponsored Interest Subsidy Scheme. The scheme aims at helping developers obtain land at a subsidized rate and build affordable houses for the lower income and middle-income sections of the poor. This shows that the government is looking at enabling the development of the real estate sector on a priority basis. Given the bright prospects of Indian Economy and relatively low standards of urbanization, it makes an excellent opportunity for firms to enter into the business to business supply of construction and home décor products. The recent entry of IKEA in India demonstrates how the Indian Consumers are willing to pay a premium on furniture and fixtures. The remarkable growth of the neo-middle class in India opens up an entirely new and diverse market for firms to proactively tap into.
The company in question is into the business of providing baskets and other kitchen fixtures. The premium input in the manufacturing process is steel while the finished output is sold to builders and real estate developers in India. As a result, there is a direct, strong and positive correlation between the output being sold with the performance of the real estate sector. The purpose of this report is to provide a strategic plan for the growth of the country by taking a close look at the overall economic outlook that is prevalent in the country. We use secondary data from multiple sources in this paper to evaluate the prospects of growth of the enterprise. We further discuss downside and upside risks and provide for a comprehensive SWOT analysis for the venture.
Introduction
The business of kitchen baskets and fixtures is intricately related to the real estate sector which has been in a slump since the last couple of years. This slump has resulted in a major slowdown within the sector which has caused a drop in the capacity utilization rates. Cheap imports from China has also resulted in a major challenge for the organized manufacturers of the sector. The unorganized or informal manufacturers were at an advantage due to their low costs of compliance however, with the GST coming in and greater formalization of firms over the two years, the balance has slowly started to tilt towards the formal manufacturing sector.
The RERA and GST on real estate has boosted the consumer confidence and the fall in interest rates has resulted in a reduction in the cost of owning a house. These factors combined have started to impact the demand for homes positively and this has had positive spill over benefits for our industry. The extremely fragmented sector has started to consolidate at precisely the same time at which the demand for our products is on the rise creating a unique opportunity for the firm to grow at an unprecedented pace. This opportunity requires us to position our firm at an advantage against our competitors so that we can become the market leader within the next 4 years. This is critical for our long term plans of initiating an IPO in the BSE-MSME exchange and raise additional equity capital to strengthen and establish our business in other related upstream and downstream industries. This business report takes a holistic view of the sector and looks at devising a strategy that can help the firm achieve its objective to emerge as the market leader in these challenging times by maintaining a healthy strategic advantage over its competitors. It is expected that the report would be instrumental in helping the business execute the strategy and meet its short, medium and long term objectives.
The Sector: A brief Overview
The trade of providing kitchen fixtures to Indian developers is an extremely fragmented trade with many small and medium sized enterprises actively engaging in the trade. It is not typical for such small enterprises to play a major role in manufacturing sector in the Indian Economy. Vaidyanathan (2014) provides an extensive review of how small and mid-sized firms contribute up to 60% of the total economic output in India. He categorizes them as the non-corporate sector as not all firs under this category would be under the informal economic ecosystem. It is not just the trade of kitchen fixtures that is fragmented as the real estate sector itself has a lot of fragmentation. Based upon the framework developed by Soundararajan, Bhasin and Singh (2018), the real estate sector can be characterized by the existence of numerous developers and agents who operate in both the primary and the secondary real estate market. Despite the relationship between secondary and primary real estate market being of immense importance, for the purpose of demand for kitchen fixtures, it is the primary real estate market that is of concern.
The distinction between the primary and secondary market assumes significance as fresh first sale of real estate assets takes place in the primary market rather than secondary market where subsequent sale of real estate assets takes place. Keeping in mind this view, it is important to stress that the nature of our business is business to business (B2B) which requires us to relentlessly pursue developers and builders who are actively developing fresh real estate projects. From Soundararajan, Bhasin and Singh (2018) we know that there is enough heterogeneity amongst real estate developers in India. This heterogeneity creates n urgent need to segment the market and understand the needs of different segments of our clientele. The real estate sector, as discussed however had witnessed a slump over the last couple of years. The data on House Inflation from the Handbook of Statistics on the Indian Economy provides for details of a slowdown in the housing inflation levels. This demonstrates that the demand for real estate as an asset class has significantly gone down over the years which is why B2B model requires an extensive review.
It has been the case in India with many firms that builders have often taken huge amounts of products on credit, however they've failed to pay for the products on timely basis. The lack of payments from time to time further require us to raise money through overdraft facility and other banking instruments imposing a cost on our operations. With RERA act coming in, it is anticipated that the payments issue would partly be resolved as it requires the builder to maintain an escrow account for the construction and development of the project.
RERA has also brought in the much-needed reforms to revitalize the sector as RERA boosts the consumer confidence which has started to translate into a renewed demand for real estate assets. A vibrant real estate market is good for our business as more fresh projects directly translate into more opportunity to sell our kitchen furniture and fixtures.
