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Real Estate Brokerage Business in a Post COVID World

Ankit Kansal(Entrepreneu) - September 02, 2020 - - 0 |
Real Estate Brokerage Business in a Post COVID World

As business activities have come to a near halt following the extended lockdown, the negative impact reverberated across the USD 180 billion Indian Real Estate industry & the brokerage space. When the crisis first broke out, there was a state of panic about how the business will continue from here. In a mostly offline industry, an overnight flight to digital was not easy. However, the industry showed some amount of resilience in the face of the crisis and could arrest a steep decline.

Currently, as the markets are recovering and the normalcy is restored, Real Estate is also gradually bouncing back. However, challenges and threats are multi-faceted and need to be carefully addressed. Simultaneously, there are also a tremendous amount of hidden opportunities that are feeding renewed optimism in the system.

Real Estate Brokerage Business in a Post COVID World
  • Challenges
  • Threats
  • Opportunities
  • The Way Forward

CHALLENGES

  • Market & Economic Uncertainty: The Brokerage Industry in India will face the heat of an overall economic slowdown. The COVID crisis and the prolonged lockdown has been a destabilizing factor for the industry, which already was going through a downtrend and muted demand for the past few years. As per the latest data by the Organization of Economic Cooperation & Development (OECD), the Indian economy is expected to shrink by 7.3% in FY 20, in tandem with the global recession, wherein world growth will knock off by around 6-7.6%. Likewise, on the back of a slump in global growth, the decline in domestic activities, & staggering demand, other organizations such as IMF (- 4.5%) & CARE Ratings (- 6.4%) have also predicted grim outlook for the economy.

Amidst slowdown in the economy, Real Estate which constitutes around ~ 8% of the GDP can’t remain unscathed. A poor economic outlook has triggered demand destruction in Real Estate. As per the market insights by 360 Realtors, in the first three months after the crisis broke out, Real Estate demand declined by up to 70% in some of the major markets of India. Buyers who were otherwise willing to buy now are in a wait & watch mode before normalization restores. Although the knock off of sales will be relatively less for larger and organized players, the decline will be steep for smaller players.

  • False hope of a price Correction: Besides a market induced slowdown, realty brokerages are also facing the heat of a “false hope amongst potential buyers that property prices will further correct”. Indian Real Estate has already been corrected in the past few years and it might not be feasible to offer further price cuts. Moreover, key components of the construction business such as land price, labor costs, construction materials are not coming down, which further makes it a little difficult to think about price cuts.

In fact, at 360 Realtors, we have done research that shows that Indian Real Estate will largely remain correction free. Discounts will be given to mostly slow-moving inventories. Others would not see any substantive dip in prices.

  • Free Fall in Commercial Realty: The Commercial Real Estate industry constitutes around 12% of the overall Indian Real Estate market. As India being an emerging corridor of the world economy, commercial Real Estate was enjoying robust demand in the past few years. It featured high on the radar of institutional investors, who were betting big on the elevated yield potential of the asset class.

However, following the lockdown, sentiments turned upside down. As organizations are now increasingly adopting WFH, new leasing activities have dried. Due to poor business forecasts, existing tenants are asking for rental concessions. Occupiers are moving from Grade-A spaces in CBDs to more affordable Grade- B & C premises.

Businesses in retail have come to a complete halt during the lockdown. Even though malls and retail are opening up, footfalls are negligible. Retailers that solely relied on offline distribution have suffered the most.

OPPORTUNITIES

  • Digitization across the value chain: In 2015, when the Government of India (GOI) introduced its flagship program Digital India to boost digital infrastructure, build a knowledge-driven economy, & encourage online commerce, industry leaders in Real Estate also welcomed the idea. However, despite the iterations of boardroom discussions, Real Estate brokerage mostly remained an offline business.

Nevertheless, the current crisis is a tipping point that has finally forced the industry to aggressively embrace the digital way of operations. Till now, despite detailed discussion on framing the digital roadmap for Real Estate transactions, there was apprehension amongst industry stakeholders- “whether a high involvement investment such as property can be traded online. However, the COVID crisis has chronicled a new era in Indian Real Estate, where the O2O (Online to Offline) model of doing business will be highly tilted towards the digital medium. Most of the transaction cycle will be realized digitally, with the offline approach mainly coming towards the final stages of decision making.

It is noteworthy that in a market like India, the virtual medium would never completely replace its offline counterpart, especially in high involvement decisions such as property purchase.

The Post COVID world will mirror a new era, where digitization will continue to gain steam across the Real Estate Transaction value chain. From operations to the marketing campaigns to the sales & CRM support, digital transformations will unravel.

The focus of digitization would not just be to ensure seamless business continuity in the face of the current crisis but to introduce wider strategic progression. By embracing active digitization, brokerages can shorten their operational cycles, reduce the cost of leads, expand their marketing reach, and streamline their sales funnel, without incurring any incremental overhead costs.

  • NRIs are Drawn towards Real Estate: In the past few years, NRIs have consolidated their foothold in Indian Real Estate. During FY 15 to FY 19, NRI investments have risen to USD 12.5 billion from USD 7.2 billion. Due to the dip in the value of rupee and renewed uncertainty in the global market, the ascending tendencies in NRI investments in India will further gain steam. Realtors need to understand the potential of NRI markets and devise ways to reach out to them. At present Gulf Cooperative Council (GCC) accounts for around 40% of NRI investments. However, there are numerous untapped markets like North America, Asia Pacific, & Africa where larger potential can be unlocked.
  • Demand for New Products: Changing business & social paradigms will result in Demand for new products and asset classes. Real estate advisories & brokerages need to keep a close watch on the pulse of the market and understand how the demand dynamics are evolving.

In the residential segment, demand for small size affordable housing units such as micro-homes, studio homes, and co-living will increase sharply.

The pre-existing popular perspective to own a home in the central parts of the city will be questioned. Families will like to own larger residential units in the peripheral areas to seamlessly do WFH away from the usual noise of urban life. A WFH culture will further justify a rise in interest for self-sufficient farmhouse livings and holiday homes.

In commercial Real Estate, warehouses and cold storage will be the go-to asset. While doldrums will continue in office and retail real estate for some time, the growth in e-commerce will drive demand for warehousing.

Investments will also edge up in income-generating small ticket size assets such as residential and commercial assets. In a time when financial markets are staggering, there is renewed interest towards hard assets such as Real Estate.

  • Market Consolidation & Asset Light Models: Amidst snag in the market, brokerages will also work in a low OPEX & CAPEX based business model. More consolidation will take place underpinned by a rise in demand for aggregators, franchise based working, & mandate based deals. Small players will align with larger advisories to leverage institutional support alongside shared technology bandwidth, digital marketing support, and training infrastructure- crucial growth enablers in the current market. Similarly, larger advisories will need the market knowledge and local market expertise of the smaller players to continue building asset-light but sustainable and profitable business.

Threat Analysis

  • Incremental cost in technology: In a Post COVID world, where physical interactions will be largely curtailed & digital technology will drive most of the interactions, substantive investment in technology is a prerequisite. Without proper investments in technology and digital marketing, it will be difficult for brokerages to evolve and expand in the new normal. However, not every brokerage will have the required bandwidth to invest. Especially in time, when the demand has plummeted, commercial activities have slowed down, and businesses are grappling with cash flow issues, incurring additional cost is difficult.
  • Customer Inertia towards Going Digital: Although the pandemic has forced everyone to think digitally, digital commerce in Real Estate is still a nascent industry. Customers have inherent inertia to ride the digital curve. To encourage wider adoption of the online medium, brokerages just can’t focus on operational and transactional efficiency but also need to render powerful experiences. This will require building original, engaging, and innovative products that can give powerful experiences. A failure to do so can undermine the overall digital drive.
  • Supply Side Risks: Although business and commercial activities are gradually picking up, the possibility of supply-side risk can’t be completely negated.  Migrant workers have moved to their villages. Though many of them are returning and resuming work, construction activities will continue to face labor challenges. Similarly, as global supply lines have disrupted, there is an imminent risk of a supply shock. In the face of recent misadventure by China and the possibility of a clampdown on Chinese imports, the situation may further aggravate temporarily. This will lead to a delay in the completion and delivery of projects.
  • Downside Risk of a Delay in Economic Recovery: If the current crisis stretches longer with no notable success in finding the vaccine, the drag on the economy will be even larger. This would not augur well for the Indian Real Estate, which already is strained and suffering from demand compression. If the road to recovery extends further, it will delimit the required cushion for Indian Real Estate, thereby further aggravating the crisis.

The Way Forward

Although lockdown has suspended and the process of market restoration has begun, the existing economic fragility is not going to reverse soon. Amidst a relatively turbulent & pessimistic market outlook, real estate advisories and brokerage need to hold a firm ground. In parallel, they have to prepare for the new normal, step up the digital capabilities, and systematically address the bottlenecks.

Despite the crisis deterring the growth, the industry is at a cusp of seismic change. Already a host of policy pivots such as RERA, demonetization, Benami Property Act, & GST formalization has introduced an unprecedented amount of structure, transparency, & organization in an otherwise opaque and unorganized Indian Real Estate Brokerage business.

Now the current can crisis gives the much-needed thrust towards digitization, adoption of technologies, & market recalibration. As it is said sometimes, distress can become a catalyst for transformation.

(Mentioned above is the way forward for the industry based on the Mckinsey 5 R model. At the onset of the crisis, the Strategy Consulting House proposed a 5 step framework towards gradual business recovery. The above model is an adaption for the Indian brokerage business.)

Businesses need to understand that the recent dip in demand is cyclic and not structural. The underlying demand is strong in Indian Real Estate. Large population, the surge in urbanization, & expansive middle class means that the current demand is huge. At present, the housing gap is pegged at 250 million and will further widen, further underscoring the long term potential in the realty business.

Similarly, after the current turmoil taking a backseat and restoration of a healthy moderation of economy, demand for commercial Real Estate will rack up. As many international manufacturers are looking to diversify their supply chain and sourcing destination, India offers a viable alternate. This will boost demand for industrial lands, warehouses alongside office spaces, data centers, co-working spaces, etc. A potential rebound in the domestic MSME sector backed by government initiatives can further fuel commercial Real estate demand. GOI has already announced a USD 46 billion credit package for the MSME sector, in which around one-third has been allocated.

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