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May, 13 2010

Real estate brokerage franchise : SUCCESS FEASIBILITY IN INDIA

Real estate brokerage market is upsurge as realty market trends advance the lucrative housing market in tier I and tier II cities. Time has never been perfect for international brokerage firms who intend to expand through franchising.

Real estate brokerage market is upsurge as realty market trends advance the lucrative housing market in tier I and tier II cities. Time has never been perfect for international brokerage firms who intend to expand through franchising. However lack of regulations in the largely fragmented real estate brokerage market dampens the feasibility of success of the model

Brokerage is one of the easiest business to start as well as franchise. Pre-assessment and evaluation of a format will facilitate calibration of success. But a word of caution, the risk involved as a result of understanding political, economic, legal, cultural and macro-economic scenarios affecting the market must be optimised.

Brokerage has no entry or exit barriers involved. Real estate brokerage business saw a surge with the boom in housing and real estate market in the past decade. Characterised by non-existence of any regulation as well as industry norms, real estate brokerage market brings with it a plethora of antagonising opportunities as well as challenges. Of late, a lot of international brokerage companies have ventured into the Indian market through the franchising mode and generated a sense of curiosity about the untapped potential of the real estate brokerage market. Franchising a brokerage system theoretically makes sense. A low-investment business format, not conspicuously skill intensive, offers business leads, knowledge as well as training, which is required for running the business successfully.

Financial brokerage, a parallel model

Incidentally, drawing a parallel, highly successful brokerage franchise model exists in the financial brokerage market. As compared to real estate brokerage, financial brokerage is much more regularised as well as organised. Many security firms have sporadically and successfully replicated their business formats through franchising. Huge level of fragmentation exists in both the sectors. However, the latter is regulated through licensing, clear-cut brokerage norms, a market watchdog and many other pull factors, which ensure the success of micro-replication of a small business like brokerage. Needless to say, for even a simple business like brokerage to perpetuate profitably, it requires the supporting macro as well as micro framework to facilitate the capital influx through identical small business formats, which eventually galvanises the evolution into organised business scenarios.

Real estate brokerage franchising evaluated on a franchise feasibility model by assessing market potential as well as the risk involved, also took account of the franchise system and the micro-economic factors involved.

Positive Macro Economic Indicators

Real estate and housing sector on growth surge: Real estate is second only to agriculture in terms of employment generation and contributes heavily towards the GDP. Five per cent of the country's GDP is contributed to the housing sector, which is expected to rise to 6 per cent in the next 5 years. With the economy surging ahead, the demand for all segments of the real estate sector is likely to continue to grow. The Indian real estate industry is likely to grow from $12 billion in 2005 to $90 billion by 2015. Given the boom in residential housing, IT, organised retail and hospitality industries, this industry is likely to see increased investment activity.

Emerging Trend: This indicates a prolific demand for a market place where buyer and seller can buy and sell real estate. Hence, greater need for brokerage services.

Attracting FDI

Since year 2006, when the Central government had provided fresh impetus to the construction and development sector by allowing 100 per cent foreign direct investment (FDI) under the 'automatic route' in the vital infrastructure sector, investment has grown six folds. Real estate and housing sector attracted the second highest FDI inflows after services across period 2007-2009. In fact, as per the Department of Industrial Policy and Planning, the year-on year per cent growth in the FDI investment for the sector has been 44.3 per cent.

Emerging Trend: A positive FDI inflow in an emerging economy indicates lucrative prospects of the market. In India, no sector has actually grown without a positive FDI impetus, so real estate demand is the next sunshine sector.

Regulatory scenario

No entry barrier: There has been literally no regulatory mechanism for the real estate market place, resulting in confusion. A real estate broker in India neither needs to be registered nor needs a license. This has led to almost anyone or everyone turning into real estate brokerage, much to the frustration of a professional broker, as it dilutes industry practices and norms. Haryana government though has made licensing mandatory. It is learnt that the government would fix Rs 50,000 as the license fee for operating as broker and consultant in the sector.

Mukesh, an Ahmedabad-based realtor, along with others supports the move, saying. “License will add to professionalism. It will ensure that only serious players enter the industry. Licensing will also improve reputation.”

Lack of legal liability on broker: Property Dealers and Consultants Bill-2008 is the most important Bill the Haryana Assembly has passed, making the broker involved in the transaction responsible for the genuineness of both the seller and the buyer. To an extent, it has put the onus on the broker to verify that the property involved in the deal is free from any legal lacuna. So far, a broker involved in a deal could not be made a party in a legal suit, in case a dispute arises between a buyer and a seller.

National Association of Realtors (NAR): An apex organisation of real estate brokers in the country is working towards developing a live property valuation index, which will become the benchmark for real estate deals in the country. Under the mandate from NHB, the brokers' body will develop Residex, which will be an index similar to the stock exchange index that will reflect the valuations of home properties in different locations across the country. Residex will be a quarterly indicator of property prices that will come in handy for property buyers. Liberalisation in the realty sector makes such valuation very important. Realty valuation indices is a standard practice in mature real estate markets and international buyers' demand data, based on statistics and future expectations about returns.

Emerging Trend: The real estate brokers have welcomed the government move, saying it's likely that other state governments will replicate similar regulations, which will regularise a fragmented market like real estate brokerage. India, being one of the most lucrative real estate markets in Asia-pacific, is on its way to futuristic reforms to enable a mature market place which can support various formats, including franchising.

Market Potential

Need for transparent and honest property brokers: As India is becoming a hu for global economic activities, the demand for quality real estate brokerage is on the rise. This has given a boost to the real estate and construction industry. But opacity in land ownership is the biggest stumbling block for international players to do business directly in the country. Annil Bedi, a Delhi-based realtor and a prominent member of NAR, pitches for greater business ethics, saying, “Foremost, low business ethics must be dealt with by developing a regulatory mechanism Real estate broker needs to understand different needs of the clients and ensure committed services.”

Real estate development in tier II, tier III towns: Since the metro property market has been exhausted, the real estate market trend is moving towards small towns. Amit Kumar of Century 21, Bhopal, says, “The market is stabilising. Things are streamlining. In tier II cities, more and more projects would be coming up. Things are getting better. It is required that the brand and the builder hold hand. For malls in India, it is still early days.”

Huge NRI investor market: NRI investment came as a significant breather for the distorted demand-supply equation in the real estate investment in past few years. However, this has been a typical example when the investment was marred due to lack of organised market place as well as brokerage services. Benami deals led to a lot of investment erosion. The 'Pravasi Bharatiya Divas' last winter saw a drop of 66 per cent in the number of those attending the annual meet, showing lack of enthusiasm among overseas Indians to buy property in India. However, this is a good opportunity for branded real estate and international franchisors, as they leverage their international, domestic as well as regional/local presence to capitalise this bandwagon of serious real estate investors. This market enables franchise models to successfully sustain the Indian real estate brokerage.

Property management: Property management is another key segment in which a sporadic franchise network can venture into. There is a realistic need for property management in India, as the population is increasingly becoming remote and mobile due to better employment opportunities.

Also, real estate in India, like gold, has been periodically the safest investment instrument. Complexity of maintaining a real estate investment portfolio creates the need for trusted as well as well-networked property management services.

Price speculation, lack of research: The real estate brokerage lacks clear indicators for market rates or trends.

For consumers, it is difficult to make an informed decision in spite of the present margin motivated. This has resulted in speculated pricing, which reflects random chaotic market conditions. Market information access and knowledge being one of the key strengths of a branded franchisor facilitates better management and direction to the price trend movements. If the franchisors can create a differentiation based on this, they will surely sustain the dynamic Indian real estate market.

Deterred perception: Most of the real estate brokers sell in secondary market, yet their work involves much more than the middleman. Though the market has recovered from recession jitters, still many believe that a serious investor is keeping distance from the real estate due to notorious reputation. This gives a huge scope to branded and reputed player to position themselves as more dependable middlemen.

Market Risk

Franchisee-dependent business model: The real estate brokerage franchise model depends a lot on the integrity of the franchisee's systems. However, since the nature of the real estate business stays honest, business deals are relatively skewed. It makes success, more challenging as accountability of the franchisee may affect profitable sustainability of the franchise system.

Ambiguity regarding brokerage charges and mode of payment: In India, there are five lakh brokers and sub-brokers, who charge about 2 per cent brokerage from both the buyers and sellers for a property deal. In the process, these traditional brokers represent only themselves. Branded real estate franchisors charge 95 per cent of the usual brokerage from  the seller and spare home buyers.

Real estate deals cannot ignore the mixed payment options involved, which is by both cash and cheque. This, many believe, creates a lot of ambiguity as well as challenges in realisation of the brokerage charges. One cannot deny the undertable deals and black money involved in most of the real estate deals, which pose a serious threat to the franchise model. An independent broker might fear losing business confidentiality through franchise audits.

Territorial rights: One of the key apprehensions that most real estate brokers have regarding the franchise model is the territory restriction. An established real estate broker has an established network of client/investors spread across everywhere. With territorial restrictions, comes restriction in terms of potential leads, he believes. Though the branded or organised players ensure corporate mandates and pre-screened leads, still real estate brokerage business in India has so far relied on personal relation than anything else.

Multiple broker consultation practices: Unlike west, where there is a mutually understood contract between the buyer and its representative to avoid multiple consulting, Indian marketplace is devoid of such norms. Hence, the buying selling deals are loosely based on negotiations and practices, making them more vulnerable.

Been there done that: The Franchisee Verdict

Dhruv Khanna, who has been a LJ Hooker franchisee, believes that the difference between a franchisee and regular broker is not of the model but the kind of investors it attracts. “A franchise model usually attracts educated and serious investment. The investor is aware that the franchise model needs time to evolve. Franchised model still needs to mature and that would take a couple of years. It's only then that you'll see branding delivering potential profits,” he says.

Another franchisee based in Ahemedabad says, “Corporate mandates as well international tie-ups enable a small business owner to capitalise on brand owner`s international presence. A franchisor realises economies by developing a reliable network and hence, making it a win-win situation for both.'’

Conclusion

A conducive market ecosystem has lead to a competitive real estate market to ensure successful coexistence of various formats and business models. Real estate marketplace seeks many reforms to facilitate regulated and organised market. Creating a healthy market can introduce the desired regulatory reforms which will certainly bring more competitiveness in the market.

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