Mr Mehta s Conundrum: Where Next?

Mr Mehta s Conundrum: Where Next?

Mr. Mehta is the CEO and MD of one of the largest real-estate businesses in India. His company, Mehta Group, has presence in both India and the United Kingdom. In India, Mehta Group enjoys a dominant position in Mumbai Metropolitan Region with an estimated ~32 million sq. ft. of prime real estate under development. Mehta Group also has large land reserves of over 5,000+ acres for future growth in this region. In addition to MMR, the group also has a few marquee developments underway in London, UK. In terms of offerings, Mehta group provides comprehensive office, residential and retail space solutions across diverse consumer segments. The group has several landmark developments in the residential space across both affordable and premium segments. Group s commercial portfolio comprises of office spaces, IT campuses, high-end corporate offices and boutique office spaces. In addition they also manage retail projects such as malls and other high street retail shopping options. The group, over the years, has become a strong and recognizable brand in the real estate industry. It has grown many folds over the last few years and continues to grow at a very healthy pace. (Exhibit 1 provides key financial figures for Mehta Group) Mr. Mehta is eyeing on next wave of growth for the company. He feels that this will likely be achieved by growing within other cities in India. He then questions to himself- Which city should I target to grow my business next or should I continue to stay focused on MMR where I enjoy dominant position? Key cities which are in his consideration set are: NCR, Bangalore, Hyderabad, Pune and Chennai. As he was going through this questions in his mind, he was flipping through the pages of a leading industry report. The report showed that residential and commercial are key asset classes in India which account for more than 95% of the real estate asset mix across the 6 top cities. It is therefore important to evaluate future of both these asset classes across the 6 cities. He wonders, what are the key drivers for demand for both residential and commercial asset classes in India? What drives demand for commercial space across the top 6 cities? is it the growth of office jobs or GDP or working population or something else? He also looks at how big is the current commercial office space across the top 6 cities and what is the historical trend for office space uptake over the last 5 years. He also reviews the announced supply for commercial office space in the next few years along with current inventory levels in these cities. (Exhibit 2A&B) What drives demand for residential real estate across the top 6 cities? He comes across an S-Curve (Exhibit 4) in the industry report which states that all household consumption (including housing expenditure) typically follow an S-curve that varies based on GDP per capita of that country. He wonders if this framework could be applied to the Indian cities in question, if yes, how? He also looks at current residential inventory (i.e. Housing units announced by developers but currently unsold) across cities. He also reviews the number for past consumption (sales) trend across the 6 cities. (Exhibit 3A&B) He then sums up his thoughts as follows: 1. Drivers: What are the key drivers for demand for both commercial and residential real estate market across 6 cities, in the long run 2. City analysis: Which city is likely to have highest net demand (net of upcoming supply or existing inventory) across these 6 cities a. For commercial real estate b. For residential real estate

3. Factors: What are other factors which he should keep in mind when thinking about entering a city Problem statement for case study solvers: 1. Drivers: Provide qualitative assessment of key drivers for both commercial and residential real estate demand 2. City analysis: Perform quantitative analysis to calculate net demand using data provided in exhibits and external data through research as required. Specify sources, state assumptions taken and also highlight shortcomings (if any) in the data or analysis 3. Factors: Provide qualitative discussion on key factors to consider for market entry into a new city Exhibit 1: Few financial figures for Mehta Group: Sales in FY18: 10,000 Crores FY18 Sales in Mumbai Metropolitan Region : 9,000 Crores Contribution of various verticals to Group s Revenues: Vertical Residential Commercial Retail Contribution 92% 6% 2% Exhibit 2A: Current inventory and upcoming supply in commercial space across top 6 cities: Cities Mumbai Pune Bangalore Hyderabad NCR Chennai Current Inventory (msf) 1 25 10 15 8 40 4 Announced Supply (next 5 years) 20 15 35 20 80 20 Rental prices (Rs./sf/month) 160 60 60 45 80 50 Current Occupied Office Space (msf) 1 80 60 135 50 85 50 1. Figures at the end of FY18 Exhibit 2B: Commercial consumption figures 2 (in msf) for the past 5 years across top 6 cities: Financial Year (FY) Mumbai Pune Bangalore Hyderabad NCR Chennai 2014 5.8 4.2 6.0 3.5 8.2 3.6 2015 4.3 5.0 17.1 4.3 6.1 4.3 2016 5.5 7.6 10.6 4.8 10.7 3.8 2017 3.8 3.7 10.6 6.8 7 3.4 2018 6 2.5 8 3.6 3.4 1.7 2. Consumption for commercial is defined as rental leased office space by companies in a given year

Exhibit 3A: Current inventory in residential space across the top 6 cities 3 : Cities Mumbai Pune Bangalore Hyderabad NCR Chennai Current Inventory (msf) 4 Current avg. price Rs/ sf 10,000 5,000 5,000 4,500 4,500 5,000 3. Inventory is defined as supply which has been announced by developers but currently unsold 4. Inventory at the end of FY18 Exhibit 3B: Residential consumption 5 (sales figures in msf) for the past 5 years for the top 6 cities: Financial Year (FY) Mumbai Pune Bangalore Hyderabad NCR Chennai 2014 80 52 90 35 98 30 2015 86 55 88 32 75 26 2016 87 53 80 38 79 21 2017 75 44 63 37 59 21 2018 64 38 51 33 41 14 5. Residential consumption is defined as sales to homeowners in a given year Exhibit 4: Theory of S-Curve: All the consumption categories form an S-curve with a different adoption level in terms of GDP per capita as can be seen from the graph below.

The same story holds for real estate where expenditure on housing takes an uptick at GDP per capita levels of 10000 USD PPP. At a macro-level, this augurs well for India which has just started on the exponential part of the curve. S-Curve equation: Y = -1E-10X 3 + 9E-06X 2-0.0669X + 195.2 ; where Y and X are as indicated on the graph above Notes: 1. In order to complete the case study, candidates will be required to and are encouraged to use external research e.g. industry reports, new articles, stats 2. Entries will be evaluated on soundness of logic and analysis and rationale provided 3. Sources, assumptions made for calculation purpose should be indicated clearly as part of submission