Real Estate Myth #5: Property development is a scalable business model

Real Estate Myth #5: Property development is a scalable business model

uge profits made by developers quite often make investors and analysts conclude that real estate is a very scalable model. The fact is that real estate is very low on scalability.

Scalability for any business is high where beyond a point, incremental growth of business requires neither large capital nor specialised skills. Also, in a scalable business, every new customer adds more value to the business.

Most new users come to Facebook through references, requiring no major capital or specialised skills. And with every new user, the value of Facebook increases. But, in real estate business, every sale reduces the inventory available for sale, thus shrinking the future growth potential of the business. Replenishment of inventory takes time and requires additional capital which reduces the scalability of the business.

Secondly, real estate business comprises larger number of activities, thus the overall complexity of operations is quite high and every new project comes with different kinds of complexities. Specialised skills, therefore, remain key to growth in real estate. Hence, there is only an optimal number of projects that a real estate developer can efficiently manage.

All these factors ultimately create limitations to the growth of a developer. So, while the real estate business can give large profits, it remains low on scalability.

Myth Series: What is its purpose?

While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.

For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.

The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.