5 insane (But true) things about online real estate
Online real estate has been one of the hottest topics in the startup world, with many new companies coming to cater the unmet needs in this segment. Some recent headline news from this sector includes layoffs, acquisitions, and clashes with broker community, etc.
“Online property market is growing exponentially in India, and it is expected that the internet would take up about 10-15 % of the total real estate advertisement expenditure soon,” Indiaproperty.com CEO Murugavel Janakiram told PTI. Thus, it becomes imperative to understand the underlying factors that are impacting the sector, as it would help us to understand the potential of this sector better.
Reality and Future Prospects of Online Real Estate
A) Genesis of the concept
So, what made these online portals startup? Indian Real Estate sector is expected to touch $ 180 billion by 2020 with housing sector alone contributing 5-6% to the country’s GDP. With such a promising market size, online platforms entered the business hoping to make the most out of it, by leveraging the use of technology. Zillow and Trulia two such platforms that gained massive success in the US were the torchbearers for early entrants like 99 acres and CommonFloor, a decade ago. After that, many online portals like Housing, PropTiger, Magic bricks came up, along with some innovative models like NoBroker, broker networks, communities etc (Read: Insights and ideas on real estate startups). It is not just the market size that attracted these players to give a head-on to the offline competitors (mostly brokers) but there exited a big gap in this sector which was left ignored by the offline players. Online real estate companies are also trying to solve a big pain point of physically visiting and comparing the various properties. With the help of these portals, one can easily browse through thousands of options in the comfort of his home. Virtual Reality enabling aerial views, virtual tours, 3-D views, retina etc. is making these platforms, even more, interesting to browse. Recently, Quikr has also started a new segment with the name of Quikr Homes and they are promoting their USP of viewing the listed property’s neighborhoods through their portal. Quikr has also acquired CommonFloor to strengthen their property segment. The long due consolidation is slowly taking this sector under its grasp.
B) Where the problem started
The main revenue streams for online real estate companies are:
2) paid listings and
3) Commission from the developer for every sold unit through their portal.
Magicbricks, 99 acres, CommonFloor, Housing are focused more toward advertisements and paid listings while companies like PropTiger and IndiaHomes are more inclined towards commission based income from developers on the sale of property.
Things were rosy before 2011, and everyone was bullish on real estate sector in India which pushed many developers to start several projects simultaneously. Funding of real estate project is primarily dependent on two major channels
a) Bank’s loan to developer
b) funds from property sales.
Post-2011, sales in real estate slowed down which caused funding crunch to developers and, in turn, affected the progress of projects. Now, the end users got concerned about the slow development of the projects and some of those who were planning to buy also put their purchase on hold. Hence, real estate sector went into a vicious cycle of poor project development due to lack of funds and slow sales due to delay in project completion.
From the above story, it is quite clear that commission based income of online companies took a hit as there was a steep decline in the number of unit sales. Real estate developers spend a good amount of money in marketing and promotions. Digital marketing is also a major component of their promotional expense, but mostly it is dominated by Google and Facebook. Due to slow sales developers also decelerated their projects and marketing campaigns that resulted in a decrease of online advertisement expenditure.
2. Business Model-
While renting a house and buying flat for resale the first thing in mind that comes is to contact a good broker. Our real estate transactions mostly rely on local brokers who know in and out of that locality. The pain point is the large brokerage that we have to shell out in return for using their services. If I go to the online portals and starts searching for flats in any area, then most of the searched results are also posted by brokers only. So where is the difference?? Ultimately I am getting in contact with the same brokers, and I have to pay the same brokerage. Most often I spend hours in finalizing some properties online but comes to know that they are either fake listings or are not available now. (Real estate portals are spending a significant portion on the verification of properties. They have even gone to the extent of visiting the property before displaying it on their site. All this effort has increased their operational cost, but this has to be done to some extent.)
Some online platforms like Flatmates and Nobroker are working on the pain point of heavy brokerage by removing the interim broker community from the transaction. These platforms are only for owners and end-users. These are great platform and have gained popularity also, but their drawback is the lesser number of options. Many owners do not take the pain of listing on so many portals, and also, they want the assurance of local broker whom they know personally.
3. Shift from real estate to financial market-
The opaque and unregulated sector are losing its customers, and people who use to park their money in real estate are now moving to more transparent and regulated option of financial assets. Under the new central government, the equity market has given good returns to the investors and experts are also bullish on future trends. Due to this many investors have dumped real estate from their investment portfolio and are opting for mutual funds and Systematic Investment Plan (SIP).
After peaking at 14.8% in 2011-12, savings in physical asset (real estate and gold) as a percentage of India’s Gross National Disposable Income (GNDI) had dipped to a low of 10.4% in 2013-14, reports ET. On the other hand, savings in the financial asset is going on increasing, from 7% in 2012-13 to 7.5% in 2014-15.
The government is also welcoming the shift from idle physical assets (as this money is not easily available to the banking system) to more productive financial assets. It will help the government depend less on foreign capital and hence insulated from volatility. However, the colored money factor will always keep infusing life to realty sector.
C) Slow recovery of the sector
1. Increasing Investments from PE-
Many PE investors have raised money to infuse funds in real estate. Till now, PE’s were cautious and had been investing in the form of structured debt, but now few of them are mustering courage to take equity risk. Housing Development Finance is raising $ 850 million funds to invest in pure equity deals. Much needed funds will help the developers to service their existing loan and resume construction on their dead project sites.
2. Investment in online real estate firms–
Online real estate portals have attracted an investment of more than $ 250 million in investments in last 18 months, reports (Venture Intelligence). Housing raised $ 113 million in 2014, followed by $ 37 million by Proptiger realty, $ 40 million by Common Floor and $ 10 million by Grabhouse. Amit Kumar, CEO of No Broker says, “Investors are looking for leaders in this segment. They are seeing three things before investing in online platforms- the team that runs the business, customer’s pain point that are being addressed and lastly addressable pain points.” Reports ET.
Top investors in this segment are: Helion ventures, Nexus venture Partners, SoftBank Group, Accel India, Horizen Ventures, Qualcomm Ventures and Nirvana Ventures. Also, read about the Future of billion dollar startup Investors
A study commissioned by Google reports that a total of $ 43 billion of the real estate transaction were influenced by these portals, out of which $31 billion were in residential and $ 12 million in the commercial segment. 62% of the Internet users who are willing to buy a house are banking on these portals for information and available options.
Developers are learning from their mistakes and focusing on project execution and delivery. Thus, experts expect a revival of the sector by the end of 2016. House prices, which declined to some extent in 2015, may see some more correction and reduction in interest rate on home loans will also be a driving factor in the recovery of the sector. The positive sentiments and growing economy are going to steer the demand for homes and commercial space. After three years of lull total purchase and leases of office space rose to 35m sq ft during 2015.
If you want to know more about insights and ideas in online real estate than please read my article – Insight and ideas on Real Estate startups