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This chapter presents the data collection, analyses and findings based on the conduct of interviews, questionnaires and case study with buyers, suppliers, government official, private sector employees, businessmen, etc involved in the housing market and industry in Sri Lanka supported by the findings of secondary research on the subject. The findings were based on critical analyses of the questions and the objectives of the research study.
The data was collected through primary and secondary sources. A self-structured questionnaire was e-mailed/posted to middle to upper income level executives, professionals and businessmen numbering 150 to understand their housing and residential plans over the next 3-5 years.
The feedback for the questionnaire was extremely encouraging and it was evident from the responses that housing was a major problem area and a matter of grave concern.
In addition 30 respondents being potential buyers and 30 suppliers were interviewed in detail to gain an understanding of their needs and preferences that drive their decisions.
Reports and websites were searched for market data. Additionally, views of experts in the construction industry were obtained to ascertain costs of construction.
Further, the macro economic data was obtained through secondary sources and evaluated with the objective of determining the future market through secondary data sources.
The property market over the last ten years was analysed to understand trends and future market drivers and potential development options.
The author had to consider a number of factors during the conduct of the interviews. Many respondents were interviewed in order to obtain factual data for the purpose of analysis. For the convenience of the analysis the respondents were identified using alphabetical letters.
All respondents were extremely positive and helped in no uncertain terms to extract information and statistics for the purpose of the research study. However, five respondents were excluded due to non value edition to the research study.
4.1 Bargaining Power of the Suppliers
In this section the author deals with collected data and analyses the findings in relation to the bargaining power of the suppliers.
4.1.1 Data Collection
Please refer to the Table 11 to find the tabulated responses of those interviewed to assess the bargaining power of the supplier's in the industry.
Table 11: Assessing Bargaining Power of Supplier's
Spoke about the ready availability of resources. For example people and skills were an important factor in any industry to carry out a successful project and he emphasized that unless the proper skills and expertise were available the project would not succeed.
the opinion was that Management Capabilities played a major role in the successful management and planning of any project, whether housing or another industry; there had to be proper management of the operation to ensure success.
In reference to the preference of location advantage, Colombo 3 was said to be a prime and lucrative locality, while Colombo 15 was considered less sought after by suppliers and even buyers.
In reference to financial backing and ability to obtain Investment Financing, the view was that large companies as opposed to low-end and small scale local companies possessed the infrastructure to lure large investments even from foreign countries. In contrast the smaller players in the business were struggling to maintain their status in the industry due to financial constraints.
Specified that supplies and the supplier were of paramount importance to ensure supplier bargaining power in the housing industry. He reiterated that in order to check the pros and cons of the industry, an analysis of all the raw material suppliers in the country may need to be shortlisted to ensure competitiveness in the market.
It was revealed that the system was efficient, capable of producing quality work through skill levels and availability of the required resources and infrastructure. The feedback covered the social aspects/ demographics of Greater Colombo and its environs.
Investor, Banker &Developer
Legal Regulations and implications were said toproduceunfavourable business environment that inhibited development programs and projects due to stringent national laws thus limiting foreign investments into the country.
the various economic down turns and a war like scenario that prevailed in the country resulted in slow development, and less projects were undertaken, which would ultimately result in the bargaining power being on the low side. It was observed that developers would have to work even under such circumstances to cover their overheads.
L, M &N,
Steel Merchants &Contractors.
The local steel industry relies heavily on the import of raw material thus the conversion cost is much higher. However, it is protected by heavy duty percentage being imposed on imported steel shippers; the local steel manufacturers are given a life line by the government imposing a high duty levy.
Spoke about Cement Manufacture and explained that supply was finding it difficult to meet the demand for the industry. He reiterated that at present there were about 5 to 6 major players in the market, who dominated the local cement market.
Investor, Developer/ Supplier
Speaking about the Political environment, explained that due to lack of proper direction, instability, uncertainty, one cannot undertake or plan long term development programmes and projects. There opinion was that it was so due to frequent changes in government policy and red tape.
R, S, &T
Developers &, Engineering Firms.
Another important factor discussed was Technological Advancement in the industry. Respondents stated that the use of cranes, formwork, etc can improve work efficiency. The use of such equipment and utilities in the modern day construction industry reduces cost, saves time and manpower requirement . Quotations/ estimates for a project will be much lower than that of competitors, i.e. some engineering firms use proprietary formwork system in their construction, which gives an advantage in cost, time and quality of work.
Respondents, when questioned about how they raise capital funding for development projects stated that they would use the best method that would be beneficial to yield maximum profits in the long term. Private Equity, Bridging Finance, Share Placement Offer, Venture capital, Angel Investors, Long and Short Term Borrowing and Government Special Purpose Loans were the methods available to developers.
Respondents stated that it was of utmost importance to the business to be able to negotiate loans and leasing arrangements to sustain the supply.
The rationale that the author was able to derive out of the above data collection was that in reference to the social aspects, for example the demographics, resources, management structure, etc, the trend in the bargaining power of a supplier was low.
Legal Regulations, due to many regulations and red tape, no permission for foreigners to own land and the imposition of 100% taxation on non-local purchases, showed a negative and the trend in this respect was low. The Economic Environment too needed restructuring as absence of convenient working hours, which leads to longer gestation period, showed a low trend.
In the Political sphere, the presence of an unstable government too was a negative aspect, which too resulted in a low trend. In the technological sphere, only a few firms had the capability to market their skills, thus the trend was low.
4.1.2 Analysing scale of bargaining power of suppliers in the housing industry.
Suppliers in this industry are not concentrated and act as separate groups competing for the same project through the bid system that is prevalent in house building construction contract work. Volume is a significant concern to these developers. On the one hand, developers require a specific amount of raw material for construction. On the other, subcontractors must build variable costs into their house building bids. Thus, large scale developers in the housing industry are not affected in terms of supply volume and giving suppliers any leverage. Moreover, the multi-million rupee nature of the bids for these large communities results in relatively few bidders/purchasers. So, the subcontractors' power is limited from the demand side as well and seems that suppliers have very little power.
However, the industry is supplier intensive in a very industry-specific sense. First and foremost, land is required, either owned privately or by the government. Although the supply of land is discrete, large and reputed developers do not spend a disproportionate amount of revenues on raw-land acquisitions. Supplier power is limited in that land prices fall within reasonably accepted ranges and buyers will typically not be able to negotiate outside of those price ranges.
Every developer requires a large number of inputs beyond land and other raw materialsfor the construction of housing units. Prices for some of these materials are non-negotiable, , which affect all companies equally and do not lead to a strategic advantage for suppliers. However, the fragmented nature of the supplier market in all other construction supplies to the developers severely limits supplier power.
For instance, HHB states in their 2008 Annual Report to Shareholders under the Cost Management section that Construction costs are controlled by obtaining competitive bids for material and labour by negotiating favourable pricing with primary subcontractors and suppliers based on the volume of services and products purchased from them on a local, regional or national basis and monitor construction costs on each house through purchasing and construction budgeting systems.
Since each project is allocated to a subcontractor on a bid-by-bid basis, their profit margins are small. A subcontractor must scrutinise a project, determine the cost of raw materials and labour, and then submit a bid . The very nature of this closed-bidding process rewards the lowest bidder. Thus, as the suppliers of raw materials, the subcontractors have very little supplier bargaining power.
Labour is also a necessary input in homebuilding. Unlike subcontractors, skilled construction workers have supplier power. This strong supplier power of construction workers leads to high costs of labour. However, in Sri Lanka labour cost are comparatively low compared to the European and American standards.
On the whole, suppliers exercise little control. Amounts paid to subcontractors for a winning bid, are very competitively priced. The shortage of skilled construction labour, although keeping labour costs high, does not represent a significant problem to the homebuilders directly; subcontractors bear this cost through reduced margins. Moreover, labour costs are only a fraction of material costs and mostly remain the same.
The finding is that the bargaining power of the supplier's are low in the industry due to all the above mentioned reasons.
4.2 Bargaining Power of the Buyers
In this section the author collected data and analysed the findings in relation to the bargaining power of the buyer's segment.
4.2.1 Data Collection
Please refer to the Table 12 to find the tabulated responses of those interviewed to check the areas pertaining to the bargaining power of the buyer's in the industry.
Table 12: Areas checked pertaining to Buyer's Bargaining Power
The respondent expressing views on the buyer's market in the housing industry stated that it was not competitive.
Speaking on the lines of buyers' needs expressed that the buyer did not have much say in their purchase. Thus the buyer power was extremely low. This aspect was evident in the large development programs and the only exception was individual housing which was an extremely minimal portion of the industry.
Observation was made that buyers did not have much choice and had to pay premium prices for their purchase as there was no bargaining power.
D, E &F
Investors, Developers &Buyers
buyers had power over developers when they are concentrated, purchase a significant portion of new houses and pose a credible threat to purchases from competitors, but this scenario these were absent due to the high demand for housing.
E, F, H, I &J
Investors, Developers &Buyers
It was evident through the responses that buyers had very little power due to fragmentation of this segment. Buyers had the opportunity to compete individually for the best price in the housing industry and had the ability choose between suppliers of new houses but since supply could not meet the demandthe bargaining power was less.
Were of the same opinion that buyers should have the option to decide on the purchase of a house in a certain geographic area of their choice, regardless of the specific developer but here too, they expressed their total dissatisfaction as the demand could nott be met in most instances. They stated that there were too many buyers competing for houses from few suppliers.
N, O, P &Q
Claimed that although they were interested and there was a need but due to financial constraints the buyers did not have power to purchase new houses, although there was a demand for same.
Stated that the only way forward was to offer low bank loan rates to encourage buyers to make a purchase. They were all of the opinion that unless this was addressed the buyer power would be always at a low ebb despite the heavy demand for housing.
Stressed the need for the implementation of a policy that provided attractive Loans and Leasing facilities to first-time buyers.
4.2.2 Analysing the degree of bargaining power of buyers in the housing industry?
Locals are buying houses at relatively high rates, due to flexible financing terms and low down payments. Buyers have power over developers when they are concentrated, purchase a significant portion of new houses and pose a credible threat to purchases from competitors but less power when they are fragmented. In the Industry, buyers of newly constructed houses have very little power and are extremely fragmented and purchasers compete individually for the best price.
Buyers usually do not have the ability to choose between suppliers of new houses but reserve the option of purchasing existing houses on the secondary market or rent houses. If a job or a family is located in a certain geographic area, there is opportunity to purchase property in that area, regardless of the specific developer.
Since houses are such a monumental investment, the costs for a buyer to switch houses are restrictive. Because there are many buyers competing for houses from few suppliers, new housing prices are high and buyers have very little room for negotiation unless they choose to purchase existing houses.
Various reports indirectly reflect this weakness and a campaign aimed at facilitating developers to build new, affordable homes, believes buyers are paying too much for homes because the supply is limited among other things by zoning restrictions.. These reports are evidence of the fact that buyers do not have much power for buying new houses.
Furthermore, demand for new homes is continually increasing. Population growth, demographics, migration into the city, household formations and changes in house ownership rates were the primary long-term factors driving this housing demand. Low bank loan rates were a positive influence on housing demand. Despite this high demand for new housing, buyers have relatively low power due to the above mentioned reasons as demonstratged by the research findings.
4.3 New Entrants
The collection of data in regard to the level of threat of new entrants was obtained through descriptive observations.
4.3.1 Data Collection
It was observed that if the barriers to entry to an industry are low, new competitors are likely to want to participate. However, in this case the economies of scale deter entry by forcing new entrant to come in on a large scale or to accept cost disadvantage. Such economies may occur in financing, research and development, manufacturing, distribution, marketing, advertising and sales promotion, utilization of the sales force, services and in fact, in nearly every part of the business.
Respondent J was of the opinion that early identification of new entrants in the housing industry was critical because they can intrude on market share and profitability of existing competitors. Another, Respondent K, stated that the economies of scale realized by large scale house developers make it almost impossible for new entrants.
Yet another observation by Respondent L was that a new entrant had to overcome considerable governmental red tape in the housing industry to succeed in the business. Respondent M stated that that the financial capital and ability to work with zoning commissions were barriers to entry into large-scale housing development projects.
All this meant that the entry was high due to all the disadvantages faced by the new entreats to the industry.
4.3.2 Analysing the level of threat of new entrants in the housing industry?
Identifying the possibility and probability of new entrants in an industry is critical because they can intrude on market share and profitability of existing competitors. Economies of scale, product differentiation, capital requirements, switching costs and government policy all affect the developers in Sri Lanka.
The economies of scale realized by large scale house developers make it almost impossible for new entrants. Housing is a very capital intensive industry, especially when done on a large scale. Not only are the costs high, but the knowledge required to build homes on a large scale is also difficult to acquire. Sourcing a parcel of land large enough for a development project requires much capital and expertise. Only with the experience and the capital is it possible for a new entrant to seriously compete with the existing large homebuilders.
Governmental red tape must be overcome to the success of a prospective building company. Possible zoning changes, building permits, traffic studies and the environmental impact reports mandate that a company needs to have extensive experience in the industry. Moreover, developers face strict environmental concerns as Greater Colombo is considered environmentally sensitive land and ecological and environmental surveys must be done before companies can begin development.
Additionally, developers need the ability to negotiate and work with the zoning commissions and the other governmental commissions to be successful. The required capital and the ability to work with zoning commissions are the two primary barriers to entry that make large-scale housing development projects in Greater Colombo difficult.
The research finding is that the level of threat of new entrants are high due to the all the above mentioned facts and reasons.
4.4 Threat of Substitutes
The collection of data in regard to the level of threat of substitutes was obtained through descriptive observations.
4.4.1 Data Collection
The descriptive observation of Respondents M & N was that substitutes were those products which were quite different in form but which offer a real alternative to the industry competitors' products and confident that the market conditions and economic status were the main factors to peruse substitutes.
Another observation was that the ready availability of substitute products limits the profit potential of competitors in the industry by placing a ceiling on the prices they can charge.
Respondents E, F and G were of the opinion that unless the industry competitors can make their product significantly superior in the eyes of their customers or differentiate by marketing or distribution, the industry competitors will suffer in earnings and possibly in growth.
Majority of the respondents opinioned that buyers were most likely to turn to substitutes in conditions such as the substitute is close in price and performance to the industry's product and switching costs are low, as buyers are accustomed to making switches to alternative products.
It was revealed by Respondents O, R, S & T that the majority like to make a permanent investment with the purchase of a house. However, they were of the opinion that apartments and condominiums were an ideal substitute for any buyer.
Respondent A, B E & P were of the opinion that condominiums and apartments did not serve as a permanent substitute and were temporary in nature. They stated that once a family expands it needs more space and the apartments and condominiums did not cater to an extended family.
4.4.2 Analysing the measure of threat of substitutes in the housing industry?
The threat of substitutes entails a consideration of such things as switching costs, buyer inclination to substitutes and the price-performance trade-off of substitutes.
Most individuals would like to make a permanent investment with the purchase of a house with apartments and condominiums considered substitutes. Some others debate that condominiums and apartments do not serve as permanent substitutes to a house but resemble a temporary substitute.
Developers realize that apartments and other rentable units are substitutes to houses and when house prices become high, they watch for a decreased demand for houses in lieu of apartments. However, extremely low interests rates on loans have enabled individuals to continue to purchase ever-more-expensive properties even with stagnant income levels. Variables such as interest rates, government programs encouraging first time house buyers and limited down payments will continue to affect how viable substitutes seem in contrast to outright ownership.
Another substitute to large scale developers is the individual or smaller boutique developers. The advantage these companies have is that they don not build large tract houses and have a striking disadvantage in increase in cost when houses are differentiated from one another.
HHB has been able to successfully expand their market as a low-cost provider. Hence, there are only two ways to make profits: be the low cost provider or differentiate your product.
Thus, the actual threat of substitutes is weak given that it takes many forms on this level of cost-savings. Access to the capital markets to raise money quickly and efficiently is one. An established reputation for quality is another. The other is the ability to negotiate large contracts quickly and advantageously and lastly, building good solid houses.
These barriers to entry will keep the industry resembling an oligopoly, dominated by a few large scale reputed developers in the industry. The research finding is that the level of threat of substitutes is low due to the all the above mentioned reasons.
4.5 Competitor Rivalry
The collection of data in regard to competitor rivalry was obtained through observation and study of the subject.
4.5.1 Data Collection
The descriptive observation of many respondents was that rivalry among existing competitors for position in the industry can be either intense or placid. Intense rivalry exhibited tactics like price-cutting and new product innovations.
It was also revealed that a number of conditions contribute to intense rivalry, i.e. numerous competitors, equal in size and power, growth slow, lack differentiation or switching costs, fixed costs are high, exit barriers high and rivals are diverse in strategies.
Respondent D, G, H & Q stated that there was tremendous potential for growth for the housing market especially in GCM. He explained that this was due to the exodus of migrant population that was converging on the city and the suburbs in search of work. However, he explained that the number of developers was limited due to barriers for entry.
Thus due to the high demand for housing in GCM, competitive rivalry was extremely high. The majority of respondents were of the same opinion.
4.5.2 Analysing the extent of threats posed by competitors within the housing industry
The growth rate of the housing market is tremendous but limited. The growth for the demand is enormous. However, growth of the actual number of developers in Greater Colombo is much smaller and the limited growth in the number of competitors is merely a related effect of the costly barriers to entry.
The large amount of initial capital required to build a housing complex leaves the entire housing industry to large companies that have sufficient capital or to individuals who have and are willing to risk the required amount of money as a Capital investment.
Moreover, the limited number of large scale developers leads to the conclusion that the market is mature and fairly saturated. However, developers in GCM will always have a market demand as they continue to develop and redevelop land and change the zoning of pieces of land.
Porter in his explanation of competitive rivalry has stated that "There have always been lots of companies in the industry and so there has always been an active situation of rivalry. But again there was plenty of room. Yes, there would be seismic tremors and overbuilding in one city or one product type for a while, but the broad upsurge in demand over a long period of time allowed a lot of companies to prosper".
In Sri Lanka developers are yet to reach such heights. Even with the active, intense rivalry of the housing industry, some developers are still making large profits. Rivalry among firms could increase through consolidation and capital intensity and by competing against each other's resources. Research findings indicate competitor rivalry was high due to the above mentioned reasons.
4.6 Competitive Market Strategies
The intention of the author was to collect data to substantiate the best competitive strategy that the industry should follow through observations and study of the generic strategies.
4.6.1 Data Collection to Substantiate Market Strategy
In this sphere, socio-economic details of consumers, market segments, preferences, affordability and the types and designs of houses was collated to find out the best market strategy.
The study revealed that many developers in the industry followed a cost leadership strategy and targeted the middle class market due to its critical mass. It was observed that this strategy had been followed by the majority through gaining experience, investing in large-scale facilities, using economies of scale and carefully monitoring overall operating costs by downsizing and total quality management.
It was also observed that some developers followed the differentiation strategy, which involved the development of unique products or services, relying on brand/customer loyalty. These developers offered higher quality, unique designs to justify higher prices in the industry.
Some followed the focus strategy and served a narrow market segment. It was observed that these players focused on a particular customer group and on geographic markets.
4.6.2 Analysis to find out the best market positioning for the housing industry in Sri Lanka?
The findings of the market survey of the residential housing market provide some interesting facts. A few developers opted to follow a 'differentiation focus', where the offerings are differentiated, while the majority opted for an 'overall cost leadership focus', where houses were sold at low cost in the local market. Almost 50% of interviewees intended to purchase a home in the next 3 years.
The market favoured detached houses in the Rs. 5 M range even though it meant travelling from outside and it was estimated that the current unmet demand would be substantially over 15,000 houses. The findings revealed that more than 70% of the people currently travel over 40 minutes daily to work or school.
The market for apartments was in the price range above Rs 8 M and was limited to 8.5% of the potential market in the upper middle and upper income category and the demand estimated in next 3 yrs was a staggering 2300 units. There was a large segment (45%), which were unsure about condominium.
It was found that, Colombo 3 was considered as the most sought after location, with Colombo 5 following close. The most expensive residential area was Colombo 7, and it was only the upper class that had inclination to purchase in this area.
People were conservative on loan commitments and assumed loan obligations well below their affordability. However, out of the sample, 53% of those interviewed owned their home, 54% valued their home at over Rs 5 Million but 72% had a mortgage commitment of less than Rs. 25,000/- per month (p.m.). It was evident that there was potential to grow the market by introducing flexible financing facilities.
In the detailed survey where the characteristics and location of the housing options were disclosed the potential buyers of apartments above the Rs 8 M range increased to 18% of the market. This was almost 49% of those interviewed and seems to be the current trend.
Thus the survey raises the estimate of the market to 4,700 apartment buyers in our target market. 22% of those interviewed were initially willing to consider apartments, but dropped out when the prices were mentioned. 23% of those interviewed dropped out when the location Slave Island, Colombo 2, a slum area, was mentioned.
1.7% of the market preferred a one bed-roomed apartment at Rs 8 M, which accounted for 10% of buyers. 8.3% of the market preferred a two bed-roomed apartment at Rs 12 M., which accounted for 46% of buyers. 6.9% of the market preferred a three bed-roomed apartment at Rs 15 M, out of which accounted for 38% of buyers. 1% of the market preferred a four bed-roomed apartment at Rs 20 M, out of which accounted for 5% of buyers.
There was no negative impact when it was disclosed that there would be large development; in fact there was a marginally positive response. 90% of the respondents preferred less than 20 floors with 10 being the ideal. In the Residential Segment the Total Supply of 1,167 units and the 2 & 3 Bedroom units constitute approx. 87%, with minimal presence of 1 bedroom apartments as shown in Figure 8.
Figure 8: Total Supply by Unit Configuration
As shown in Figure 9, the Absorption Residential Segment is approx. 72% of the luxury apartment supply in Colombo. Average annual supply was 90 units and Average annual absorption was 68 units.
Absorption pattern varied among configurations and absorption levels in two bed-roomed formats were relatively low. Absorption in three bed-roomed formats and healthy absorption in four bedroom and penthouse categories were notice primarily because of low supply.
Figure 9: Absorption by Unit Configurations
Primary influences in absorption pattern are Pricing, Quality & Facilities and Location. Projects in Colombo 3, 5 and 7 witnessed high absorption levels due to image of the localities as prime residential destinations and the Profile of Development/ Positioning.
The Investor Activity of the Residential Segment indicates that 87% of Investors in Luxury Apartment Segment are of Sri Lankan origin. Figure 10 provides a breakdown of the data.
Figure 10: Profile of Investors
The Motives of Investment is explained in the Figure below; majority of the respondents have stated that the reason for purchase is for purpose of capital appreciation and rental yields. Breakdown of the preferences is depicted in Figure 11.