Urban India today houses 460 million people, making up 33.6% of the country’s population. By 2030, this percentage is expected to increase up to 40% or approximately 600 million urban dwellers.
The influx of population into urban areas is stimulated by the attraction of better employment opportunities, better education facilities, improved standard of living, etc.
Given the scenario, it becomes necessary to fill the existing gaps in the strained urban infrastructure, especially housing. Amid the growth of the urban population, the government launched the PMAY-U (Pradhan Mantri Awas Yojana – Urban) to provide affordable housing to the masses in the urban areas.
As per the data presented to the Lok Sabha, the government approved a total of 15,263 projects under the PMAY-U scheme aiming to provide more than 7 million new houses. By the end of the year 2018, it has been noted that about 20% of this target is already complete, while 50% more (3.7+ million) is set on the ground for completion within next three to four years.
There is a clear gap between the supply and demand of housing units in the growing urban cities, and it is unlikely to see a slowdown in the next 10 to 15-year period.
Existing Demand Supply Equation in the Indian Real Estate
The real estate market in India is experiencing a lack of transparency and clearly defined construction workflows. As a result, the construction of large affordable housing projects is delayed, far too often. Given the lower margin of profitability in this business and delay is resulting in significant erosion of profits.
According to a recent report, approximately 5,61,100 housing units, worth Rs. 4.5 lakh crores are either incomplete or still waiting for approval in major residential markets across the country, including NCR, Chennai, Kolkata, Hyderabad, and Pune.
Here, if we assume that many such housing units will be completed shortly, the average price of these properties would be a little more than Rs. 80 Lakhs (at the current valuation). If we consider that many of these households will use home loans to fund their property purchase average minimum income of the buyers will need to be more than Rs. 13-15 Lakhs per annum. As per the wealth report, in 2015 less than 10% of Indian households boasted of this kind of income. However, the largest segment had the income levels of below half of this amount; i.e., Rs. 5-7 lakh p.a. or less.
The demand-supply gap estimated for these years was above 18 million units in urban areas in the 2015-16 period. With accelerated urban population growth, this gap would only have increased over the past three years.
Affordable Housing Projects & Developers
Affordable housing seeks to bridge the demand-supply gap in the urban housing segment by serving to the largest buyer segment.
Affordable housing launched by the government under their “Housing for All by 2022” initiative has now been accorded “infrastructure” status, which implies that real estate developers in this segment will have access to cheaper loans.
The government has also provided for a reduced GST rate of 1% for affordable housing properties. In addition there is a tax moratarium for developers building under this PMAY scheme. And last but the not the least the government is providing a subsidy for the buyer as well.
These benefits are applicable for housing units acquired or constructed under the Credit-Linked Subsidy Scheme (CLSS) for Economically Weaker Sections (EWS); lower-income category (LIG) and middle-income categories (MIG-I and MIG-II) under the Pradhan Mantri Awas Yojana (Urban) or Housing for All (Urban) Mission.
Moreover, the carpet area of a housing unit for MIG I category (individuals with annual income between 6 to 12 lakhs) and MIG II category (individuals with annual income between 12 to 18 lakhs) has been revised to 160 sqm and 200 sqm respectively.
Thus, affordable housing comes as an opportunity for real estate developers to target a much broader buyer segment by constructing smaller units at a lower price point, and have a lesser tax liability.
Riding the Affordable Housing Demand Wave
Affordable housing opportunity comes with its own unique challenges. However, the two most compelling challenges stand out as:
- Reliability of the Builder
- Timely delivery
Enrolling in RERA and staying compliant to the affordable housing conditions will create a bridge over these challenges. However, other typical challenges will also need addressing, and affordable housing builders will need to plug the time delays and cost overruns and be more efficient.
Perform Demand Analysis
Affordable housing projects will be successful if they have access to different modes of transportation, quality healthcare, education, better connectivity, and proximity to community services. Therefore, it is crucial to analyse and optimize the allocation of planned residential projects for the right buyer group.
Otherwise, developers would have to deal with vacant or unsold inventory. A bottom up approach here would be to consider the distribution of target buyer population and their ratio in areas identified for constructing housing units.
Moreover, factoring in location and connectivity will help developers cater to the basic requirements of their buyers and ensure better returns for the investors.
Prepare Cash Flow Plans Early
Along with demand analysis, it is also crucial for developers to prepare detailed cash flow plans early into the project lifecycle. Doing so, will not only help smoothen out the financial flows but also manage risk effectively.
A definitive cash flow plan and budget help the developers adhere to the payment schedules, through the life of a project. With affordable housing projects, the PPP (Public-private partnership) model forms a crucial part of the project’s cash flow plan as it provides significant subsidies.
Using latest cloud-based construction ERP software builders can address the planning needs at a very granular level.
Enhance the Project Execution Ecosystem
When it comes to developing affordable housing properties, capacity building is essential for developers, in terms of creating scale. An understanding of the best construction technologies both on site and off site along with the right training can help developers create organizations that can operate at a massive scale. Technology can be a key enabler for this.
On the other hand, building capacity in the contractor and subcontractor ecosystem also helps eliminate any bottlenecks that may arise while introducing large scale new construction technologies.
Affordable Housing A Great Opportunity
The government’s push towards providing affordable housing is helping the realty industry gain traction and attract both small and large real estate developers and investors. Affordable housing segment presents a tremendous opportunity for both foreign and domestic investors, due to the enormous unmet demand for homes. With the advent of RERA and the government’s “Housing for All by 2022” and Pradhan Mantri Awas Yojana (PMAY) schemes, there is an increased impetus for this sector. Technology platforms and real estate ERP systems can go a long way in helping create that scale.
Real Estate in India: A Present-Day Scenario
Real estate sector in India will contribute to 13 percent of the country’s GDP by 2025 and is expected to reach USD 1 trillion by 2030. For an industry with an enormous contribution, it has its fair share of challenges in India. Real estate developers are worst hit for several reasons, including:
- Oversupply of residential properties
- Sliding prices
- High levels of unsold inventory
- Significant cost overruns
- Lack of transparency
- Delayed deliveries
- Stagnant absorption rates
Developers with a cash-crunch are either closing shops or borrowing money at high interest to keep their businesses running. Whereas developers with large holding capacity are following the ‘watchful waiting’ approach since the customer is focused on execution and deliveries and not buying.
In both cases, investors are losing money and developers are hurting their brand.
The introduction of ‘Real Estate (Regulation and Development) Act’ is a welcome change that is likely to increase transparency, process adherence, and customer centricity. It has created a hope for better and more systematic way of dealing with the real estate transactions. However, RERA is not enough since it does not address challenges outside of its ecosystem.
The present-day real estate sector is experiencing a confluence of different challenges like change in customer’s expectations, rise in distinct business models, complex approval processes, delayed deliveries and cost overruns. Hence, there is an increased need for an evolved ecosystem to stay relevant and meet these challenges.
Digital Transformation: An Introduction
Digital transformation is in full swing and industries across segments are gearing up to ride the digital highway. Changing core processes and shifting from an industrial past to a full-swing digital future is on a roll.
Even though the real estate industry is no different and can highly benefit from a digital transformation – it does lag in adoption, and the laggards revolve around the lack of a common framework (process) across developers.
The digital ecosystem is capable of streamlining various processes in the industry and ultimately provide more value to the developers.
Scope for Real Estate Developers
Whether it is a commercial, residential or smart city project – integration of technology-enabled platforms across internal and external processes is destined to bring a positive outcome for the developers.
The scope of digital integration lies right from the start and through the entire life cycle of a real estate project. Digital integration will help in fulfilling the following key factors:
- Increase Operational Efficiency
- Improve Customer Experience
- Boost Sales
- Introduce Transparency
- Risk Reduction
- Improve Quality
- Time and Cost Savings in Planning, Construction, Operations and Exit
Digital Roadmap: The Milestones For Real Estate Developers
Digitalization is picking up speed in the real estate sector. Developers can embrace digital transformation around the following and ensure long-term success.
- Adoption of an ERP to automate the Construction Project Life-cycle
Real estate developers face many challenges during the entire life cycle of a project. Reporting discrepancies, pilferage and dependency on paper trail leads to financial loss.
A vertical ERP for the real estate business should help resolve some of the most intractable problems for the sector. We at BuildSupply have an end-to-end ERP software that is rooted in easing out the development process. It manages the entire process workflow of a real estate project from inception to handover. With this integrated software, automated cost plans, smart BOQs, e-tendering and procurement, invoicing and progress updates, material and store management and much more can be done right from a single dashboard.
The first digital pit-stop for any real estate developer starts with superior construction process management, and a specialized ERP is fully equipped to meet all the requirement of the real estate and construction sector. With an ERP platform, real estate developers can:
- Precisely budget for the project
- Monitor that budget at granular level on an ongoing basis
- Control and reduce execution costs
- Monitor time and cost in an integrated way
- Promote collaborative working
- Avoid duplication
- Eliminate redundancy
- Accelerate positive decision-making
- Get a 360-degree view of an ongoing project
- Data Analytics for Transformational Insights
In the new age of highly efficient and cost-effective cloud storage veery industry is generating and collecting data at a massive scale. Real estate is no different. Data is one of the most significant factors that aid decision making in the digital ecosystem. Real estate developers can find game-changing insights through data analytics for their business and establish parametric goals accordingly.
Various artificial intelligence algorithms are also embedded in ERP software that can provide key performance indicators like earned value analysis, cost variance, schedule variance, cash flow and much more.
- Internet of Things (IoT) for Smart Buildings and Cities
Internet of Things (IoT) is already bringing disruption across different industries. However, in the real estate sector, it makes more sense to deploy IoT based connected smart devices. The advent of the smart city concept to the first smart city is based on digitalization. IoT forms as a base of smart cities and enables a host of automation features while cutting out on operational expenses.
With IoT, real estate developers can use data to provide proactive maintenance, utility, and energy optimizations strategies and push towards a predictable future.
The digital realm brings out artificial intelligence, augmented reality, cloud computing and Internet of Things to facilitate the idea of smart cities. Real estate can be one of the primary beneficiaries of this and drive asset flexibility. Real estate will always be about “location, location, location” but the ‘digitization’ of buildings will significantly enhance values and be a crucial enabler for success.
The Future is Here
The real estate sector is poised for disruption through technology. This has already impacted all the major real estate verticals like residential, commercial, hospitality and industrial. With rapid progress in the development and innovation of the industry, it is critical for real estate developers to understand and align with the broader ‘technology-enabled real estate ecosystem.’
Developers and other stakeholders will need to adopt, leverage and capitalize on data sources, tools and technologies to eliminate the current challenges. The digital future of the real estate industry looks promising and will necessarily make the entire journey of a project economically efficient and leaner.
So, the question is no longer whether real estate developers will accept the changing dynamics, but rather how long it will take for the market as a whole to be permeated by technology.
In India, large residential projects are delayed far too often due to several reasons including tedious approval process, flawed budgeting, inaccurate cost management, poor cashflow planning, inefficient resource management, and labour issues.
The delays in construction and escalated cost of completion have adversely affected the buyer confidence in the market and tarnished the reputation of the industry as a whole. Bad planning and poor cash utilization have even caused a few big names to declare themselves defunct in recent past.
It would seem the way the real estate industry had been operating has not proven out to be beneficial for any of the stakeholders be it – consumer, government or the builders themselves.
Globally, the real estate sector is notorious for being a laggard, when it comes to structural changes into their modus operandi. India is no different, given the experience of the past ten years, especially in the residential sector, the companies need to get their act together and gear up for some radical changes.
Projects getting completed on or before projected deadlines and in the estimated cost seems to have become the holy grail for the sector. This is what real estate developers and regulators need to aim for if the industry is to revive itself out of the slumber.
Efficient Organisations for Better Coordination & Faster Decisions
Creating collaborative efficient organizations is important for seamless coordination between the various stakeholders, primarily for– cost saving, time efficiency, and higher accountability.
Construction delays and an apparent lack of ownership mean that developers need to proactively work on improving their workflow processes, accountability, and transparency to improve their project’s time-to-market.
Real estate development companies need to identify shortcomings in their current business processes and leverage specialized proptech platforms like integrated workflow management software to break project team silos and encourage collaborative working.
Furthermore, it is crucial for them to embrace newer business models and adopt a fail-fast approach while looking for ways to make faster business decisions. Doing so would help enhance operational efficiency, information flow, and customer experience.
Plan More Comprehensively to Cover the Risks
According to a recent report published by a real estate consultancy, construction of more than 23 lakh houses spread over 16,330 projects across India is significantly delayed mainly due to lack of financial discipline and planning on the part of developers.
Planning is the most crucial part of any project as it ensures that the project is being delivered on time and within the desired budget. In the case of residential real estate, there are just too many factors defining the success of the project other than just the quality of construction and location.
Complete Material Planning with Possible Escalations
The modern construction ERP software can help builders with in-depth project planning. Builders can plan the cost down to the last material with accuracy using the frequently updated list of materials along with their integrated rate analysis using these proptech solutions.
Integrate Technology in Other Essential Processes
Beneficial tech integration in the legacy processes with the existing workforce is a challenge, which has as many failed use cases as there are successful ones. Studies suggest that organizations need to understand and prioritize the most critical functions for digital transformation.
Functions, where transparency and faster information flow would help save costs and avoid unnecessary losses, should be prioritized for digital integration. For example, BOQ, Tendering and Material Management.
While completing the project on time is a challenge; selling the units has also been a pain area. For many residential projects completed units are unsold, even when the sale had started much before the construction.
Vast swathes of unsold inventory point to the faulty placement strategy for the project. Use of market data and modern data analytics can help developers in devising a powerful strategy for marketing their projects.
Word of Mouth – The Question of Reliability
In today’s world of hyper-connectivity and social media, consumers are increasingly gaining more power. The modern customer is tech-savvy and always connected and has a unique journey to a purchase decision which involves a lot of research, especially focused on the digital word of mouth.
For brands, this would mean focusing on building the digital face of the brand and working on building customer experience.
A builder running multiple projects could see all the projects suffer the brunt of one lousy project. That is why, timely delivery and transparent processes, will increasingly wield power to make or break the brand.
In short, the residential real estate sector must transform into customer-focused entities, from traditional builder/landowner entities. With a product as essential as a house, the ability to make faster decisions, and timely delivery will define the leaders in the future real estate market.
FDI (Foreign Direct Investment) for the real estate sector opened up in 2005. Back then the real estate sector and especially smaller players were reeling under the pressure of unsold inventory, delays in projects, and negative cash flows, foreign investors too were shying away due to the uncertainty in profits and the mandatory tenure of locking for investments.
In 2005, the government and RBI decided to change up things and issued a directive to allow 100% FDI for the housing, townships, built-up infrastructure and construction-development, albeit with specific terms and conditions including a certain minimum capitalization, minimum area and lock-in period for repatriation.
This reform, in turn, helped open up newer ways of funding and led to the maturing of the real estate industry in terms of product offerings and business practices. FDI inflows to the realty sector increased by over 150% (year-on-year) on an average, between 2005 to FY2009-10). A total of approx $25 BN flowed into the Indian real estate sector.
That being said, the government further approved changes to relax the terms above and conditions after considering the slump in the real estate industry between 2009 and 2014.
In 2018, the Indian Government decided to allow 100% FDI under the automatic route (not requiring any government approval) in construction development segment (that includes housing, townships and built-up infrastructure) and single brand retail trading. Also, the Union Cabinet also clarified that real estate projects within the Special Economic Zone (SEZ) are eligible for 100% FDI.
Policy Changes Are Driving Fund Flow
Post relaxation in FDI norms, the real estate sector has started seeing renewed growth in terms of investment and developmental activities.
As per a report published by KPMG and Naredco, the real estate sector is expected to grow up to $650 billion by 2025 and exceed $850 billion by 2028. This change would be driven by emerging asset classes such as co-working spaces and affordable housing along with a steady demand generated due to rapid urbanization, regulatory reforms, and rising household income.
Some of the notable aspects of investments made under 100% FDI in the retail sector, as per the report, are:
- In 2018, average deal size tripled to $157 million from $47 million in 2016
- Overall, 44 percent of the investments made in 2018 came from foreign investors primarily based out in the U.S., Canada, and Singapore
- Over 90 percent of the foreign investment has been towards commercial projects across Mumbai, Bengaluru, Pune, and Hyderabad
- Average deal size of foreign investors is $149 million compared with $87 million of the domestic investors
- Domestic investors have almost equally preferred commercial ($959 million) and residential ($870 million) projects.
- Mumbai has been the preferred real estate investment destination for foreign investors, with attracting almost 53 percent (or $2 billion) of the total investments.
- Hyderabad ($793 million) and Bengaluru ($694 million) have been the preferred destinations for domestic investors
Increasing Investor’s Interest Towards Commercial Real Estate
With the introduction of 100% FDI, there has been an increasing focus of investors towards commercial real estate, which would help them build a portfolio of rent-yielding assets.
Investor inflows in 2014-17 in commercial projects have increased by more than 150 percent, which is more than the combined inflows from the previous seven years. Key drivers behind this decision include steadiness in the commercial office sector, strong impetus in leasing, stable returns on investments, and the potential to include income-yielding assets under REITs.
Also, foreign players are showing more and more interest in office space due to scarcity in supply of sustainable office spaces, recovery of global growth and improvement in the country’s real estate sector courtesy various reforms.
Affordable Housing Projects Gaining Preference
Along with the commercial real estate segment, residential market too has been reviving, thanks to the clarity of the implications of GST and RERA, along with 100% FDI.
That being said, the government’s push towards providing affordable housing is helping the realty industry gain traction and attract both small real estate developers and investors. Affordable housing segment presents an opportunity for both foreign and domestic investors, due to the enormous unmet demand for homes, RERA and the government’s “Housing for All by 2022” and Pradhan Mantri Awas Yojana (PMAY) schemes.
Moreover, the government’s decision of extending benefits of the PMAY and granting the infrastructure status to affordable housing has given further impetus to the sector. For small private real estate developers, the Public-Private Partnership (PPP) initiative of the government, which allows central subsidy and interest subsidy, each up to INR 0.3 million on per house built comes as a welcome benefit.
Impact of 100% FDI in the Real Estate Sector
According to industry experts, the regulatory reforms such as RERA, GST and Benami Transactions Bill have helped create a path for a consolidated, transparent, and investor-friendly real estate sector. Further introduction of 100% FDI norms would affect the Indian real estate segment in the following ways:
- Standardization of the quality of projects
- Likely increase in competition among local developers in terms of price, quality, and timing to market
- Geographical expansion of foreign institutional investors and private equity players
- Simplification of government and RBI procedures relating to investments into the real estate sector
Joining the Future Dots
Traditionally, real estate in India was one area in which only the NRI’s were interested. With the introduction of 100% FDI in 2005; however, we saw a huge influx of capital with both Institutional and Corporate Investors investing their funds into the country’s real estate segment.
As of 2019, the sector is experiencing increased transparency and accessibility, and FDI inflows continue to grow in the segment.
Alongside, both large private players and small developers have revamped their management and accounting systems to meet due diligence standards and attract funding. Moreover, technology is going to be a key factor in consolidating partnerships between small-scale local players & foreign brands and improve the image of real estate in India.
Thus, software technologies such as a specialized Real estate ERP, workflow automation software, etc can help private developers to improve the ease of doing business with higher FDI inflows. Not only this, leveraging real estate ERP and other associated technologies can help small-scale local players gain a firm footing against more prominent industry players.
In the past few years, real estate as an asset class is transforming quickly. Major real estate players are building and investing in the sector on an epic scale. Moreover, the landscape is becoming more sophisticated and widespread, with a varied range of risks, returns and innovations being the new drivers of value.
For instance, the demand for private capital for real estate investment has increased manifolds during the past decade. In the emerging economies, the sector is witnessing a great migration to the cities, where the growing population and middle class are the drivers behind a desperate need for more urban real estate.
On the other hand, the cities are growing too, although not so rapidly. Here, the new value drivers are demographics, environmental issues, and real estate innovation. To give you a glimpse of what future possibilities lie ahead for the real estate sector, here are a few insights from some of the industry’s best minds. Take a look.
“The new regulatory framework will bring more order to the sector” – HN Vijaya Raghava Reddy, National President, Builders Association of India (BAI)
The regulatory framework implemented under RERA is expected to bring more order to the industry. Subsequently, real estate developers who depended on market capitalization and the consumers will have to change their ways.
For example, being a small or big player will no longer matter. What would matter; however, is how streamlined and transparent their business workflow and operations are. Therefore, it is only the players who are organized and have proper project development & estimation plans, real-time monitoring tools, project financial management, material procurement systems and adhere to compliance, who can thrive now.
Going forward, real estate companies will have to reduce their dependency on market liquidity and cash-based transactions. Instead, these companies will have to streamline their process workflow, especially in terms of cost planning and estimation, invoicing and billing, procurement and sourcing, tendering and material management. They will have to provide complete transparency to their customers on project execution and cash flows.
Transparency, Clear Accountability, and Effective Auditing can help avoid construction project cost overruns – one of the Big 5
In India, real estate companies are running behind schedule in terms of construction project delivery due to the following factors:
- Inadequate planning and inaccurate estimations
- Ambiguous contract terms and lack of cost control incentives
- Ineffective project oversight, governance, and management
- Availability of skilled labor
- Non-transparency in the procurement process
- Delayed payment and Imposed cash constraints
- Inexperienced management team
- Insufficient communications and sluggish decision making
- Absence of real-time monitoring tools
Due to the factors mentioned above, real estate construction projects often veer far off track. However, they can be corrected if both the real estate companies, contractors and other stakeholders work collaboratively by implementing successful workflow automation platform.
As part of an efficient plan of action, real estate companies need to invest in a comprehensive ERP software for real estate & construction, for monitoring and managing the project from inception to closeout.
These technology-driven business solutions can help mitigate schedule delays and cost overruns while improving critical governance and control processes including:
- Standardization of processes
- Transparency of controls
- Accountability of responsibilities
- Information audit trail
An effective risk management process is also essential to ensure timely project delivery. It enables real estate companies to monitor risks and identify when they need to implement a mitigation plan in place.
“ The real estate industry will undergo a consolidation phase on account of RERA and other factors.” – Ashish Puravankara, MD Puravankara
2018 had been the year of revival for the real estate sector in India. Not only was there was an improvement in the housing sales, the but the major realty players too, got serious on the completion of projects, after the implementation of the subsidies under RERA and PMAY.
Moreover, transparency and accountability in the real estate sector improved to a great extent with the implementation of the Real Estate Regulatory Act (RERA).
In 2018 and now 2019, there have been some remarkable trends in the real estate sector including Affordable Housing as well as mid- segment and luxurious home spaces. By capitalizing on Affordable Housing and Credit Linked Subsidy Scheme (CLSS), real estate companies are now able to access loans at more affordable rates.
That said, the companies also need to be compliant and adhere to the project completion deadlines set by the RERA. To do this, realty majors are leveraging technology to develop process capabilities such as effective budgeting and estimation, automated tendering and procurement, real-time project monitoring tools, etc.
Real Estate market in India Needs Workflow Automation
According to a market study conducted by McKinsey, real estate projects may take up to 20% more time to finish than their scheduled completion and experience budget increments by up to 80 %.
Therefore, the real estate and construction sector not only has to adopt process and technology innovations but also take steps to fix the basics. Project planning, for instance, remains mainly uncoordinated because real estate companies prefer working on paper.
Similarly, contracts often fail to include incentives for risk sharing and innovation while procurements are still unsophisticated. Therefore, the real estate industry needs to embrace new digital technologies such as ERP software for real estate and construction to achieve long-term benefits. Without workflow automation or process management tools, real estate companies would face a hard time meeting the increasing consumer demands, adhering to stricter compliance requirements and remaining profitable.
In India, the real estate industry is facing an increasing need for a workflow framework, especially after the challenges posed by demonetization, GST implementation, RERA, and the new ICBC guidelines. Continue reading “The Need for An End-To-End Workflow Automation Software in Realty”
The APAC region is home to half of the world’s population and probably the most important when it comes to built world technology. Continue reading “Nikhil Kapur, Head of South Asia for Gree Ventures talks on how BuildSupply with its plans is positioned to take a leadership in the PropTech sector in Asia.”
What’s wrong with Indian real estate?
Is the end of the biblical drought of capital for real estate in India anywhere near? Will real estate again become a favored asset class for international investors? Sadly, the answers are no.