On the face, a geographically diversified developer appears have lower risks than a developer operating in limited locations. So, the former is often believed to be a better equity investment option for a portfolio investor. Is it indeed true ?
One of the key criteria for assessing investment potential of any equity stock is the competitive advantage enjoyed by the company. In case of a real estate developer, the Competitive Advantage to an extent lies in things like construction skills, design skills, etc. but since such skills can be outsourced, the power of these advantages gets diluted. The true competitive advantage of a developer lies in the “Local Knowledge”. This comprises knowledge of land parcels, of regulation, of local markets etc.
It is almost impossible for any developer to build expertise in Local Knowledge across large number of geographical locations. Moreover, due to the complex web of activities involved in the real estate operations, pre-defined processes cannot handle challenges of real estate business. Regular intervention by top management becomes essential.
For these reasons, expanding operations beyond a few geographical locations does not result in superior returns for the developer. It surely results in increasing the risk of the business. Therefore, for a portfolio investor, developers focussed on few geographies, generally, offer better Risk-Return proposition than developers present in large number of locations across India.
Deepesh Salgia is Director, Shapoorji Pallonji Real Estate.
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Myth Series: What is its purpose?
While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.
For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.
The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.