A snapshot of the Real Estate sector

The real estate industry in India is currently estimated to be worth approximately US$ 16 billion with a CAGR of 30%. Growth in this sector is driven primarily by IT/ITeS, growing presence of foreign businesses in India, the globalization of Indian corporates and the rapidly growing middle class. The high growth curve in the real estate sector also owes some credit to the liberalized Foreign Direct Investments (FDI) regime in the real estate sector.
Role of FDIs in real estate
The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization cleared the path for foreign investment to meet the demand for development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. However, in 2005-06, post the liberalization, this figure went up dramatically. While total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The sector emerged as the recipient of the highest levels of FDI equity inflows in 2007-08, with a near five-fold increase over FY07.
India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million, according to the data released by the Department of Industrial Policy and Promotion (DIPP). Better to put numbers in billions itself as done above
India will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD).
Recent Developments
A recent joint report by Ernst and Young has urged the government to improve the regulatory environment to facilitate real estate development in order to stay ahead in the economic race. Some of the salient proposals of the report are:
  • Creation of a regulatory body for real estate: The ministry of housing had issued a draft Model Real Estate Act in September 2009; the purpose of which was to establish a regulatory authority for the sector. The report has suggested that the role of the body should be purely advisory, and should not serve as a hurdle to growth.
  • Infrastructure status to housing: Foreign direct investment norms of minimum area and minimum capitalization should be relaxed in case of affordable housing. At present, foreign investors are restricted by a minimum capitalisation requirement of $10 million (around Rs 45 crore) for wholly-owned subsidiaries and $5 million (around Rs 22.5 crore) for joint ventures with Indian partners; and a minimum area of 50,000 sq metres.
  • Greater flexibility to foreign investors: According to the report, the three-year lock-in period for Foreign Direct Investment (FDI) in the real estate sector has been dubbed as too tough a restriction to allow the smooth flow of foreign funds. Currently while the original money invested cannot be repatriated before a period of three years from the completion of minimum capitalisation, investors can exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). This approval is very difficult to obtain, and cases of investors exiting before three years have been very rare. It has also been proposed that greater leeway be given to foreign investors in cases of dispute between residents and non-residents, and the non-resident wishes to exit the project; or where the project could not be initiated due to lack of statutory clearances.
Government Decisions
In September, this year, the government announced that foreign investors in the country’s real estate sector will have to remain invested for a minimum of three years and rejected industry claims about the policy restricting FDI inflows.
According to Commerce and Industry Minister Anand Sharma, foreign investors should be willing to stay invested for longer than three years. The purported purpose of the move is to limit exposure of the domestic economy to external risks and fluctuations. In fact, Sharma pointed out, India was able to come out of the real estate generated global financial downturn quickly only because of its prudent policies in FDI. India’s central bank, RBI too is highly cautious of allowing unrestricted FDI into the real estate sector.
Furthermore, the department of Industrial Policy and Promotion (DIPP) has clarified that the lock-in period of three years will be applied from the date of receipt of each instalment/tranche of FDI or from the date of completion of minimum capitalisation, whichever is later. Previously, it was understood that original investment meant initial investment. DIPP has clarified it implies total investment.
The change could be a boon to at least 30 Indian real estate groups, large as well as small, which had sold put options to foreign investors to bring in FDI through various deals. These put options required the Indian promoter to buy out the foreign investor. But grappling with a cash crunch, low demand and soft property prices, these developers are today not in a position to honour these options. And, even if they can cough up the amount, they want to avert a large payout.
Under these circumstances, if the government spells out that the entire investment of the foreign investor belocked-in for three years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped developers time to organise money. However, it will further dampen the sentiments of foreign investors in real estate.
Future prospects
The Indian market has emerged as an attractive destination for foreign investors interested in investing in the retail sector. India was ranked as the fifth most attractive destination for future real estate investments in a list topped by China, according to a latest report of FCCI and Ernst and Young. In such a scenario, given the forthcoming opportunities, policy restrictions would not be the best way to protect traditional retailers.
The government should instead impose regulations such as sourcing requirements, zoning regulations and back-end investment requirements to protect traditional retailers. Furthermore, it should strive to make regulations more investment-friendly, like boosting the availability of liquid vehicles for investment such as REMFs and REITs.
The sector assumes an even greater importance given that real estate is second only to agriculture in terms of employment generation and contributes heavily towards the country’s GDP. In countries such as China, the retail sector has been a major propellant of growth and with a more liberal FDI policy; the story can be repeated in India.


Growth strategies in the luxury industry: the case of LVMH

The author of this post is Erminia Monzo, an exchange student at IIM Ahmedabad. She hails from the University of Bocconi, Italy.
Growth is extremely difficult to manage in luxury companies, as they have to strike a balance between raking in the profits versus maintaining an exclusive aura around the brand and goods sold. Empirical research in literature shows that multi-brand companies dominate in the luxury industry from a dimensional point of view and all together retain a higher market share than mono-brand companies. Also, there seems to be no significant difference in terms of economic performance between mono- and multi-brand companies operating in different business segments of the luxury sectors. So, why is the general trend in the luxury goods industry towards the consolidation and the promotion of multi-brand conglomerates? The immediate answer lies in the importance of the intangible components of luxury goods: in order to maximize the company dimensions and allow it to achieve a dominant position in the market without destroying the brand equity, companies must accept the limits of brand extension and move to the next step, i.e. brand portfolio; therefore the intangible components strongly influence the decision to grow through the external acquisition of brands because of the need to find a balance between the firm’s necessity to grow and exclusivity, which creates high value for the final customer.
LVMH, known as the luxury industry best player, has managed to formulate and execute this strategy successfully. Headquartered in Paris, LVMH Moët Hennessy – Louis Vuitton is world leader in the luxury sector with a unique portfolio of over 60 prestigious brands. The sustainability of its strategy of growth through brand acquisition is mainly due to the following reasons:
  • Ability to grasp the sector specificities of the brand;
  • Creation of a balanced and attractive brand portfolio;
  • Management of the brand portfolio not just with a logic of maximizing financial results in the short term but also with a logic of creating symbolic value for customers in the medium/long term;
  • Ability to acquire the adequate managerial to tools to reach an appropriate balance between brand autonomy and integration, search for synergies and maintenance of the brand identity.
The resilience of the multi-brand strategy during the last financial crisis has shown its capability not solely confined to managing cyclical patterns of luxury goods during good times but also to be able to weather through extreme periods of down turn. LVMH as a group managed to recover from the crisis remarkably also because sales from a division or market could cross-subsidize losses made in another. The diversity of LVMH’s business allowed the possibility of LVMH to free resources to meet new challenges and also take on emerging opportunities whereas other competitors in the same industry were barely surviving. LVMH took advantage of this period to expand into the hotel industry, a move indirectly strengthening specific brands in its portfolio. Also, despite facing a complex market, LVMH has been able to discover the peculiarities of the Chinese consumer by leveraging on its existing brand capabilities and also developing new competences together with local Chinese managers. Up till date, LVMH has successfully managed the acquisition and positioning of the Chinese brand Wenjun, one of China’s top traditional spirits distilleries, because of the organization’s ability to adapt and learn. Accordingly, despite failed attempts at multi-channel marketing via the internet, LVMH shows no slowing down when it comes to e-shops and has recently launched separate e-stores for Kenzo and Loewe, two of the brands it owns. The point here is that, with an era of hyper-competition and rapid change, LVMH as large as it seems, is nimble when it comes to learning, adapting and reacting to contemporary challenges.
Overall, with LVMH’s fundamental values propelling it forward, and financial bottom lines restricting its parameters and overall direction, there is no doubt that LVMH has mastered the art of the multi-brand strategy. Although, this must be said with caution, that this strategy is not for the faint hearted or simply any aspiring conglomerate. Competitive advantages such as material scale advantage, a stellar brand portfolio, balanced categories of goods and a wide geographic exposure are built up over a long period of time, led by a strong leadership.

Strategy Digest Volume 2 (Nov)

Videocon to reorganize businesses

Videocon, an electronics-to-energy conglomerate, has decided to undertake reorganization to facilitate greater focus on each of its businesses. Videocon has been increasing the number of verticals it operates in, all under the Videocon umbrella.

The consumer electronics business of Videocon, which contributes approximately half of the company’s revenue, is likely to continue under the Videocon brand whereas the other business will likely be spun off. Videocon while most likely appoint a consulting firm to assist them in figuring out the best way to reorganize in order to benefit the company and its shareholders.

Harley to assemble bikes in India

In a move that will most likely reduce the prices of high-end bikes in India, Harley Davidson, the well-known manufacturer of luxury bikes, will start assembling bikes at Bawal in Haryana.

The Harley Davidson recognized the potential in India for such bikes in India and said that the growing economy, rising middle class and better road infrastructure makes leisure bikes a good proposition. India is currently the 2nd-highest bike market in the world but most of the bikes are used for commuting purposes. However, the rising number of millionaires in the country has increased the demand for high-end leisure bikes.

Tata DoCoMo prices 3G services aggressively

In a bid to convert many of its 2G customers, Tata DoCoMo has announced an aggressive tariff policy for its 3G services. In the process, Tata DoCoMo has also become the first private operator, and 3nd overall after BSNL and MTNL, to introduce 3G services.

Most of its plans do not differentiate between its 2G and 3G customers as 3G customers will pay 0.66-1.1 paise per call, which is approximate the same as 1 paisa a second paid by the current 2G customers of Tata DoCoMo. Also, for its 2G customers wanting to experience 3G services, they can do so at a nominal cost. Of course, it remains to be seen how the other private players price their services, and these set of prices introduced by Tata DoCoMo could only be transient prices till the competitors set theirs.

Strategy Digest Volume 1 (Nov)

Can Nokia regain ground?

In recent times, the smart phones and high-end touchscreen phones have dominated the market and much of the market-share has been taken away from Nokia by players such as Apple and Samsung.

However, Nokia is ready to launch new phones which touchscreen facilities, high of design, overhauled current operating system and a new operating system. The new operating system, called the MeeGo, will be launched later this year and promises to be competitive with the rest. Nokia also plans to price its new products aggressively to regain the lost market share.

An example of such a phone is the N8 which is banking on its overhauled operating system, Symbian 3, which is more memory-efficient and can also run more applications simultaneously. It has a 12-megapixel camera and will be priced at approximately Rs. 26,000 competing with the Samsungs and LGs. Nokia wants to build its brand and increase sales through improving user experience and giving them more value for money phones.

Oracle to buy software firm

Oracle Corp. announced that it would be acquiring the Art Technology Group (ATG) for $1 billion. This would strengthen its e-commerce software applications. This acquisition will increase Oracle’s retail software portfolio, which also includes Retek, a company it acquired in 2005. This acquisition is another example of a major technology company acquiring other firms in order to diversify its product portfolio.

This deal is considered to be a safe and sound acquisition for Oracle which was reflected in its share price increasing after the acquisition announcement.

SpiceJet plans for expansion

SpiceJet, the low-cost Indian airline, is planning for a huge expansion and intends to spend upto $ 900 million to buy new aircrafts. SpiceJet will buy 30 NextGens from Bombardier Inc. and plans to double its fleet size from the current 22 by 2013.

SpiceJet is looking at taking advantage of the growing aviation sector in India and the growth opportunities available by connecting tier 2 and tier 3 cities. Also, it is looking at entering the international markets where there are few low-cost airlines.

However, the source of funding for this expansion plan is unclear. It might resort to the share plan that it had planned to raise $ 75 million before Kalanithi Maran, the Sun TV founder, came forward and bought a stake in the firm.

BHP Billiton still forced to wait

BHP Billiton, the resources major, is still awaiting a green signal for its offer for Potash Corp, the world’s largest supplier of fertilizers, an all-cash $ 39 billion deal.

The Canadian government is still unwilling to let the deal go through although there have been rumours that the government is being advised by bureaucrats to pass the deal.

BHP has currently bid for Potash Corp at $130 per share and analysts expect the offer to go higher before the deal goes through. The deal is expected to help BHP gain access to high-quality resources at a reasonable rate.