The residential real estate market hasn’t been easy in recent years. Short-term demand factors have stalled growth, and low consumer demand at current prices has accentuated the problem.
Developers who have been unable to sell their products have either closed up shop or are borrowing money at high costs to survive. Yet there are signs of light at the end of the tunnel. A new government bill is expected to increase transparency and process adherence.
Required approvals have historically put extreme pressure on developers, but greater transparency should reduce approval charges and help lower construction costs. It will also help accelerate the construction process and reduce overall costs for consumers.
Discounts (both up front and discreet) and innovative pricing schemes have increased, and growth is supported by robust underlying market drivers such as favourable macro-economic conditions.
Developers must understand five fundamental dynamics in order to succeed, and each dynamic carries a specific implication for businesses.
Emerging competitive forces giving rise to distinct business models
New business models are rapidly evolving, and developers must focus on becoming strong local market leaders in order to build a platform for sustainable growth.
They are doing this by being more thoughtful about the operating models they use to compete in different marketplaces. Within each local market, there are a multitude of developer types. The key to building a sustainable business is to achieve local scale first. In addition to reduced upfront land costs, developers tend to benefit from landowners’ deep local knowledge.
Furthermore, developers must define the key priorities for their business models and assess their core competencies across the value chain.
Complex market and regulatory environment
The new regulatory bill means that real estate developers face higher levels of scrutiny than ever before, and to stay afloat, businesses must actively manage risk.
The implication is to drive excellence in process execution in the pre-construction phase, during construction and post-handover. Customers expect a level of maintenance and upkeep of the property post-handover.
Indeed, the brand image of some developers has taken a hit due to suboptimal property upkeep and maintenance or because of consistent delays during construction.
Shifting profit pools
Raw material prices have grown by a factor of 2 to 3 times since 2005 and land prices have increased even more dramatically. While sales numbers may have increased, developer margins are lower than before.
This leaves developers with no choice but to focus on tight cash management by project and cash flow return on investment (CFROI). Cash is king in this project-based business, and it will remain so.
Increase in customer awareness and rapid changes in customer expectations
Buying real estate is often the largest, most significant purchase people make in their lifetimes. As such, customers have high degrees of involvement and there is greater emphasis than ever on word-of-mouth information, including online reviews.
Customers’ expectations have changed rapidly and developers must anticipate what customers will want 3 to 5 years in the future - and then begin building that today.
There remains a major opportunity for developers to tailor their brands to key purchase criteria, both current and projected.
Innovative selling approaches and channels
Selling properties has become increasingly challenging, and once developers have their internal processes in order, they must turn their focus outward.
To best reach customers, developers have begun to employ integrated, multichannel go-to-market (GTM) strategies that include multiple channel pipelines.
Such as direct sales, customer referrals, international initiatives, collaboration with partners, corporate sales and more. Indeed, major developers are already focusing on building this sales strategy and creating niches where they can excel.
While it is still too early to predict the outcome of new regulations and the impact of short-term factors, with these recommendations in mind, developers can better prepare themselves for whatever lies ahead.