Explaining the decent but not impressive quarterly performance, compared to the industry peers, the CEO of a listed real estate developer justified it with heavy concentration in the residential portfolio. According to him, the diversified portfolio of industry peers with income producing commercial spaces gives those companies an edge. More than an answer over his company’s performance, Track2Realty feels the statement raised an all important question: Does diversified portfolio give an edge to realty companies.
What is Diversification? Diversification by its very meaning is a business strategy that includes a wide variety of investments within a portfolio. Many of the developers, and even the seasoned investors, keep a diversified portfolio to reduce risk and improve returns. A diversified portfolio contains a mix of distinct, often conflicting asset class and investment vehicles in order to limit the exposure to any single asset or risk.
The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on an average, yield higher long-term returns and lower the risk of any particular asset class in the portfolio not giving impressive returns.
So, a diversified real estate portfolio is one where the developer has a mix of developments – residential, office spaces, retail, etc. Diversification as a strategy is not just product specific. It could also mean the developer is balancing riskier & volatile micro markets with other safer geographies.
However, a school of real estate analysts believe that unlike other asset classes, or asset class as a whole, the real estate business doesn’t follow the same diversification hedge. This is because the demand for office spaces indicate a robust job market which necessitates the demand of houses and then the consumption pattern leads to retail success. So, a real estate cycle never compensates for one asset class over the other.
Another school of analysts, on the contrary, assert that it is quite evident that the real estate players, especially those sitting over rental assets and/or REIT have a distinct edge over only limited portfolio players, say residential or commercial, companies.
This raises certain fundamental questions:
Is product mix & diversification a better strategy to hedge?
Does a diversified portfolio reflect healthier balance sheets?
Is income producing asset class necessary for fiscal balance?
Is specialised portfolio better in terms of consumer trust and/or satisfaction?
Industry Reactions
Aditya Kushwaha, Director & CEO of Axis Ecorp agrees the diversified portfolio players have an edge in the competitive market. According to him, while working exclusively on holiday homes, he has no choice but to let go many of the trusted buyers looking for a primary home. Holding buyers with alternative property as different asset is easier with diversified portfolio. On the other hand, advantage with niche segment is that the developers specialise and get to the perfection.
“If I have a satisfied home buyer and I operate with diversified portfolio then I can bring that residential buyer back to my commercial property as well. Opportunity to encash a trusted and won over buyers is lost when I don’t have a diversified portfolio as every buyer won’t necessarily buy a second home as next property. Keeping the buyers glued with diversified portfolio saves my operating cost, brokerage cost and the overall client acquisition cost,” says Kushwaha.
Abhishek Kapoor, CEO of Puravankara categorically says that he doesn’t think being a purely residential player has any negative impact. According to him, even in residential verticals you can have a pure range of products – plotted villas, affordable housing, upper middle income housing, and luxury housing. Yes, a diversified portfolio strengthens your balance sheet; in commercial you have an asset which is rent yielding to strengthen your financial bandwidth.
“Does residential only has a disadvantage? Just look at some of the leading brands (as per Track2Realty rating) and you find that they are predominantly residential players. Even if they have commercial portfolio, it is very small part of the business. So, it is not a disadvantage. But yes, a diversified portfolio helps you to strengthen your balance sheets; it is here that you have an advantage with your books and P&L,” says Kapoor.
Some of the property analysts on ground even remind that too much of diversified real estate companies in this part of the world have also been too leveraged. They cite the examples of likes of Jaypee, Unitech, HDIL et all that became too big & diversified to sustain. This school of thought suggests not only micro market focussed approach but also niche segment approach to give quality product and avoid market backlash, if any.
“It is not like stock market; nor are we talking about the investors. Yes, it is a prudent strategy for any investor, whether in stock market or in real estate, to diversify the portfolio. But it is not for every developer to diversify the product portfolio or the geography. Most of the high-profile failures that we have seen in the business of real estate has been due to over diversification by the respective developers. You can call it ‘Greed Driven Economy’ instead of a diversified portfolio,” says Rajan Narshetty, a local broker in Hyderabad.
Key Takeaways
Diversified real estate companies have an edge in principle
Diversification could be either with the product diversification or geographical spread
Real estate volatility nevertheless is mostly uniform and not segment specific
Diversification is a two-way sword that could either act as hedge or make the developer over-leveraged
Some of the biggest defaults have been with over-diversified companies
The Verdict
In a nutshell, diversification in its core theory assumes that what may negatively impact one asset class may be beneficial to another. For example, rising interest rates usually negatively impacts home buying. But the same higher interest rates may result in increases in rent for real estate, especially with the commercial portfolio.
A diversified portfolio or geographical spread acts as a hedge and helps the developer with balance sheet. It also acts as a risk mitigation if one segment of real estate is not doing well at any given point of time. Combination of outright sale and recurring income producing asset avoids balance sheet fluctuations. However, diversification is only the game of deep pockets in the business, where over-ambition to diversify and grow has in the past led many to a greed driven vicious cycle of economy.
Ravi Sinha
#RaviTrack2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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