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Transcript of Bain Report India Real Estate
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Residential real estate in IndiaA new paradigm for success
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Net Promoter System® and Net Promoter Score® are trademarks of Bain & Company, Inc., Fred Reichheldand Satmetrix Systems, Inc.
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Residential real estate in India | Bain & Company, Inc.
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Contents
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg.1
1. The residential real estate market: Gaps between demand and supply . . . . . pg. 5
2. Selecting the right business model: Aiming for local scale . . . . . . . . . . . . . pg. 11
3. Driving excellence in process execution: Running a tight ship . . . . . . . . . . pg. 17
4. Focusing on tight cash management: Choosing the right success metrics . . . pg. 23
5. Using an integrated go-to-market strategy and tailoring your brand:Building a customer mindset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 29
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Residential real estate in India | Bain & Company, Inc.
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Executive summary
India’s residential real estate market hasn’t had it easy in recent years. Short-term demand factors have stalledgrowth, and low consumer demand at current prices has accentuated the problem. Absorption rates have stagnated,causing high levels of overhang across all major cities, with Gurgaon and Mumbai among the worst hit. Developers,especially those with holding capacity, remain largely in “wait and watch” mode without lowering prices. Customersseem intent on waiting out the slowdown. On the other hand, developers who are cash-crunched or who havebeen 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. The Reserve Bank of India (RBI) is leading the way in initiatinga virtuous cycle of consumption and growth. The Real Estate (Regulation and Development) Bill is expected toincrease transparency, customer-centricity and process adherence. Required approvals have historically put extreme
pressure on developers. 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.
In addition, ination rates appear to have stabilized and lending rates have started to come down. While quotedproperty prices have yet to correct for the overhang in supply, discounts (both up front and discreet) and innovativepricing schemes, such as possession-linked payment plans and subvention schemes, have increased.
And so, beyond the short-term demand factors, there is immense potential in residential real estate in India.Organised Indian real estate demand is estimated at roughly 880 million square feet. It is forecast to reachapproximately 1.35 billion square feet by 2020, a 9% annual growth rate. Residential real estate is responsible for85% of the demand. This growth is supported by robust underlying market drivers such as favourable macro-
economic conditions, increasing affordability and urbanization, improved access to credit and the gradual shiftfrom unorganised real estate construction to organised development.
Due to the conuence of these factors, the Indian real estate market is starting to witness a substantial shift. Whatit used to take to win in this space is very different from what it will take in the future. In this environment, webelieve that real estate developers must understand ve fundamental dynamics in order to succeed. Each dynam-ic carries a specic implication for businesses. We will discuss all ve dynamics and their implications in thisreport. They are:
• Emerging competitive forces giving rise to distinct business models. New business models are rapidly evolving.Focusing on land acquisition and effective management of regulatory bodies is no longer sufcient; devel-opers must also focus on becoming strong local market leaders in order to build a platform for sustainablegrowth. They are doing this by being more thoughtful about the operating models they use to compete indifferent marketplaces.
The main implication for developers hoping to successfully weather changing competitive dynamics is toselect the right business model. Due to the low overlap of costs and customers across disparate locations,real estate projects across markets are truly distinct businesses. Within each local market, there are a multitudeof developer types. The key to building a sustainable business is to achieve local scale rst, as most traditionalplayers, such as Sobha and the Prestige Group, have done. Another increasingly common option for developersis to forge joint development agreements (JDAs), in which they partner with land owners and share prots. In
addition to reduced upfront land costs, developers tend to benet from land owners’ deep local knowledge.
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Furthermore, developers must define the key priorities for their business models and assess their corecompetencies across the value chain. Developers can build strong businesses by focusing on certain coreelements of their value chains and building effective outsourcing models for other activities. They must alsobe “intelligent customers”—possessing enough knowledge about outsourced activities to avoid getting takenadvantage of by vendors.
There are certain activities across the value chain that help create value—typically these include businessdevelopment, land acquisition and design. Other activities, such as planning, budgeting and projectmanagement, protect value. Businesses should focus on building critical capabilities when deciding whichof these activities to undertake themselves and which to outsource. It is important to note that there aresegments of businesses in which some of the value-preservation activities could be a competitive advantage.For example, a developer adept at strategic procurement will have a sustained competitive advantage overcompetitors in the affordable housing segment.
• Complex market and regulatory environment. The new regulatory bill, combined with region-specificregulations across the country, means that real estate developers face higher levels of scrutiny and greatercomplexity than ever before. To stay aoat, businesses must actively manage risk through both internal andexternal processes.
The implication for developers is to drive excellence in process execution in the preconstruction phase, duringconstruction 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 upkeepand maintenance or because of consistent delays during construction.
To a signicant extent, companies can drive improvement merely by focusing on processes and running atight ship. Key processes to optimise include those related to change management, risk mitigation, cross-functional processes, key performance indicators and incentives, organizational setup, IT setup, optimalmanagement information systems (MIS) and governance.
Developers can use tools such as project trackers to view and manage the many interlinked processes thatmake up a construction project. Trackers can alert companies to critical bottlenecks before constructioninitiation, allowing teams to take corrective actions before problems occur.
• Shifting prot pools. There has been a tectonic shift in the Indian real estate market in the last 10 years. Costsof both land and key inputs (primarily steel and ready-mix concrete) have skyrocketed. Raw material priceshave grown by a factor of 2 to 3 times since 2005. Land prices have increased even more dramatically. Thismeans that 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 ow returnon investment (CFROI). Fundamentally, a real estate business is the sum of its projects plus overhead andcorporate expenditures. Cash is king in this project-based business, and it will remain so. The unique natureof the real estate business, which includes high peak investment levels, a long cash ow break-even cycle andinows skewed toward the end of projects, lends itself to particular nancial challenges. Yet traditional prof-itability metrics, such as EBITDA and PAT, can vary based on accounting methodologies. CFROI, in contrast,reects the true cash generation ability of a project and, ultimately, of a developer. A critical way businesses
can maintain a CFROI focus is by organizing around projects and empowering project heads to lead.
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• Increase in customer awareness and rapid changes in customer expectations. Buying real estate is often thelargest, most signicant purchase people make in their lifetimes. As such, customers have high degrees ofinvolvement and investment in their decisions. There is greater emphasis than ever on word-of-mouthinformation, including online reviews. Currently, Indian residential real estate developers do not have acustomer mindset. This has resulted in poor advocacy, with few customers saying they would recommend adeveloper’s projects to a friend or colleague.
Customers’ expectations of residential apartments have also changed rapidly. What was considered top of theline in 2010 is a base expectation in 2015. We expect this trend of fast-changing demands to accelerate overthe coming years. Given that many residential projects take more than ve years from conceptualization tohandover, developers must anticipate what customers will want 3 to 5 years in the future—and then beginbuilding that today.
There is a major opportunity for developers to tailor their brands to key purchase criteria, both current andprojected. Creating strong product and brand strategies to match target customer preferences is moreimportant than ever. Delivering key attributes, from pricing and payment to clear communication, requiresmanaging key touchpoints with customers before, during and after purchase. Developers should also considersegmenting their customers and building their brands to position themselves for various customer types.Each of these changes requires developers to transition from a transaction-based approach to a relationship-based one.
• Innovative selling approaches and channels. As inventory levels remain high, selling properties has becomeincreasingly challenging, particularly in the post-launch phase. Once developers have their internal processesin 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. These channels could include direct sales, customer referrals,international initiatives, collaboration with channel partners, corporate sales and more. Indeed, majordevelopers are already focusing on building this multichannel sales strategy and creating “excellence niches”where they can excel.
Many changes have taken place in the residential real estate market in India, with further changes still to come.While it is still too early to predict the outcome of new regulations and the impact of short-term factors, with theserecommendations in mind, developers can better prepare themselves for whatever lies ahead.
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• Residential projects make up 85% of the Indian realestate market. Between 2015 and 2020, we expect
demand to grow from approximately 880 millionsquare feet to 1.35 billion square feet. While we alsoexpect demand for hospitality, retail and commercialreal estate to increase, residential real estate willcontinue to represent the bulk of the demand.
• Reasons for high demand for residential real estateinclude a continuing urbanization trend and reducedhousehold sizes due to the rise of nuclear families.
• However, after a long period of growth, the Indianeconomy dipped in 2012. The GDP growth rate hasstagnated (but is expected to begin trending upward),and gross fixed capital formation (GFCF) andindustrial production have slowed.
• The downturn has contributed to inventory “overhang,”in which supply exceeds demand but prices remainhigh. The situation seems to have worsened in the lastfew quarters.
• The RBI has encouraged developers to lower prices,but pricing has yet to correct. To compensate, developershave been using innovative pricing schemes to attractbuyers. For example, under the 20:80 scheme, homebuyers pay only 20% of the cost upfront, with therest funded by banks.
• Cash-crunched developers have either closed shopor are borrowing money at extremely high costs. In
some of the pricing schemes, developers are actuallyborrowing money from people.
• Early indicators suggest that the residential realestate market may be on the road to improvement.During 2015, interest rates decreased by 0.75% andination leveled off. Major developers are continuingto expand in developable areas and consumercondence is rising.
1.Residential realestate market: Gaps betweendemand andsupply
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Figur : However, there has been a dip in the economy in recent years after a long period of robust growth
Note: $1USD=64.93 INRSource: Euromonitor
Real GDP growth rate is expected to trend upwards in mid term Gross fixed capital formation slowdown is expected to continue
Industrial production slowed in 2012–14; improvement expected in 2015–16 Economic slowdown has also impacted the equity market in recent years
03
5
8
10
13%Real GDP YOY growth rate
2 0 0 0
2 0 0 2
2 0 0 1
2 0 0 3
2 0 0 4
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 8
2 0 1 0
2 0 0 9
2 0 1 1
2 0 1 2
2 0 1 4
2 0 1 3
2 0 1 5 E
2 0 1 6 E
2 0 0 0
2 0 0 2
2 0 0 1
2 0 0 3
2 0 0 4
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 8
2 0 1 0
2 0 0 9
2 0 1 1
2 0 1 2
2 0 1 4
2 0 1 3
2 0 1 5 E
1 9 9 9
GFCF YOY growth rate (current prices)
10
20
30
40%
0
0
5
10
15
20%
Uptick observedin 2014
Industrial production index YOY growth rate(IPI indexed to 2010)
500
0
1,000
1,500
Market capitalization of listed companies($B at current prices)
2 0 0 0
2 0 0 2
2 0 0 1
2 0 0 3
2 0 0 4
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 8
2 0 1 0
2 0 0 9
2 0 1 1
2 0 1 2
2 0 1 4
2 0 1 3
2 0 1 5 E
2 0 1 6 E
2 0 0 0
2 0 0 2
2 0 0 1
2 0 0 3
2 0 0 4
2 0 0 6
2 0 0 5
2 0 0 7
2 0 0 8
2 0 1 0
2 0 0 9
2 0 1 1
2 0 1 2
2 0 1 4
2 0 1 3
1 9 9 9
Figur : Organised Indian real estate demand is estimated to be ~880M square feet and is forecast toreach ~1.35 billion square feet in 2020
Notes: Other includes hospitals, special economic zones and education; residential segment includes only the organised portion of residential real estateSources: India Brand Equity Foundation report; Bain analysis
Residential
Commercial
Retail
Hospitality
0
500
1,000
1,500
2015
~880M
2020
Residential(organised)
~1,350M
Indian real estate demand• Growth in all segments of hospitality demand:
foreign and domestic tourism, andbusiness travel
• Strong urbanisation trend will continue• Reducing household size due to rise of
nuclear families• Organised sector growing faster than
unorganised sector
• Stable growth expected for services sector,which drives demand for commercial real estate
• High growth expected in retail sector overall
• Increase in overall consumer spending andshare of organised retail will drive retailreal estate growth
(Square feet in millions, 2015–2020)
CommercialRetail
HospitalityOther
8–10%
9–10%
8–10%
7–8%
~25%
(2015–20)CAGR
Fundamental factors for each segment are expected to drive growthResidential (~85% of Indian real estate market)to grow at 8%−10% CAGR by volume
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Figur 3: Demand factors accentuated the problem as absorption rates have stagnated, causing highinventory levels
*Mumbai, National Capital Region, Bengaluru, Pune, Chennai, HyderabadSources: Bain Analysis; Knight Frank
Residential absorption has stagnated in the past two years The situation seems to have worsened considerably in recent quartersNumber of units (top 5 cities + NCR) India: organised residential inventory overhang (months)
H12012
H22012
H22013
H12013
H12014
H22014
H12015E
Q2FY2012
Q3FY2012
Q1FY2013
Q4FY2012
Q2FY2013
Q3FY2013
Q4FY2013
Q1FY2014
Q2FY2014
Q3FY2014
100,000
120,000
140,000
160,000
180,000
200,000
220,000220,000
LaunchesAbsorption
0
20
40
60
City 3
City 6City 5City 4
City 2City 1
Uptick observedin recent months
Figur 4: Initial indicators suggest that the real estate market may be showing some signs of improvement
27.1%
Prestige
59
27.4%
Sobha
38
28.8%
Oberoi
8
29.5%
Brigade
25
Godrej
108
13.3%
CAGR FY13–15
Sources: CEIC database; IndiaStat; RBI; Inflation.eu; company reports
Interest rates are starting to decrease Inflation is showing signs of improvement
Developers are continuing to expand Consumer confidence levels are increasing
Bank interest rate (%) Inflation (based on consumer price index)
Growth in developable area Consumer confidence survey: RBI: current situation index
7.5
8.0
8.5
9.0
9.5
Nov2014
Jan2015
Mar2015
May2015
July2015
0
2
4
6
8%
Aug2014
Oct2014
Dec2014
Feb2015
Apr2015
Jun2015
Aug2015
0
10
20
30%
FY15, areain sq. ft.,
millions
75
85
95
105
115
May2013
Aug2013
Nov2013
Feb2014
May2014
Aug2014
Nov2014
Feb2015
May2015
Aug2015
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Figur 5: Real estate developers in India need to contend with signicant evolution across external forces
Source: Bain analysis
E Selling approach
A Competitive dynamics
• Selling, especially large inventory, hasbecome challenging
• Particularly true in the post-launch period withsignificant inventory overhang
• Nontraditional channels are emerging fast,whether digital or wealth management networks
• Business models are rapidly evolving• Ability to acquire land, managing regulatory
bodies effectively are emerging as competitivestrengths
• Local market leaders have very strong positions toenable growth
D Customer demand
C Input dynamics
• Urbanisation and income levels on the rise will fuel demand• Consumer activism on the rise, with specific preferences• Intelligent and aware customers• Greater-than-ever emphasis on word of mouth, including online
• Land prices have skyrocketed• Owners are more aware; aggregation has
become difficult• Input (material and labour) costs have risen by
two to three times in past five to eight years• Labour issues have added complexity
B Complex market environment
• Increased scrutiny on designs, approvals, transac-tions across space
• Regulations more stringent, increasingly in favour ofthe customer
• Complexity due to regional regulations• Call for greater transparency due to organised
funding and customer activism
Real estatedeveloper
Figur 6: Five key topics matter differentially regarding what these ecosystem forces imply for realestate developers
Note: REIT refers to Real Estate Investment TrustSource: Bain analysis
Competitivedynamics
Complexmarket
environment
Inputdynamics
Customerdemand
Sellingapproach
Due diligence to identify& execute appropriate
land development models
Customise customer-centric design process
& offering
Integrated go-to-market approachacross channels
Tailoring the brandto key customerpurchase criteria
Frequency of customerupdates during
construction
Create cost-efficientdesigns & aggressive
value engineering
Tight program managementoffice process to track
in-cost, on-time delivery
Strategic sourcingpartnership
model
Optimisation ofcost-effective
construction methods
Identify & implement requirements &access opportunities for organisedexternal funding, e.g., REITs, PE
Identify & buildstrategic capabili-ties in local market
Codify rigorousapproval tracking
processes
Third-party contractor &supplier risk identification
& management
Detailed launchplanning &execution
Process disclosure& communication
strategy
Identify strengths &weaknesses in brand &product differentiation
Businessdevelopment
Landacquisition
Design Approvals Planning &budgeting
Contracts &purchase
Sales &marketing
Project management & construction
Propertymanagement
Selecting the right business model
Excellence in process execution
Tight cash management and focus on cash flow return on investment (CFROI)
A
B
C
D
E
1
2
34
5
Standardisepost-handover
CRM
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Figur 7: Adapting to these ve business implications is critical to successfully building a protable realestate business
Source: Bain analysis
Key industry trend Business implication
Business models have evolved and new ones have emerged
Regulatory environment is becoming more complex; fund sourcesare becoming organised
Profit centres are shifting due to steep rise in land and input costs
Customers have evolved and are more intelligent and aware
Selling (especially large inventory) has become challenging, particularly after launch
Selecting the right business modelNeed for increased focus on core capabilities, as well as theimportance of local scale
Driving excellence in process executionEnsuring tight internal and external processes to offset anenvironment of complexity
Tailoring the brand to key purchase criteriaDeliver across touchpoints on what customers value most tobuild advocacy for the brand
Focus on tight cash management by project Project-centric cash flows will be the cornerstone fordefending and expanding margins
Building a multichannel GMT strategy Go to market with an integrated and coordinated strategyacross multiple channel pipelines
A
B
C
D
E
Competitive dynamics
Complex market environment
Input dynamics
Customer demand
Selling approach
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• Distinct markets can be described by the extent towhich they share capabilities and customers. The
markets for shampoo and conditioner, for example,share both capabilities and customers. Video ondemand and video rental, in contrast, compete forcustomers but do not share capabilities. Real estateprojects across two different cities share few capabilitiesand customers. Local regulations and customerpreferences are different enough that developersshould consider them completely separate businesses.
• Real estate in India is a local business. To be relevant
to customers and build a local brand, it is critical tocreate local scale. This should be the goal of developersin all markets.
• Prestige in Bangalore is a good example of acompany that is building local scale. Prestige had10 to 15 million square feet of property underdevelopment in Bengaluru alone in 2007. In 2013,Prestige had 47 million square feet under develop-ment, and a signicant presence in southern cities.
• To succeed, developers must assess competenciesacross the value chain that both create and protectnancial value. Companies should evaluate the relativeimportance of various activities for their businesses,then determine which activities they want to controlin-house and which they want to outsource.
• This self-assessment has led developers to differentoperating models. Some conduct most activities
in-house, while others outsource some activities fora leaner approach. Some developers use a hybridmodel of the two.
• Joint venture (JV) models and JDAs have becomecommonplace. JVs occur between two developerswho share risks and access one another’s capitaland expertise. JDAs, in contrast, tend to be agree-ments with land owners. The land owner contributesland, while the developer oversees approvals,construction and marketing.
2.Selecting the rightbusiness model: Aiming for localscale
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Figur 9: There are a multitude of developer types within each local market
Source: Bain analysis
Business model
Description
Key capabilities
Examples
Small local players New and upcominglocal players gaining scaleEstablished playershaving local scale National players
• Focus on smaller stand-alone developments withina particular city
• Limited access to capital
• Focus on specific locationand local expertise toscale up
• Limited access to capitalfor expansion
• Rapid growth and scaleachieved through focus onspecific location andharnessing local expertise
• Decentralised operationalmodel
• Growth and scaleachieved by harnessingbrand and capability
• Strong relationships withlocal authorities
• Small but loyal localinvestor and customer base
• Track record of successfullycompleting few projects
• Strong relationships withlocal authorities
• Growing local investorand customer base
• Proven track recordacross several projects
• Deep relationships with localauthorities
• Strong local investor andcustomer base
• Large capital pool and localproduct portfolio
• Established track recordacross multiple projects
• Nationally recognisedbrand and reputation
• Streamlined processes anddecision roles
• Strong organisationcapability with multipleleaders within organisation
Savvy
Sanjeevani
Akshaya
Omkar
Emaar
M3M
The 3C Company
VGN
SobhaAdani
HiranandaniDLF Prestige
LodhaGodrej
PropertiesTata
Housing
Striving to achieve local scale Desired end state Striving to achievescale in all markets
Achieving local scale in real estate development business is key to building a sustainable and scalable business
Figur 8: Real estate projects across two markets are different businesses altogether due to low costand customer sharing
Source: Bain analysis
Customer sharing
High
LowHighLow
Separate markets withpotential for cost
leadership shifts, e.g.,oil and refinery
byproducts
One market withpotential for differentia-tion or niche position,
e.g., Ray-Ban andordinary sunglasses
Separate
markets,e.g.,books and cars
Low costand
capabilitysharing
Lowcustomersharing
Separatemarkets with
potentialfor
bundling, e.g., computer
hardwareand software
One market withpotential forsubstitution, e.g., videorental andvideo ondemand
• Varied local approval and regulatory require-ments add to the complexity
• Variation in contractor capability across regions• Potentially low economies of scale in materials
procurement• Marketing initiatives lack scale and, hence, will
need to be activated at a local level (newspapers,hoardings, below-the-line activities)
• Channel partner network to be reestablished at alocal level
• Fundamental differences in customer expectationsand requirements
- Different vastu requirements across regions- Different aspects given premium (top floor highly
desired in Mumbai but last to sell in Ahmedabad)• Low overlap of customers across cities
- Few customers from one city looking to buy aproperty from the same developer in another city
• Customer reach-out channels need to bereestablished in each location
Real estateprojects
across twodifferent cities
Cost(and
capability)sharing
One market, e.g., shampooand conditioner
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Figur 1: Most traditional players have focused on one city and then expanded to other cities (Prestige)
Sources: Company annual reports; analyst presentations; Bain analysis
Prestige Group
2007
2010
2013
Percentage of area under development Example No. 2
• Completed ~4M square feet and ~11M square feet under developmentin Bengaluru in 2007
• Started expanding in Kochi and Goa
Focused on Bengaluru with slow expansion in South India
• Further expansion in Bengaluru with ~42M square feet underdevelopment
• At the same time, started expanding primarily in Chennai along withKochi, Hyderabad
Market leader in Bengaluru and focused on Chennai
• Further expansion with primary focus on Bengaluru and Chennai market;~41M square feet under development
• Significant presence in Southern Indian cities
Market leader in Bengaluru and Chennai market
20
40
60
80
100%
0 1 2 3 4 Rest
Portfolio in cities
F Y 1 0 P r e s t i g
e
F Y 0
7 P r e s t i g
e
F Y 1 3 P r e s t i g e
50% ofportfolio
Figur 0: Most traditional players have focused on one city and then expanded to other cities (Godrej)
Sources: company annual reports; analyst presentations; Bain analysis
Godrej Properties
2007
2010
2013
Percentage of area under development Example No.1
• Modest scale of area under development overall (~3.5M square feet)• Spread across Mumbai, Bengaluru and Kolkata• No significant local scale in either cityEqual focus on three different cities; lack of local scale
• Mega township project shifted focus to Ahmedabad• Ahmedabad, Pune, Hyderabad were leading cities for areas under
development• Live projects in eight other citiesFocus on three new cities implying Pan-India focus in the long run
2015• Local scale in Ahmedabad• Live projects in 11 other citiesPan-India focus; local scale in Ahmedabad and Mumbai
20
40
60
80
100%
0 1 2 3 4 RestPortfolio in cities
F Y 1 0 G o d
r e j
F Y 0 7
G o d
r e j
F Y 1 3 G o d r e j
F Y 1 5 G o d r
e j 50% ofportfolio
• Continued focus in Ahmedabad; significant local scale in Ahmedabad(among top two players)
• Live projects in nine other cities• Large number of upcoming projects in MumbaiPan-India focus ongoing but starting to strategically achieve local scale inselect cities
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Figur 3: Unique models have emerged within the Indian real estate landscape as developers focus onkey strengths across value chain…
In-house Partially outsourced OutsourcedSources: Annual reports; company websites; news reports; Bain analysis
Developer1
Developer3
Developer
2
Developer4
Developer5
Developer6
Businessdevelop-
ment
Landacquisition
Design Approvals Sales&
marketing
Planning&
budgeting Integratedcontracting
Strategicpurchasing
Contracts & purchase Construc-tion
Projectmanage-
ment
Propertymanage-
mentArchitectural& structural
Concept& product
Create financial value Protect financial value
Internally focused business model, capabilities built in-house across entire value chain
Notavailable
Notavailable
Notavailable
Notavailable
Notavailable
Notavailable
Notavailable
Notavailable
Notavailable
Hybrid model
Lean business model, outsourcing all but noncore capabilities
Notavailable
Notavailable
Notavailable
Figur : It is important to dene the business model priorities and to assess core competencies acrossthe value chain
Source: Bain analysis
Create financial value Protect financial value
Businessdevelop-
ment
Landacquisition
Design
Typical value creators
Approvals Sales&
marketing
Planning&
budgeting Integratedcontracting
Strategicprocure-
ment
Contracts & purchase Construc-tion
Projectmanage-
ment
Propertymanage-
mentTechnicaldesign
Concept& designmanage-
ment
Why is eachreal estate
activity valuable?
What shouldbe our focusfor in-houseoperations?
How bestdo we useexternal
partners?
When do we initiate
change?
Who shouldplay keyroles for
each activity?
1 542 3
• Valuecreators vs.valueprotectors
• Relativeimportanceof eachactivity forthe business
• Three to fivekey activitiesthat we wantto controlin-house
• Degree ofcontrol toretain
• Optimaloutsourcingmodel forchosenactivities
• Which activitiesand whichprojects areimmediatepriorities forthe businessrather than long-term goals?
• Internal vs.externalmandates
• Roles ofpromoter,leadership team,execution team
• Implicationson capabilitybuildingTypical value protectors
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Figur 4: …including joint development models
Source: Bain analysis
Nontra i tiona mo e s
Land bank model
Developer1
Developer2
Developer3
Developer4
Developer5
Developer6
Developer7
Developer8
Developer9
Developer10
Joint venturemodel
Joint developmentagreement model
Joint venture model• Joint venture for:
- Access to partner’s expertise or capital- Gain access to a project or asset that would have been
inaccessible otherwise- Share risks- Strategic reasons
• Example: 50:50 joint venture between DLF & NakheelProperties (Dubai-based real estate developer)
Joint development agreement model• Tie up with land owner for developing projects
- Land owner contributes land- Developer responsible for approvals, construction and
marketing• Asset light model• Financial agreements with land owners
- Revenue share- Area share- Profit share
• Example: Godrej Properties’ joint development agreementwith Ador Group to develop a project in Mumbai
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• There are six key enablers real estate companiesshould focus on to promote excellence. Underlying
all six is a focus on process. Well-dened processesrunning throughout the value chain, from pre-construction through the construction cycle, handoverand beyond, can create alignment and increasecompanies’ ROI.
• Companies can also apply disciplined processexecution throughout their internal operations,developing clear procedures for organisationalsetup, governance, IT setup and risk management.
For example, real estate companies can optimisehow they collect payments from customers. Ratherthan waiting until after a due date to request pay-ment, companies can send reminders to customersat scheduled times before the due date.
• Similarly, companies can use a detailed MIS to raisekey issues across the firm. A robust governancesystem can help leaders make timely decisions,keeping projects on schedule and improving or-ganisational productivity and performance.
• Many interlinked and overlapping processes runthrough the construction value chain. Developers canimprove their processes by using a detailed trackerto monitor all construction steps. A tracker is a visualaid that provides visibility into project tasks; it helpsidentify the critical path and proactively alerts teamsto potential conicts. Use of these tools reduces timeto launch and thus increases return on capitalemployed (ROCE).
• Finally, the right set of key performance indicators(KPI) and incentives can ensure targeted efforts byemployees. This in turn also improves productivityand results. For example, sales heads should alsobe responsible for collections. Leadership share inthe company’s fortunes should be based on rigorouslydened metrics and indicators.
3.Driving excellencein process execu-tion: Running atight ship
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Figur 5: Six key enablers that lead to success in real estate
Source: Bain analysis
Process optimisation Key performance indicators (KPIs)and incentives
Organisational setup
Management information
systems and governance Change and risk management IT setup
Seamless cross-functional alignmentacross all key processes
Well-defined processes runningthroughout the duration of the value
chain, before and during construction
Project-centric organisation structure thatcreates empowered project heads
End-to-end accountability with authorityto project heads to deliver on time, on
cost, with quality
Focus on controllable operational,financial, people, strategic goals
Leadership share in company’sfortunes based on rigorously defined,
periodic metrics and indicators
Project and overall governance acrossall key business elements
Cross-functional reviews and reportsfocusing on the few outcomes and
metrics that differentially matter
Governance, KPI measurement, keytransactions fully IT enabled
IT functioning as a differentiator,providing live, accurate and
actionable inputs to management
Mitigating risks actively throughappropriateinterventions
Handling volatility throughappropriate measurement and
control of business or people risk,including fixing talent gaps
Figur 6: Following a robust preconstruction tracking process helps identify the critical path and raiseags proactively, thus reducing time to launch and increasing ROCE
Illustrative residential project under different cash flow and NPV scenarios
Potential overall increase in EBIT of 10−20%; NPV by 20−30%
Inventory management- Genetic algorithms could be used to model optimal NPV, EBIT scenario
Defined timelines & boundary conditions for all preconstructionprocesses (design, contracting, marketing) helps limit theexpectations and targets
3−5 years
Time
Cumulativeproject
cashflow
Potential time tolaunch reduction
by 10–20%
Source: Bain analysis
15–20% potentialincrease in EBIT
Value engineering across - Shell & core - Finishes- MEP - Waterproofing
NPV=Rs. 115NPV=Rs. 105
NPV=Rs. 100
NPV=Rs. 90
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Source: Bain analysis Project launch Property handover
Pre-construction(1–1.5 years)
Business development (~2 months)
Construction(1.5-5 years, dependent on project size)
Post-construction
Businessdevelopment
Technical duediligence
RA
Land acquisition DA
Approvals
Preconstruction approvals Construction-related approvalsLandand JDA
Sales &marketing
Branding & marketing
Launch planning Customer-centric sales
Customer relationship management
Sales & collections
Design
Concept & design
management
Technicaldesign
Value engineering
Concept & schematics
Market research
Product planning
Planning & budgeting
Property management
Integratedcontracting
Strategicpurchasing
Project construction Quality & safety
Project management
Contract monitoring & vendor performance monitoring
Strategic procurement relationships
Contracts &purchasestrategy
Tendering & integrated contracting
Propertymanagement
Integrated project planning and monitoring (milestone reviews and revisions)
Design linked costing & budgeting Payments, capital & cash management
Contracts&
purchase
Figur 9: Multiple interlinked processes run through the duration of the value chain
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• The price of key construction inputs, including land andmaterials, has increased dramatically over the past
decade. Raw materials have doubled or tripled inprice, while land prices have increased even further.In Mumbai in 2015, land cost has increased to manytimes that of the 2005 levels. Delhi, Bengaluru andChennai saw similarly rapid increases.
• Whereas typical developer prots were once 20% to 25%of the cost of a project, they made up only 8% to 10% ofprice realisation currently. In 2005, land costs comprisedan average of 20% to 25% of the total price of a project;
currently, they comprised roughly 40% on average.• Squeezed margins, combined with elongated
construction cycles and the unique nature ofstaggered cash inows in the real estate business,present challenges for developers. The fact thattraditional protability metrics depend on completionof work further complicates this matter. Becausedevelopers often do not see signicant cash inowsuntil the later stages of projects, common revenue andprot metrics (such as EBIT, EBITDA, and PAT) do notprovide a complete picture of rm performance.
• However, solvency and access to cash are moreimportant for developers than accounting prots.Instead of traditional metrics, developers should useCFROI to judge their returns and business health.CFROI logically measures returns against investedcash in a project-based, capital-intensive industrythat often faces capital crunch.
• To maintain focus on CFROI, companies should orga-nize around projects and empower project headsto maximise returns. They should give project headsfull, end-to-end responsibility for the time, cost andquality of their projects. They should also plan tomeasure cash ow and other milestone metrics ona monthly or quarterly basis. Specic initiatives,such as upfront project inventory managementand project phasing and pricing strategy, couldrelease signicant value in terms of overall project netpresent values (NPV), rather than just end-of-projectaccounting metrics such as EBIT and PAT.
4.Focusing on tightcash manage-ment: Choosingthe right successmetrics
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Figur : The land and materials price increases have eaten into the prot margins of developers
Note: All values indexed to 2005 total price realisation
Illustrative breakup of price realisationfor residential project
Price realisation Rs. 100 psft. Price realisation Rs. 250 psft.Illustrative breakup of price realisationfor residential project
Land costs Labor Other Profit0
20
40
60
80
100%
0
20
40
60
80
100%23
Material Land costs Labor Other ProfitMaterial
17–18 23–25 15–17 21–24
2005 Developer profit=20−25% of price realisation Current developer profit=8−10% of price realisation
Landcosts
Profitto
developer
Profitto
devel-oper
Labor Labor
Other
Reinforce-mentsteel
Reinforce-mentsteel
CementCement
ElevatorsElevators
UPVC doors & windowsElectrical materials
CP & sanitary fittings
Other Other
Architects & consultantsfee+CM fee
Liasioning charges
Market-ing
Market-ing
Interest cost
Over-head
Over-head
Prelim-inaries
Prelim-inaries
UPVC doors & windowsElectrical materials
CP & sanitary fittings
Architects & consultantsfee+CM fee
Liasioning chargesInterest cost
117 36–40 43–4740–44
23–27
Landcosts
Other
Figur 0: The price of land and materials has increased signicantly over the past decade
2008100
2008100
Raw material prices have increased substantially
Overall, raw material costs increased by a factor of 2-3x since 2005
However, land prices have seen a multifold increase
0
100
200
300
400
Steel(rebar)
Concrete
Elevators
Tiles
UPVC doors& windows
StoneElectrical materials
CP &sanitary
Woodendoors
2005indexed
price
level
Ironmongery
DG set
2.5–3.25x
2.5–3x
3–3.75x
1.8–2x
1.8–2x
1.8–2x
1.8–2x
2–2.5x
2–2.5x
2–2.5x
3–3.75x
Notes: Land price appreciation estimated from actual deals conducted or circle rates where available; FSI-adjusted range accounts for higher floor area ratio; raw material priceincreases weighted by percentage age of total cost for each inputSources: Bain analysis; interviews with 20 property dealers across four cities and four industry experts across three sectors
Bengaluru Chennai
3–15x
7–15x4–10x
10–20x
FSI-adjusted
range
FSI-adjusted
range
FSI-adjusted
range
FSI-adjusted
range
0
500
1,000
1,500
2,000
2008100
2013
1,500
0
500
1,000
1,500
2,000
2013
2,000
0
500
1,000
1,500
2,000
2013
1,500
0
500
1,000
1,500
2,000
2008100
2013
1,000
Delhi NCR Mumbai
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Figur 3: Fundamentally, a real estate business is the sum of its projects; CFROI is the best metric tomeasure business health
Source: Bain analysis
Any actions to improve returns must be taken at the project level
Project 1
Project 2
Project n
Miscellaneous spending(Corporate overhead, etc.)
CFROI (Cash flow return on investment) is the best metric to judge returns in the real estate business
Traditional profitability metrics(EBIT, EBITDA, PAT, etc.)
• Income statement line items are skewed due to theirdependence on work completion accounting methodologyin real estate
• Both revenue and profit metrics are mere accounting lineitems and don’t reflect real state of affairs
Cash flow return on investment
• Reflects true cash generation ability of the project andeventually of the developer
• Logically measures returns against invested cash in acapital-intensive industry that often faces capital crunch
Time
Project Miscellaneous EnterpriseCumulative cash position of individual projects
CumulativecashflowReal estate developer
Figur 2: The unique nature of the business lends itself to very peculiar nancial challenges
3 Long cash flow break-even cycle
Source: Bain analysis
Spora ic an ac -oa e in ows aong wit imme iate out ows
Business development (~2 months)
Preconstruction(1 to 1.5 years)
Q17Q16Q15Q14Q13Q12Q11Q10Q9Q8Q7Q6Q5Q4Q3Q2Q1 Q18
Illustrative project lifecycle cash flows1 Inflows skewed toward end of project
4 Actual profit realisation at end of project
Cumulative
Construction(1.5 to 5 years, dependent on project size) Post-construction
Need razor-sharp focus on managing cash flows to build a scalable, profitable business
0
10
20
30
–20
−100
50
100
150
−50
2 High peak investment levels
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Figur 4: Organising around projects and empowering project leaders is critical
Source: Bain analysis
Executive chairman ormanaging director
Externalpartners
Project team
Sales & marketing
leader
Customerrelationship
management leader
Marketingleader
Salesleader
CEO
Business development,land acquisition and strategy
• Project heads responsiblethrough the preconstructionand construction phases
- Including businessdevelopment, designand contracting
• End-to-end project
responsibility: on time, oncost and of the right quality
- Cash flow and milestonemetrics measured on amonthly or quarterlybasis
Function mapsin project
teams basedout of head
office
Site teamunder project
leader
Project leader A Project leader B Project leader X
Businesssupport
(e.g., HR, IT)
Corefunctions
(e.g., design,contracts)
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• Brand building is critical to real estate developers’ long-term success. Few developers have the luxury of an
existing parent brand. As Lodha Group and Prestigehave demonstrated, creating a scalable, local businesscan help create sustained and protable business growth.
• In real estate, customers are highly invested and involvedin the buying process. Developers therefore must createbrand awareness and anticipate customers’ needs duringproduct conceptualization and design. Because projectscan take more than ve years to complete, developersmust design products and amenities their customers are
likely to want when the products launches—not currently.• Customer segmentation, product conceptualization
and design are critical for project success. Often, projectdesigns change close to the project launch basedon poor responses from customers. This increasestime to launch and signicantly increases overall costs.
• In our surveys and interviews, customers in Mumbaiand Bengaluru listed on-time delivery, luxury interiors,
nancial strength, track record, premium location andtrust, among other factors, as the attributes that drivetheir purchase decisions. But when customers ratedtheir perceptions of 17 major real estate developers,fewer than half received a positive Net Promoter Score®,a well-established measure of customer loyalty.
• Developers have opportunities to differentiate them-selves and their engagement with potential customers.We found seven key attributes that matter most,
and they fall into two categories: those that driveconsideration and those that drive advocacy.
• On the front end, customers can increase customersatisfaction by matching customers with a single pointof contact and collecting all feedback over the courseof a sale. On the back end, developers can givecustomers a choice of location and project features.
• Elements of customer-centricity should be just one piece
of a developer’s overall GTM strategy. To scale up rapidly,businesses need integrated, multichannel strategies thathelp them grow on multiple fronts. Developers havealready begun to build “excellence niches” based ontheir strategic priorities.
5.Using an integratedgo-to-marketstrategy andtailoring yourbrand: Building acustomer mindset
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Figur 6: There is signicant room to demonstrate greater customer centricity in most attributes thatcontribute to purchasing decisions
Ease of financing
Smart project Design Architect
Religious complianceDesign efficiency
Vastu complianceConvenience of access
Value for money
Timely approvalsBroker network
Sample flat Quality of collateral
Financial strength
Word of mouthSustainability
Safety and security
Redevelopment
Maintenance
Luxury exteriorsPremium location
Community
Luxury interiors
Perceived resale value
On-time delivery
Trust Track record
Contractor brand
Construction quality Parking area
Goods
Fair pricing
Service level
Notes: Word size indicates frequency of mentions by survey respondentsSources: Field survey; focus group discussions; detailed primary interviews
Figur 5: In real estate, the customer journey requires the highest involvement and investment
Source: Bain analysis Consideration shortlist Project purchase Property handover
Pre-sa es Sa es Post-sa es6–9 months 3–4 months 36–60 months
1 Need & brandawareness
Description
Focus areafor
developer
2 Initial enquiryor outreach
3 Directengagement
4 Salesprocess
5 Projectconstruction
6 Post-handoversupport
• Begin customer journey—identify needs andconstraints
• Initiate initial enquiry—through a variety of models
• Get updateson ongoingprogress
• Havepropertyhanded over
• Monitor ongoingactivities, getcomplaintsresolved
• Short-list property, engage andnegotiate with sales team
• Apply, complete paperwork andregistration, make payments
• Appoint relationship manager assingle point of contact
Attributes thatconvert a
potential buyer
Outcomes in projects alreadydelivered, such as quality and
timely handover
Attributes thatcontinue to
build advocacy
Delivering those outcomes in theproject a customer invests in
Attributes that attract apotential buyer initially
The developer brand,location, etc.
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Figur 7: Indian residential real estate industry does not have a customer mindset, with poor advocacyas a result
Notes: Focused on Mumbai and Bengaluru respondents; Net Promoter Score corresponds to “On a scale from 0-10, how l ikely are you to recommend projects from the followinggroups to a friend or colleague for purchase of a new residential apartment?;” Net Promoter Score is the percentage of promoters (score 9/10) minus the percentage of detractors(score 0-6); Net Promoter Score is a trademark of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.Sources: Field survey; Bain analysis
The stars The middle bunch The strugglers
Mumbai and Bengaluru focus
Net Promoter Score® for real estate brands (n=236)
0
50%
–50
–100 Developer16
Developer15
Developer14
Developer13
Developer12
Developer11
Developer10
Developer9
Developer8
Developer7
Developer6
Developer5
Developer4
Developer3
Developer2
Developer1
Developer17
Figur 8: Across these attributes, seven key attributes differentially matter; brand both inuences andis inuenced by them
*Mumbai, National Capital Region, Bengaluru, Pune, Chennai, HyderabadSources: PropEquity; Knight Frank
Project purchaseConsideration shortlist
Attributes thatattract a potential
buyer initially
Attributes thatconvert a
potential buyer
Attributes thatcontinue to
build advocacy
Pre-sa es Sa es Post-sa es6–9 months 3–4 months 36–60 months
Need & brandawareness
Initial enquiry oroutreach
Directengagement
Sales process Projectconstruction
Post-handoversupport
Driving consideration Driving advocacy
1 Location
2 Product specs
3 Pricing & payment
(encompasses word of mouth, reputation, ranking inpublications or websites, perceived track record, etc.)
Back-endproject
imperatives
Front-endsales & CRMimperatives
4 On-time delivery
5 Quality delivered
6 Communication
7 Service delivery
Brand is strengthenedthrough increased
advocacy, weakenedthrough detraction
Brand plays a keyimplicit role in drivingconsideration in the
first place
Real estate brand name
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Figur 3 : To scale up rapidly and maximise their reach, developers need a structured go-to-market strategyacross multiple channels
Source: Bain anal sis
2 Channel partner
3 International
• Strength of relationships among CPs
• Competitive brokerage terms
• Brokerage payout time andtransparency
• Brand perception among CPs
Examples:
• Majority sales done through channelpartners (>60%)
• Pre-launches done through channelpartners
• Volume-based brokerage slabs
• Rewards and recognition foron-the-ground channel partnerssalesforce
Prestige Group, DLF
• International marketing initiatives
• Direct or indirect overseas presencefor lead follow-up and conversion
• Strength of relationships amonginternational channel partners
Examples:
• Special pre-launches in internationalmarkets and expos
• International offices and significanttime and effort spent on the ground
• Large nonresident Indian basedeveloped in GCC, US, UK andAustralia
• Sobha: 25%–30% of sales comingfrom nonresident Indian customers
Lodha, Sobha
6 Emerging channels
• Online
• Wealth management networks, banks,NBFCs
Examples:
• Strong focus on online platforms:
– Tata Housing: tie-up with GoogleOnline Shopping Festival 2013
– Unitech: 14% of sales generated fromdigital platform (FY13)
• Strong tie-ups with wealth networks andNBFCs
Unitech, Tata Housing
1 Direct sales
4 Corporate
• Brand awareness and perception
• Extent of reach via marketing initiatives
• Direct sales force effectiveness
• Sales force motivation and incentives
Examples:
• Aggressive and skilled sales force
• Attractive incentive programs
• Structured cross-sales teams and initiatives
• National-level events with pan-India portfolioon offer
Godrej Properties, Sobha
• Structured reach-out program forcorporates
• Exclusive value proposition
• Trustworthy brand image forcorporate interest
• Structured follow-up process
Examples:
• Top-level corporate tie-ups
• Structured corporate reach-out andfollow-up processes
• Exclusive corporate deals onspecific projects
Godrej Properties, Tata Housing
5 Customer referrals
• Strength of relationships andloyalty of customers
• Structured and attractivecustomer loyalty program
Examples:
• Exclusive tiered customerrewards programs
• Rewards ranging from cashpayouts to gifts
• Exclusive events and launchesfor loyal customers
Hiranandani, Lodha
Channels
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Authors and acknowledgments
About the authors
Gopal Sarma is a Partner in Bain’s New Delhi office and leads the firm’s Infrastructure, Real Estate andOrganization practice areas for the region. To contact Gopal, email him at [email protected].
Parijat Jain is a Principal in Bain’s New Delhi ofce and a member of the rm’s Infrastructure, Real Estate, Strategyand Performance Improvement practices. To contact Parijat, email him at [email protected].
Srikrishnan Srinivasan is a Manager in Bain’s Mumbai office and a member of the firm’s Real Estate andOrganization practices. To contact Srikrishnan, email him at [email protected].
Acknowledgments
The authors thank Sitanshu Shah, Hemant Chhabra, and Amrutayan Pati from the Bain India ofces for their support.
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For more information, visit www.bain.com
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Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisitions. We developpractical, customized insights that clients act on and transfer skills that make change stick. Founded in 1973, Bain has53 ofces in 34 countries, and our deep expertise and client roster cross every industry and economic sector. Our clients haveoutperformed the stock market 4 to 1.
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