New rules for the old real estate game

3rd Dec 2015
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In one of his essays, Paul Graham talks about schlep blindness in startups. Schlep is a Yiddish word that means a tedious or an unpleasant task. He talks about how great startup opportunities are lying unexploited right under our noses because the amount of unpleasant work they require is enormous. After having spent eight plus years pioneering online real estate in India, I’ve recently moved to building an online to offline business in the used car space, and in coming years, perhaps would be able to share which industry had more schleps to deal with!

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As I put things in perspective, I can appreciate how the online real estate evolved as a market and as the sector goes through a sluggish phase, how tectonic changes will happen in the near future – creating opportunities galore for existing and new players alike.

Real Estate is the classic example of schlep blindness. The estimated size of the real estate market is approx. $100 billion, which is almost 5 per cent of India’s GDP. This does not include the size of transactions in the secondary and rentals market. Cumulatively, brokerage in this industry comes to more than $5.5 billion. It’s schlep for sure, but very lucrative.

Real estate is inherently cyclical in nature. After a great bull run – post the sub-prime crisis in the US – a despondent bearish cycle started two years back. The nature of the market, and especially the buyer, has changed so much that existing players will have to evolve quickly, else they’ll perish. It’s the classic case of “what got them here will not take them there” because the underlying rules of the game have changed.

The biggest change that has happened is the end of speculation. For more than a decade, a tax-efficient mode of investment was real estate. In the primary market, experts estimate the investor to customer ratio to be historically 70:30 in real estate. But that is fast changing to 30:70. Because of this, there is massive buildup of unsold inventory in the market. As reported by Knight Frank, there are six lac+ unsold units, which at the current absorption rate will take more than two years to clear, even if no projects are launched.

Think about this and look around you - we all want to live in our own homes. Culturally, we as Indians have always wanted to buy a home, yet there is such a massive buildup of unsold inventory. This is indeed ironical. The problem as I see is that builders have been shortsighted and were happy to sell to investors who created a lockdown situation as supply became abundant and was commoditised.

This situation is scary because a lot of investors are/will start defaulting on their installments and this will create massive pressure on builders to sell remaining stock. This will result in changing the underlying power equations in the industry. Some of these changes I think will be permanent beyond this slump cycle.

Home-buying decisions were always difficult for the end customer. “Prices revising next week” was the most effective sales tactic, but even that is no longer effective. Going forward, as the market changes from being seller-dominated to buyer- dominated, the sales process will become harder and consultative.

China’s real estate market has gone through a similar phase and entirely new models have come to prominence in the last two years. AiJuWiJu raised $150 million last week, while FangDD, which has an asset-lite model and sells through a network of real estate brokers raised $225 million last month. In China, with the slowing overall economy and slowing real estate sector, there is a lot of vertical integration where the classified players are doing transactions.

In India, a lot of VC money has been invested in Real Estate and the market has begun to see consolidation, which I see increasing in the next 6-12 months. The incumbent players like 99acres and Magicbricks will see competition from stronger merged players. This is the right time for the incumbents to drive acquisitions to strengthen their product offerings for the customers and the builders.

There is a new wave of startups which have cropped up in the recent past focused on distinct offerings in rentals, zero brokerage platforms, managed rental marketplaces, broker networks, communities, etc. This is interesting as these are all trying to solve unique problems, which the incumbents are not focused on. I see these players as interesting wild-cards who can possibly build an asset-lite model in the real estate space, which scales much faster than the vertical-integrated approach efforts of classified players. Models like BroEx, IRX, RexProp etc look promising but need to figure out their revenue strategy as they build engagement platforms to hook the real estate community. Community building platforms like ApartmentAdda and Commonfloor have built significant presence within residential apartments and it would be interesting to see if they can participate in the ongoing euphoria of hyper local marketplaces.

I think there will eventually be clear $3-4 billion + companies in this space each with possibly different DNAs - maybe a classified, online integrated brokerage and an asset-lite marketplace.

The online real estate game, as I see it, is very interestingly poised with the rules of the game reset midway and housing.com having showed that all leaders are vulnerable.

The game has just begun.

About the Author:

Prashan Agarwal is one of the pioneers of online real estate in India, who realised as early as 2007 the impact that internet will have on the industry. He was the Co-founder of PropTiger.com, India’s largest online transaction marketplace -+for real estate.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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