EMB
7. USE CAPITAL WISELY.
“Risk in integration? Yes, there is an element of truth to that…
For many companies, contracting is a means to an end and
most people shouldn’t do it. But it’s different here at Sobha,”
says Siddharth Vaikunta.
Mastering the real estate cycles leads to enhanced decisionmaking with regard to capital and investment allocation.
To this end, it is imperative that companies (a) focus on
forecasting where demand is most likely going to grow, (b) size
their investment needs to satisfy that demand and (c) develop
a good understanding of every business asset.
Sobha’s integrated model helps minimize the inherent impact
of real estate cycles by providing the ability to manage and
control the supply chain to suit changing conditions. The
group establishes a base capacity that keeps the factories
running when demand is low, and increases capacity when
demand is high.
Meanwhile, careful analysis of break-even costs helps Sobha
calibrate the entire production chain and meet demand as
it arises by scaling production units to the market’s needs.
Specifying how many workers and management staff would be
required in advance and assessing equipment requirements
invariably minimizes unnecessary capital allocation and
improves efficiency. At Sobha Group, PNC Menon also stresses
the importance of maintaining debt at half the level of equity.
These preemptive actions help to balance assets and fixed
costs according to cycle demands.
Of course, hiring mediocre contractors can also keep costs
in check, but for large developers that target the higher ends
of the market, creating internal capabilities that enable highquality output should take priority over cost.
The Lessons Beyond Real Estate:
• Integration requires careful capital budgeting, with
base case investments aligned to the expected market
demands.
• Backward integration allows companies to scale and
adapt operations according to changes in market cycles.
8. DIVERSIFY IN DIFFERENT GEOGRAPHIES.
“Our current plan is to scale up, go to new markets and grow
from 3.5 million square-feet per year to eight or nine million,”
says Ravi Menon.
“Time and again, whether in Oman, India or UAE, Mr. Menon
has disrupted quality standards, regardless of the competitive
landscape. His uncompromising commitment to quality
permeates throughout the organization and it is what
ultimately enables us to deliver a truly differentiated product,”
says Raj Chinai.
“We were growing at a rate of more than 79 percent CAGR. In
terms of annual revenues we went from 138 million rupees
[in 1999-2000] to 145 billion rupees [in 2007-2008]. India was
experiencing 10 percent growth per year. We wanted to follow
that growth by expanding to other cities, meeting demand and
providing integrated townships,” says JC Sharma.
Diversifying and expanding operations into different
geographies is vital to sustaining growth, but plans to establish
long-term presence in any given country must be justified by
sound research which demonstrates that projected levels of
demand would be sufficient to sustain business.
Sobha continuously explores new locations where documented
demand for exceptional products exists, or, as was the case
in India, where quality is lacking. In the latter scenario, an
established developer can build on its competencies and
become an industry pioneer. Furthermore, by improving the
overall quality of a market, developers can indirectly create
the need for enhanced products.
Of course, such experimentation has its own set of risks, but
when products are consistently delivered on time and the level
of quality is enhanced after each project, customer demand
and brand loyalty will follow.
The Lessons Beyond Real Estate:
• Integration can offer competitive advantages in more
than one market—when one masters the model, more
markets can open.
• By improving quality, companies can indirectly develop
demand for enhanced products.
TO INTEGRATE
OR NOT TO INTEGRATE
Full integration has created substantial value for Sobha Group.
However, such a model involves significant risks. Backward
integration in real estate requires additional capital investment and
management effort. Then, there is the inherent risk of integrating
many business units under one roof, thereby making it challenging
to grow profitably. But more importantly perhaps, is the stark reality
of an “all or nothing” scenario: backward integrated models cannot
be easily imitated or partially reproduced. All risks considered, real
estate developers have to be sure that the reward is there.
For those who get it right, backward integration can create
a significant competitive advantage in the long-run, enabling
companies to tailor their products as markets change. An
inside look at how Sobha runs its business gives a clear picture
of what integration means in real estate and the value it can
provide to end-users.
Where some firms lack clarity regarding team responsibilities
and business plans, Sobha focuses on a core set of values and
hedges its risks through a combination of careful business
planning, constant refinement of its model, and hiring and
training the right people. But perhaps most importantly,
as with many a great venture, Sobha lives and breathes the
vision and passion of its founder—an achievement all business
leaders should strive for, integrated model or not.
Andreas Georgoulias. Lecturer in Architecture and Senior Research Associate at Harvard Graduate
School of Design. His current research includes the development of the Gulf Encyclopaedia for
Sustainable Urbanism, sponsored by the Qatar Foundation.
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