Mahindra War Room 2017 Realty & Infrastructure Business Caselet

MAHINDRA REALTY & INFRASTRUCTURE SECTOR:

ACING THE RENTAL HOUSING BUSINESS

Mahindra Group forayed into the realty business in 1994, with a dream of transforming
the way India lives and works. Over the last 2 decades, Mahindra has built over 13
million square feet of residential and commercial properties, with 9.5 million more under
development across the Mumbai Metropolitan Region (including Mumbai, Thane,
Palghar, Alibaug & Boisar), Pune, Nagpur, Nashik, Ahmedabad, National Capital Region
(New Delhi, Gurgaon & Faridabad), Jaipur, Hyderabad, Chennai and Bengaluru.

BUSINESS BACKGROUND
Mahindras realty business comprises of 3 distinct business lines premium residential
developments offered under the Mahindra Lifespaces brand, affordable housing
projects under the Happinest brand and large format integrated cities under the
Mahindra World City brand. The residential developments offer apartments and villas
with world class modern living in gated communities, and provide open green areas for
recreation and relaxation. Amenities often include swimming pools, squash courts,
gymnasiums, jogging tracks, community halls, crches, club houses and party facilities,
though some formats targeted at different types of users (such as affordable housing)
may not offer all the amenities. This strategy of growth has strong optionality as the
business can expand in all three demand segments. The business has been able to
post strong growth despite disruptions like demonetization and tax regulation changes.

Mahindra World City pioneered the concept of integrated cities, designed to create a
balance between Livelihood, Living and Life. These integrated urban centres are
located near existing metros and comprise SEZs, Industrial Parks, Retail and Social
Infrastructure. The two Mahindra World City developments in Chennai and Jaipur have
been carried out in PPP model with the respective state governments and together
cover over 4,600 acres and house over 130 leading MNCs and Indian companies.
Mahindra Realty is committed to sustainability across all business verticals. A pioneer in
the Green Design Healthy Living philosophy, Mahindra Lifespaces was among the
first companies to receive Green Homes pre-certification for all their residential
projects, by the International Green Building Council (IGBC). Similarly, both the World
Cities have been developed on the principles of sustainability. MWC Chennai is Indias
first IGBC Gold (Stage 1) certified Green Township. It also became the first zero food-
waste development and also the first to set up an off-grid roof top solar power plant in

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Tamil Nadu. MWC Jaipur is the only private city under the C40 Clinton Initiative and
became the 1st in Asia to be certified as Stage 2 of C40.
LIVE CHALLENGE: ACING THE RENTAL HOUSING BUSINESS:

Owning a home has always been every Indians biggest dream. At least till a few years
back. And until about 20 years ago, it wasnt impossible for that dream to come true.
Not anymore. Today, it is virtually impossible to buy a house in a big metro, thanks to
the astronomical increase in property prices over the past two decades. At the same
time, generational changes have seen a shift in preferences many people today are
happy to rent a house rather than own one. This is driven by the flexibility, minimal
capital requirements and proximity to work-place that rental housing provides. These
trends have created a significant segment of Rental Housing, in India, as it has done
in the rest of the world. The proverbial hedonistic treadmill is driving people to realize
that the potential benefits of investing into houses might not outweigh other investment
avenues. The more such believers the truer this paradigm becomes. Companies need
to innovate because the need for living spaces would not diminish.

Globally, rental housing forms an important component of the Real Estate sector. In
many of the developed countries, rental housing accounts for 30-60% of the total
housing stock. In India, however, this percentage is just 11%. While the numbers in
India are skewed by the large rural population (where home ownership is highest), the
picture is not very different in cities. For example, Delhi has only 28% rental housing
compared to 89% in Berlin, 49% in Rotterdam, 55% in New York and 41% in London.
These differences have been driven by a number of factors including social acceptability
of rental housing, affordability, rental yields, urbanization and migration as well as
government policies. Rental housing also plays an important social role in providing a
home for transitory groups such as migrant labour, students, new entrants to the work
force as well as those at the bottom of the pyramid who cannot afford to ever buy a
house.

As India becomes increasingly urbanized, rental housing will start playing an ever-
bigger role in solving the housing problem and realizing the Housing for All mission.
Research suggests that about 590 million people will live in cities by 2030, nearly
double the population of United States today. Housing them will require addition of
about 700 million sq. meters of additional built space - equivalent to a new Chicago city
every year. 68 Indian cities will house more than a million people each by that time

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which is a huge positive asymmetry opportunity where Mahindra Life-spaces venture of

building new city cluster can potentially bring them huge upsides while protecting them
against downsides as the land parcels would be on the fringes of major towns and
investment would be in the PPP mode. It is estimated that about 35% of every city hosts
a floating population, who live in the city but do not plan to own a home there. As the
country goes through this period of high economic growth and urbanization, the demand
for rental housing will increase dramatically across all segments. Policy makers in India
have traditionally focused on driving home ownership. The laws of the land such as the
Rent Control Acts favour tenants and make it difficult for the owners of the property to
(in some cases) increase rents in line with the market realities or to evict tenants. This
has resulted in a significant stock of vacant homes as owners prefer to keep the houses
empty rather than risk renting them out. Even in case of social housing, the
governments focus has historically been on creating stock for ownership through slum
re-development, EWS and LIG housing built by state housing corporations, cross-
subsidy models for private developers and so on. However, in the recent times, the
government has recognized the importance of rental housing and moved to make the
necessary regulatory framework to encourage rental housing.

People who opt for Rental Housing may be categorized into 3 segments:

Those who are driven by Lifestyle considerations: these are primarily digital
nomads and millennials, who do not want to be tied down to one place. It is
important for them to be able to move from one place to another, seeking diverse
experiences. They value the flexibility provided by rental housing. They also do not
want to tie up their capital in assets but would like to spend it on experiences,
traveling to new places and so on.

Those who are driven by Work considerations: these are people who move from
one location to another as part of their work, and are therefore reluctant to invest in
one location. They usually belong to varied set of economic classes, ranging from IT
professionals, Government employees in transferable jobs, skilled and semi-skilled
construction workers and so on. They usually live in rented accommodation for most
of their working lives, and buy a house closer to retirement, typically in their home
town. This group also includes students who normally intend to be in the location of
their college or university, only for the duration of their studies.

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Those who are driven by Financial considerations: This group comprises of

those people who might want to buy a house but cannot buy one due to non-
affordability. The lack of affordability could be absolute (someone who cannot buy a
house, no matter where) or relative (someone who can buy a house in far-flung
suburbs, but not in areas close to his/ her work-place). This group includes those
renting in the formal segment as well as in the informal segment (slums, unapproved
houses, kuchha homes etc.) as well as the homeless.

Thus far, Mahindra Realty has focused on selling homes. But the megatrends have
created an opportunity for disruption, by creating a unique segment of Rental Housing,
with distinct needs. Can Mahindra use optionality to change course in the Realty
business, by taking the positive side of uncertainty (the need for more homes), without
serious harm from the negative side (lesser buyers, those more are in need for homes),
due to those who prefer to rent, either due to unavailability or unaffordability.

With this new view of the situation, please evaluate the rental housing
opportunity as a Business Vertical. Is the Indian market truly ready for an
organized rental housing product? If yes, what are the key drives of this change?
What would be the major customer segments in terms of volume and revenue
potential that will drive the market? If the opportunity is indeed large, what will it
take for Mahindra Realty to succeed in the market? What product offering
(physical product plus services) is preferred by potential customers? What
operating models have emerged globally and which of these will be relevant and
likely to succeed in India? Would financial investors invest in the product and
why?

Develop a comprehensive business strategy for Mahindra Realty to dominate the

rental housing business in India.

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