Overview of Real Estate Industry

India is one of the fastest growing economies in the world and one of the major contributors to

this rapid economic growth has been the real estate sector. This sector is at the core of the Indian

growth story, in view of the significant upswing in demand across various spheres.

The industry has grown with a CAGR of 26% over the past 5 years to $ 50 bn today and is

expected to triple in next 10 years. Its contribution to the GDP has grown from 2-3% in 2000 to

about 6% of GDP today which is considerably small compared to 14% in developed markets.

The combined market capitalization of real estate companies has grown 3000 times from year

2000 levels which is indicative of the tremendous confidence the investors have in the industry

and more and more companies are getting publicly listed.

Historically, the real estate sector in India was unorganized and characterized by various factors

that impeded organized dealing, such as the absence of a centralized title registry providing title

guarantee, lack of uniformity in local laws and their application, non-availability of bank

financing, high interest rates and transfer taxes and the lack of transparency in transaction values.

In recent years however, the real estate sector in India has exhibited a trend towards greater

organization and transparency by various regulatory reforms.

Further, the fast pace of the economic growth and the liberalized FDI regime have given a boost

to the development of the sector. The Government of India in March 2005 amended existing

norms to allow 100 per cent FDI in the construction business. Also, a regulatory authority on the

lines of SEBI & IRDA is envisioned to ensure greater transparency and accountability in this

cyclical industry which is exposed to the vagaries of market driven forces.

The Indian real estate is experiencing an unparalleled demand which is a composite phenomenon

of several macro and micro level forces. At one end, factors such as sustained high GDP growth,

upsurge in industrial activity, consumerism, favorable demographics, and urbanization are

creating a big demand pull in the industry. At the other end factors such as favorable policies,

regulatory changes, positive investment climate and unlocking of land parcels are stimulating a

major supply push.

However, the supply is lagging behind the demand due to certain intrinsic factors. Some of the

barriers inhibiting the seamless scaling up are:

1. Government regulation

a. Tightly regulated Floor Space Index(FSI)

b. Urban land ceiling regulation act (ULCRA)

c. High stamp duty and registration fees

2. Shortage of developable land

3. Inadequate infrastructure such as water, roads, and electricity

4. Unequal distribution of population

5. Inconsistent supply & inconsistent prices of raw materials

6. Shortage of labor and skilled manpower in the real estate industry

Asset Classes

The industry is broadly composed of four main asset classes – residential, commercial, retail

and hospitality. More than 80% of real estate in the country is residential in nature. According

to a study conducted by realty services firm Cushman & Wakefield, India will need about 240

million sq. ft of commercial property and about 4.25 million units of residential real estate to

meet the demand in four years between 2010 and 2014. Due to the highly efficient capital

utilization the residential sector is the preferred sector of the developers as they can work on

negative working capital.

The housing sector has seen a rise in demand over the last two to three quarters. However, the

supply largely remains constrained due to the slow pace of construction activity during 2009–10.

About 70% of the total estimated demand for residential units during this period is expected from

the mid-range and affordable segments. Around 60% of the total estimated pan-India residential

demand by 2014 is expected to be from India’s top-seven cities.

About 46% of the pan-India office space demand estimated over the next five years is likely to

be from Bangalore, NCR and Mumbai, signifying their continued pre-dominance. Tier-II cities,

such as Kolkata and Chennai, are, however, likely to generate demand at a faster pace.

Retail property refers to space used for the sale of goods. The demand for retail space is

estimated to be about 55 million sq.ft. with the current oversupply situation likely to be stabilized

only by 2013.

There is a demand for new hotels in all segments, from the budget segment to upper scale and

luxury segments. India, as the second most populous country in the world and with rapid

economic growth, will see an influx of both business and leisure travelers in the coming years.

The hospitality sector is thus expected to see demand of about 78 million room nights during the

period of 2010-14.

Going forward the real estate sector will continue to have long-term prospects due to its strong

fundamentals. REMFs and REITs will bring in further institutionalization to the sector.

Moreover the relaxation of FDI norms for retailing will open up additional avenues for foreign

chains.

Real Estate Value Chain

A typical real estate project involves land procurement, design, construction, marketing &

property management. Out of these activities a real estate developer may choose to focus on

some activities like land procurement & marketing and outsource the other activities like design,

construction & property management to specialized firms. A real estate development can be a

joint development or an outright purchase of land. In Joint development the developer forms a

joint venture with the land owner and shares the gains from the property. In outright Purchase the

developer buys the land at the market price and develops the project.

Construction may be outsourced to contractors like L&T, Gammon India and other local

contractors who are provided with the design made by the architecture firms. Contractors then

undertake the project on a turn-key basis & hand over the property to the real estate developer

for sales. Property management firms may then operate & maintain the property.

*Construction is mostly outsourced either to local contractors or large players like L&T

Timelines

may

overlap

Godrej group

Established in 1897, the Godrej group is today one of the most accomplished and diversified

business houses in India. The Group is a leading manufacturer of goods and services in a

multitude of categories: home appliances, consumer products, real estate, industrial products and

agri products to name a few. It is one of India’s most trusted brands and enjoys the patronage and

trust of over 470 million Indians every single day. Its turnover crosses US $ 2.8 billion and more

than 25% of its revenue comes from outside India.

Godrej Properties Limited

Company Overview

Godrej Properties Ltd (GPL) is one of the leading real estate development companies in India

and is based in Mumbai. GPL has inherited the Godrej Group vision of ethical and professional

business practices and has the advantage of immense customer trust that the Godrej brand name

inspires.

Godrej Properties’ portfolio is diversified, spanning numerous cities across India and containing

residential, commercial and township projects. The residential portfolio covers a wide range,

right from affordable housing to premium developments. The township portfolio includes

integrated townships consisting of residential and commercial developments. The commercial

portfolio mainly comprises office space catering to blue-chip Indian and international companies,

IT parks catering to the requirements of IT/ITES companies and retail space. Currently the

portfolio comprises 60% residential developments while the others are either commercial or

mixed types.

GPL started its first project in 1991. The company initially concentrated its operations in the

Mumbai Metropolitan region and later expanded to include other cities such as Pune, Bengaluru,

Kolkata, Hyderabad, Ahmedabad, Mangalore, Chandigarh, Chennai, Gurgaon and Kochi. The

total area under development currently is nearly 82 million square feet.

Business Model

GPL’s joint venture business model whereby it partners with landowners to develop their land

rather than purchasing the land on an outright basis has been a key differentiator that has led to

its superior growth while mitigating capital requirements and risk. One key factor that allows

GPL to be successful in adding joint venture developments is the ‘Godrej’ brand. More than 470

million customers across India use one or another Godrej product every day. Having been in

business since 1897, the Godrej Group is well known for its emphasis on corporate governance

and professional and ethical business practices. The trust in the brand allows landowners to

confidently partner with Godrej Properties for the development of their most valuable asset.

Under this model, the JV partner (JVP) brings the land as his contribution to the JV, under either

a profit-sharing, revenue-sharing or area-sharing arrangement or any combination of these, while

GPL manages the entire development. The ratio of sharing varies from project to project and is

largely dependent on the value of the land. All decisions regarding design, construction and

marketing of the project are taken by GPL. This model ensures effective management of capital

and insulates GPL against the cyclical nature of the industry.

Moreover, all the design and construction work is outsourced and is supervised by lean in-house

teams. This allows GPL to scale up or down relatively easily without the burden of idle

resources. GPL has strategic tie-ups in place with L&T for construction and PG Patki &

associates for architecture and design. This ensures seamless execution of outsourced activities

while adhering to best practices and ensuring quality and economies of scale.

GPL follows a no-inventory, no-leasing policy. In the commercial space it capitalizes the lease

so that the payback is decreased. A no-inventory model makes the company asset light and easily

scalable without locking in the capital. This business model thus mitigates the various risks the

industry faces and protects the company against the cyclical nature of the industry.

The Godrej Group has a proud history of supporting sustainable development. The CII Godrej

green business centre has been a pioneer in supporting green business in India and the building

the centre is housed in was the single highest LEED (Leadership in Energy & Environmental

Design) Platinum rated building in the world when it was completed in 2004.

Godrej Properties Ltd has brought the group’s commitment to sustainable development to the

real estate industry and ensures all its buildings are planned to the highest standards of green

development. GPL was a founding member of the Indian Green Building council (IGBC).

Godrej Garden City is one of the only two projects in India and sixteen worldwide to be chosen

by the Clinton Foundation to partner them in the goal of achieving a climate positive

development.

A key differentiator for GPL is its customer centric approach which helps in creating sustained

value for its customers through extraordinary focus on deep customer insight, quality of product

and superior customer service. The Customer Centricity Cell at GPL helps in fostering a

customer-oriented mindset in the organization to ensure high level of customer satisfaction.

Financial Performance

GPL delivered a healthy performance in FY 2010 on the back of increased sales and competition.

It delivered 3.9 mn sq ft area during FY 10 which resulted in an increase in total income of

53.2% on y-o-y basis. Even the operating profit grew by 42% in FY 2010 to Rs 2,312.1 million

as compared to Rs 1,627.9 million in FY 2009. Profit after Tax grew from Rs 746.8 million in

FY 2009 to Rs 1228.1 million in FY 2010, showing a growth of 64%. (See annexure)

Inital Public Offer

During the year 2009-2010 GPL has entered the capital market with the Initial Public Offer

(IPO) of 9,429,750 equity shares of Rs 10/- each through 100% book building process and was

listed on the Bombay Stock Exchange Limited and National Stock Exchange of India Limited on

January 5, 2010. The stock has been performing exceedingly well since listing and has been

constantly trading over the float price. (See annexure)

Questions for discussion

GPL aims to grow approx. 6 times, from its current 360 Cr turnover to a 2000 Cr company in the

next 5 years.

1. Is the current business model sustainable and adequate to achieve the above targets?

What changes do you suggest, if any?

2. You are required to make a presentation to the Board of Directors outlining overall

business strategy for the way forward. Your recommendations should include but not be

limited to:

i. Financial Strategy

ii. Marketing Strategy

iii. Operational/Execution strategy

iv. HR strategy

v. Portfolio strategy (including Geographical spread, Asset Classes and

Income generating & Development assets)

vi. Exploring new markets

vii. Risk Management

viii. Customer service strategy

The recommendations should be made bearing in the mind the following constraints. In the next

five years GPL intends to:

i. Focus on real estate sector only

ii. Remain as close as possible to its current JV model

iii. Maintain high ROE

iv. Maintain consistently high profitability

v. Not consider forward or backward integration

vi. Focus on Indian market only

3. Also comment on the strategy of GPL to go Green keeping in view the profitability

tradeoff.

Annexure

A. Key Projects

Name Location Project Type Est. Saleable

Area (mn sq ft)

Godrej Prakriti Kolkata Apartment Complex 2.72

Godrej Genesis Hyderabad IT Park 9.60

Godrej Eternia Chandigarh Commercial & Retail 0.16

Godrej Garden City Ahmedabad Township 27.38

Godrej Avalon Mangalore Mixed Use 0.61

Godrej Palm Grove Chennai Residential 1.15

Kochi Project Kochi Residential 1.76

Godrej Genesis Pune Commercial 0.15

Godrej Genesis Kolkata Commercial 0.47

Godrej Waterside Kolkata Commercial 0.67

Tumkur Road- || Bengaluru Residential 0.85

Woodsman Estate || Bengaluru Residential 0.40

Woodsman Estate Annexe Bengaluru Residential 0.06

Godrej Riverside Kalyan Residential 0.28

Vikhroli Project - | Mumbai Mixed use 1.67

Godrej Gold County Bengaluru Residential 0.15

Pune Township Pune Township 1.18

Kalyan Township Mumbai Residential 0.10

NCR Gurgaon Residential 1.04

B. Stock Performance

Year 2010 (source: www.moneycontrol.com)

C. Organizational Structure