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10 Reasons Why Indian Real Estate needs Specialists

Realism Publications

Fall 2010

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The Indian Real Estate Developer: a Generalist or a Specialist? 10 Reasons Why Indian Real Estate Needs Specialists

What does it take to become an expert

in real estate development business?

Who would make the best real estate

developer: a scientist, an engineer, an

analyst, a finance expert, a marketer, a

salesman, a strategist? Is real estate a

Science or an Art?

The most politic answer would be: a

combination of all; isn’t it? Then, a

successful real estate developer would

be a generalist; a jack of all trades.

That would imply that there is no

“expertise” in real estate. Do you really

buy that argument? To make it less

confusing to you, let us dig deeper in

what books have to say about it: all

disciplines can be broadly tagged to

one of the three categories:

1. Science which refers to the

expertise of understanding what

exists;

2.Applied Science which refers to

the expertise of extracting

practically usable knowledge from

science; and

3. Engineering1 which refers to the

expertise of making use of the

knowledge to improve what exists.

In which of these three categories

would real estate fall? Dr. Julian Diaz,

one of the founders of behavioral real

estate explains that real estate is an

applied science with an inclination

towards engineering. In other words,

“What does it take to

become an expert in real

estate development

business? Who would make

the best real estate

developer: a scientist, an

engineer, an analyst, a

finance expert, a marketer,

a salesman, a strategist?

Real Estate

Science

Applied

Science

Engineering

Natural Artificial

-Real Estate as an academic discipline*

*See reference for source

real estate discipline is an applied

science wherein you strive to create

improvements to the land and

structures built on land.

Real Estate development process

involves deep understanding of the

economic phenomenon at national,

regional; and, most importantly, local

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A common skepticism of several new

interventions in the Indian markets is

confronted by the gatekeepers of the

status quo: the old-schoolers who

perceive new interventions as

unnecessary disturbances. Real Estate

is no exception; and why would it be?

In spite of an almost absent

specialized support from academia,

Indian real estate is said to have

grown to US$ 15 Billion maintaining

an estimated annual growth of

roughly 30%. Is there is any further

need for “specialized” real estate

education in the India? Instead of

shrugging to this seemingly profound

question, we take the call to explain.

“The ultimate aim of

the real estate expertise

is to create

improvements:

improvements on and of

the land in a financially

profitable, socially

acceptable and legally

viable manner.”

“The analysis of

consumer behavior is

not subjective; their

irrationality can be

predicted to maximize

the profitability.

However, such

predictions need the

knowledge of analytic

tools and methods.”

Maintaining the Status Quo

levels. It also requires one to understand the

financial system, marketing strategies, legal

implications, design & engineering

imperatives and consumer behavior among

others. Such an expertise establishes real

estate as a science. Nevertheless, the ultimate

aim of the real estate expertise is to create

improvements: improvements on and of the

land in a financially profitable, socially

acceptable and legally viable manner. This

feature establishes real estate as an applied

science making great use of engineering.

Clearly, real estate is not an art; neither is it a

subset of Finance, Construction, engineering

or Architecture (although elements from

these disciplines blend in varying proportions

in different areas of real estate). Gurus of

business in the American universities have

posited that real estate is a separate discipline

by itself; one which needs specialists and

experts. A fast growing real estate market,

India needs to recognize the need for

expertise in real estate development. In other

words, formal education in real estate is a

necessity for India.

1. They are coming

India has become the second most

favored destination for Foreign Direct

Investment after China; a place earlier

enjoyed by the US. Ailing economies of

the developed nations and an emerging

India, their thriving counterpart, has led

the foreign investors to the realization

that real estate development business in

India is a prudent investment. What

else?

The Indian government has been doing

everything in its capacity wooing

serious foreign companies to do

business in various sectors of real estate

in India not excluding the housing. This

attitude has several merits; but it

challenges the domestic developers

who, now, will have to share their

markets with far well-equipped foreign

players. As competitors, the foreign

players’ expertise would challenge the

Indian know-how of real estate

business. The challenge will not be

much different for their Indian

counterparts who plan to partner with

them; they who will have to match the

quality of business processes,

knowledge system and efficiency.

Foreign real estate players, no doubt,

will be savvy, strategy intensive,

process-driven and aggressive. Are

Indian professionals prepared?

2. Gut Feelings are not all

Some recent real estate studies

suggest that “gut-feelings” are an

integral part of the real estate

business. Not everything can be

calculated; no estimates are precise

and no forecasts are accurate. Yet,

not all decisions can be made on gut-

feelings; a practice that several small

and medium sized Indian developers

are used to. The gut-feelings of smart

real estate developers derive from

heuristic behavior and biases. The

upcoming opportunities in real estate

are poised to create predicaments due

to their intensity and scale. Relying

on untrained gut-feelings will be

risky in order to tap these

opportunities; the markets will be

competitive. In fact, the “smart” gut

feelings will require strong support

from intensive project-specific

analyses. Nonetheless, the analysis of

10 Reasons for Specialized Real Estate Education in India

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Indian real estate is going to be the

introduction of REITs. Although all Indian

investors want to capitalize on the fast

growing Indian Real Estate markets, not

all can afford to invest in it; a situation

similar to the US of mid 1960s. REITs

were introduced in the U.S. to make equity

investment in real estate affordable to

smaller investors & individuals who,

subsequently, did not have to completely

develop, buy or operate real estate assets.

It will not take long when REIT will be a

reality in India. Indian REITs, as any other

economy, will have to compete with

equity-starving corporations from other

industries where the production cycle is

far faster; and thus, will be under pressure

to maximize and sustain their profits.

Undoubtedly, Indian real estate markets

which will feel the pinch of the lack of

formal real estate education even more.

5. We still don’t have it

Real Estate is Local. Thus, by definition,

Real Estate Education needs to focus on

the local system. Moreover, the education

“The Indian Real Estate

industry needs to support and

invest more in professional

real estate education focused

on the Indian markets.

consumer behavior is not subjective;

their irrationality can be predicted to

maximize the profitability. However,

such predictions need the knowledge

of analytic tools and methods.

3. Efficient Markets

Markets are efficient. In other words,

information spreads fast. Opportunities

for arbitrage are not sustainable. If one

can make irrationally high profits from

the local markets, the competitors will

soon start preparing to claim a share of

the pie. With increasing sophistication

in the real estate business in India,

they will work hard to improve their

business capabilities whatever

advantages one is currently enjoying

over them. Unless the developer

maintains the state-of-the-art level of

real estate education; the competitors

may outwit easily. This means that

however localized one’s market is; and

however strong monopoly one enjoy in

the markets, the need for formal real

estate education cannot be ignored.

The old-school mindset must go.

4. The Future of Real Estate

Investments

The primary reason that Indian real

estate market is flourishing is the

emergence of India as a fast growing

economy. However, it also entails

increased similarities with the

economic dynamics of developed

economies. One of such impacts on

needs to be primarily provided by those

who specialize in the discipline of real

estate. India lags on both these fronts.

Most available literature on Indian real

estate could be categorized as a passive

commentary of the trends and forecasts.

Academic literature on real estate is thin

and highly fragmented. There is a

tendency to adopt academic literature

directly from American publications; a

tendency which ignores the drastic

differences between the real estate

systems of the two nations (the U.S. and

India). The market needs specialists that

have exposure to the foreign market

systems, the motivation to improve the

performance and capability to interpret the

inherent knowledge adopted in the Indian

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markets. The Indian Real Estate industry

needs to support and invest more in

professional real estate education

focused on the Indian markets.

6. India wants more

Within last decade, the number of listed

real estate companies in India has grown

from a handful to around 30. The

interest of Indian investors in real estate

sector has grown to become comparable

with the IT sector. The Real Estate

sector is booming and real estate

development companies are

mushrooming. But has it helped in

rescuing India from the great housing

deficit? Not really. India still needs

around

25 million houses in urban areas alone2.

In spite of huge opportunities in the

sector of affordable housing, developers

maintain their allegiance to high-end

residences. This can be greatly

attributed to the lack of analytical

understanding among Indian developers

about the profitability of affordable

housing.

7. It can always be better

Boutique developers may be complacent

about a couple of projects they develop.

So may be some mid-sized and large

real estate developers in India. At the

same time Indian economy has inclined

towards capitalism. More is always

better. A shift from the mentality of

“Profit” from a project to the “Return”

from a portfolio (hence, an "enterprise)

cannot be achieved without a good

understanding of the principles of real

estate process, strategy, finance and

marketing. Avoiding or even deferring

the need for formal real estate

education creates a risk of losing the

competitiveness even in an unlikely

scenario of absent institutionalization

and foreign players.

8. New Generation of

consumers

Changing economy has led to changed

social values, family structure,

consumer preferences and

demographics. The burgeoning middle

class, growing disposable income and

inexpensive housing finance is

transforming the way real estate

demand has been perceived. As a

result, more subjective, quantitative

analysis of specific consumer

segments seems to be a need of the

time. Moreover, developers will need

to meet the upcoming demand of

“custom-built” houses. Very few

Indian developers have ventured into

this arena. An integrated

understanding of real estate supply-

chain management and the formation

of an optimum firm-level normative

development process requires strong

background of specialized real estate

education.

9. Regulatory Reforms

The Regulation of Development Act

which was recently introduced by the

Union Ministry of Housing and Urban

Poverty Alleviation is potentially the

beginning of a new era of real estate

development in India. When

implemented, it will force rules and

regulations that will be binding to all

parties. Transparency, which is one of

the foci of the act will force the

developers to make rational decisions.

In turn, these decisions will have to be

reached analytically; and require a

minimal formal knowledge of

financial and legal aspects. In future,

10 Reasons

for Specialized Real Estate

Education in India

1. They are coming

2. Gut Feelings are not

all

3. Efficient Markets

4. The Future of Real

Estate Investments

5. We still don’t have it

6. India wants more

7. It can always be

better

8. New Generation of

consumers

9. Regulatory Reforms

10. Is MBA enough?

10. Is MBA enough?

Knowledge of various generic aspects of

Business including Finance, Marketing,

Accounting among others is essential to

running real estate business; and their

role is critical. However, to survive in a

competitive market and match pace with

the international players, academic

specialization in real estate has become a

necessity. Students majoring in real

estate are preferred to those specializing

in other areas are often preferred by

employers in the US due to the unique

nature of real estate business. The MIT

Center of Real Estate provides several

convincing arguments regarding why

candidate aspiring for real estate career

should opt for a degree in real estate

than an MBA3. Indian real estate

industry needs to facilitate a support

system that can produce real estate

specialists.

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There is Some Good News, Though The message of this paper is optimistic. Crises lead to

innovation. Indian consumers now value Indian brands

far more than they used to do earlier. Moreover, a

common mantra taught in globally leading B-schools

about FDI is to partner with a suitable local partner.

Interested Indian real estate developers have an

opportunity here! Also, There is a large contingency of

Indian students gaining real estate education abroad. In

addition, several academic institutions are gearing up to

provide, at least, introductory courses in real estate in

India. In future, it is more likely than not that more

serious market players will venture into this area.

Quality would be the key driver, motivation and

academic pedigree of the education providers would be

another. However, the biggest drivers would be the

current real estate players themselves in India that

should provide a whole-hearted support to a nascent

body of real estate research and education system in

Acknowledgment:

Our sincere thanks to Vivek Sah (University of San Diego), J. Clements Sherwood (University of Alabama) & Alan Owen Tidwell (Georgia State

University) for their valuable inputs.

References:

1Here, the word engineering is not limited to the likes of “Civil Engineering”; but refers to a broader concept encompassing Activities & Allocation

Engineering. 2 In rural areas, there is an additional demand of more than 15 million houses. 3 For more details, visit http://web.mit.edu/cre/apply/mba-msred.html

Image (Real Estate as an Academic Discipline): Derived from Diaz III; “Science, Engineering, and the Discipline of Real Estate”; Journal of Real

Estate. Literature; 1:183-195 (1993)

Authors:

Divyanshu Sharma, Partner (divyanshu@realism.in)

Prashant Das, Partner (prashant@realism.in)

Vinod Singh, Partner (vinod@realism.in)

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