Anti-fall pills

IIPM, GURGAON

Portfolio plays an important role when you have to negotiate a steep downturn in an industry. In the case of real estate, developing both residential and commercial lands have their respective advantages for a developer. Building residential complexes gives you the liberty to work on negative working capital whereas building commercial complexes results in locked-in cash flows, which provide stability in a volatile pricing environment. If we take up an analytical viewpoint, companies, which do not have a problem of liquidity crunch should go for developing residential land otherwise opting for developing commercial land is a safe choice at present. With rising home loans interest rates, residential complexes may see a fall in demand marginally, but if the experts are to be believed, residential properties will see a benign growth even after the rising interest rates.

If you look at the land banks of players like DLF and Unitech, they are investing mostly in commercial properties as a long term strategy. Sources in Unitech confirm that the focus of the company will be commercial only in the near future and their main drivers would be Tier II and III cities. On the other side, there are players like Parsvnath which have a considerable share of their project portfolio devoted to residential properties and are likely to see a downfall in the near future if this scenario continues.

The situation would be less difficult for players who have had the foresight to explore real estate opportunities overseas. We have already witnessed Omaxe’s announcement of entering Mauritius property market after making a prominent presence in the Dubai real estate market. Unitech and DLF have already announced their plans to get listed on the Singapore stock exchange. DLF is already present in Dubai (a Joint Venture with Dubai-based property developer Nakheel) and is a well-known brand at present. Unitech is also a renowned name in London as they are associated with Unitech Corporate Parks Plc. So, forecasting the cyclical change in the Indian real estate market much before, various players have made a strategic move to get into the global real estate market, which has paid off well too.

In addition, brand building seems to be a perfect antidote. As Pradeep Jain opines, “We are spending about Rs.35-40 crore per annum on advertising and marketing initiatives and we see this budget going up by 20-30% in next 3 years. We believe a strong brand name can be built through satisfying our customer and keeping our vendors comfortable.” And we have already witnessed the focus of various realty majors in the country on advertising and various marketing initiatives to create successful brands. Some of the best companies realise that it is very prudent to make sustained investment in brand building even in a downturn. We can see how the prowess of a brand like DLF has enabled it to defy the overall negative sentiment.

As the cliche goes, this is truly the time to separate the men from the boys. While large companies may be able to weather the impact, the smaller ones may need to cut the flab or sell out altogether. It would be better for such players to see the tide coming and avoid a painful situation like the one faced by one of their peers Down Under.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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