Industry Report
Recent Trends of Development and Competition Rivalry in the Real Estate and Construction Industry
Executive Summary
For the past decades, the UK real estate industry has undergone various faces of growth. The most recent was the decline phase experience during the 2008/ 2009 economic crisis. Trends in 2010 seen to dictate that the sector might be resuming its growth but the industry players are not sure on how to act. The report provides an analysis of the current trend in the real estate and construction industry with aim of providing players in this industry information to base their decisions on. The analysis was based on Porters Five factors model. The study took the design of a historical analysis where data for the past 5 years were corrected and analyzed. The report found out that the industry is undergoing a renewed growth face.
Introduction
According to statistics by Property Wire (2010), the UK real estate and construction industry has begun to show signs of recovery from the economic crisis that reached its peak in 2008. However, players in this industry still remain cautious with statistics indicating that 84% of the companies have no plans of expanding in the next three years. The aim of this report is to provide an analysis of recent trends of development and competition rivalry in the UK real estate and construction industry. This report will be useful in assisting the industry players in making their strategic decisions.
Audience
This industry report targets the real estates and construction industry players and in particular, the actual building and construction companies. Since the report was tailored for these companies, corrected data and methods of analysis were focused on items relevant to them.
METHODS
Porters five forces model was adopted as the basis for the industry analysis. Evaluation of the five forces was carefully conducted on the Real Estate industry before arriving at the conclusion. 5 years of data were used to identify the required trends in the industry. Other social economic forces that prevail in the industry were also analyzed.
Design of the Study
This study took the approach of a historical analysis research design. Historical analysis involves studying past events in order to establish a trend or sequence of activity (Wyche, 2006). Relating occurrence of events with time is usually the emphasis in this type of research. This type of design was the most convenient since it is cheap, appropriate for studying large population and the most appropriate for identifying trends which is inline with the objectives of the analysis. Data was mainly conducted from secondary sources.
Secondary Data
Secondary data refers to data that was collected by somebody else for another purpose (Boslaugh, 2011). Sources of secondary data included; published research and reports, statistics from various governments’ agencies, periodicals, articles and publication available online and on print and reports and memos of companies including sales reports.
Data Collection Techniques and Instruments
Data were partly collected from real estate building and construction companies’ records and documents. These included records such as; sales reports, accounts documents and memos among others. Economic reports covering issues about the real estate industry from government and other external bodies were also used. The goal of this exercise was to collect comprehensive data concerning the customers, nature of the industry, nature of the market and the nature of competition in the industry. Only records that covered the last five years and that were relevant to the achievement of the objective of the analysis were used in the analysis.
Data Analysis
Qualitative methods of data analysis were employed in this study. One qualitative method used was content analysis. This involved a detailed analysis of the texts and literatures identified for the purposes of the study (Marshall, 2006). Since multiple sources of data were used triangulation method of analyzing data was also used to arrive at the conclusion. Triangulation refers to a research process that entail mixing of data types with the main aim of validating the claims by these types of data (Olsen, 2004).
Discussion
I. Social Economic Factors
Social economic factors refer to factors such as; rate of employment, inflation rate, interest rate, demographic factors, existing laws and regulations. These factors have the ability to influence the market and competitive trends of the real estate and construction industry. In this study this factors were divided into two broad categories;
a. Political and environmental factor
Political and environmental factors include; legislations, policies, by laws and other political or environmental measures that may affect the industry. An analysis of how such factors have evolved will help us project the path that the industry is going to take in the future. Statistics indicate there are tougher government regulations on the industry today which are likely to retard growth (Levin & Pryce, 2009).
b. economic indicators
These refer to indicators such as; rate of exchange, inflation rates, interest rates and employment rates. Data collected indicate that these economic indicators are not in favor of the Real Estate Industry (Walayat, 2009). This date indicate that low real interest rate and employment rates have led to slower growth of the Real Estate industry (Levin & Pryce, 2009).
II. Porter’s Five Forces Model
The Porters Five forces model enables an organization to understand the external forces within the industry that are likely to affect the organization’s competitiveness. This model formed the basis of our industrial analysis. The five forces in this model include; threat of new entrants, suppliers, buyers, substitute products and existing competition (Ward, 2009).
- Threat of New Entrants
This force refers to the easiness of new companies to join the industry (ward, 2009).This section involved analyzing the barriers existing in the real estate and construction market that may hinder new companies from entering. Major barriers that were considered for analysis included; capital requirement, access to distribution channel and brand identity
- Capital Requirement
The Real estate and construction industry requires high capital investments. High capital investments may act as barriers to new entrants (Hindinger, 2010). This data was obtained from existing reports and government websites.
- Government Regulations
The real estate industry in the UK and Europe at large is governed by tough regulations (PWC, 2011). This data was also obtained from existing reports.
- Access to Distribution
The real estate has a relatively short distribution channels. In most cases the channel may involve two to or at maximum three intermediaries (Levin & Pryce, 2009). Therefore, access to distribution is not an adequate barrier to new entrants.
- Suppliers
This force refers to the bargaining power of the suppliers. Suppliers to the building and construction companies are such as; cement and other building material suppliers, services outsourcing firms and labour supply. Factors considered under this force included; supplier concentration, presence of substitute inputs and threat of forward or backward integration.
- Supplier Concentration
This refers to the number of suppliers in the industry and their degree of organization. Fewer suppliers mean more power for them and therefore they will dictate the value of inputs required by the industry (Ward, 2009)
- Presence of Substitute Inputs
Substitute refers to material that may used in place of the ones provide current suppliers. Substitute for some building material will be easier to find while other will be difficult. Presence of substitute inputs reduces the bargaining power of suppliers.
- Threat of Forward or Backward Integration
Forward and backward integration by suppliers will mean more bargaining power for them and reduced power for real estate businesses.
- Buyers Bargaining Power
The bargaining power of buyers will also influence the competitive environment of the industry (Ward, 2009). Higher bargaining power will mean that the buyers control the market prices while lower power will mean larger influence by the industry players. Buyer bargaining power is mainly determined by; the concentration of buyers; access to information by buyers, price sensitivity of the buyers and organization of the buyers.
- Buyer Concentration
This refers to the number of buyers existing in the market. The 2008 economic crises that affected most part of Europe affected the purchasing power of consumers including those from the real estate market segment (PWC, 2011).
- Buyer Information
This refers to the level of information the buyers has with regard to existing market prices, quality of product, availability of alternative and option among other factors. Buyers that possess a lot of information concerning a product or service have greater bargaining power.
- Price Sensitivity
Price sensitivity refers to the degree of reaction by the buyers to a given change in the price of the product (Levin & Pryce, 2009). Real Estate buyers are highly sensitive to price and this increases their bargaining power.
- Organization of Buyers
Buyers usually have greater bargaining power when they are well organized into consumer groups, cooperatives or associations. However, buyers in the UK real estate industry are less organized into such outfits and therefore their bargaining power is reduced.
- Substitute Products
Substitute products in Porters model refer to products that the buyers may use to replace the products provided by the industry in question. Existence of many substitutes for the industry will mean that the buyers will have greater bargaining power than the industry players. Substitute to real estate may include other spending or investments options by the buyers. For example, a buyer may decide to buy stocks instead of buying a house. Threat by substitutes to the industry are largely determined by; prices and quality of substitute and the buyers affinity to these substitute.
- Relative Price/ Performance Relationship of Substitutes
When the substitutes present high utility for the consumers or if their prices are much lower that that of real estate, they become greater threats to the industry (Ward, 2009). The real estates are forms of investments to the buyers and have a number of alternatives that the buyers may opt for instead (Levin & Pryce, 2009).
- Buyer affinity towards Substitute
Existence of substitute that are more appealing to the potential real estate consumer also present a threat that may affect the competitive environment of the industry. For example, if investing in stock becomes more profitable than investing in housing, the threat of this substitute will be more significant to the industry.
- Existing Competition
Under this force competition between the established companies within the real estate industry is analyzed (Ward, 2009). The analysis entails identifying their numbers, strength, structure, market share and factor that influence their ability to compete. Existing competition may be influenced by; degree of concentration, industry growth rate, product differentiation and exit barriers.
- Degree of Concentration and Balance among Competitors
Degree of competition refers to the number of competitors in the industry while balance refers to their financial, technical and other capacity. The more balanced competitors in the market the greater the intensity of competition.
- Industry Growth Rate (Past and Projected)
This section analyses the rate of industry growth of the industry as the higher the rate the lesser competition and vise versa. The rate of growth will determine the intensity of the competition.
- Product Differentiation
Product differentiation refers to introduction of unique features into the product that will distinguish them from those of competitors. Industries with highly differentiated products tend to have stiffer competition. However, real estate is not one of them.
- Exit Barriers
Exist barriers refers to factors that may prevent a company from existing the industry. These may be such as lack of alternative use of assets, high capital invested, high closure costs, loss of reputation and image and high write off costs.
Conclusion
Economic analysts have reported that the real estate industry in the UK has begun to recover from the effects of the global financial crises of 2008. However, players in this industry still remain adamant to commit their full resource into the industry because of the uncertainty that still grips the industry. The industry analysis report was aimed at providing an analysis into the industry so that industry players can have a basis to make their decisions upon. Based on statistics concerning the numbers of players in the industry; the rate of growth being experienced; volume of sale and the characteristic of the market, this report concludes that the UK real estate industry is now experiencing a renewed growth stage in the product life cycle (Rejuvenation). The industry was at its peak in 2007, but the onset of the financial crisis brought a decline reducing growth and forcing out many companies. However, this trend has been reversed and signs for growth are now visible.
Recommendation
The growth stage in the product life cycle is characterized by a growth in the market, increase in sales and increased competition but which is yet to reach the saturation point (Komninos, 2002). At this stage company should focus on modification and differentiation of product to prevent loss of market share to companies that may copy concepts.
The companies should also focus on improving productivity to take advantage of the growing market and on increasing efficiency which will consequently increase profit margins (Komninos, 2002).
References
Boslaugh Sarah (2011). An Introduction to Secondary Data Analysis. Cambridge University Press. Retrieved on April 22, 2010, from http://assets.cambridge.org/97805218/70016/excerpt/9780521870016_excerpt.pdf
Hidinger J. (2010). High Capital Requirements. April 22, 2010. http://www.ehow.com/list_6522892_high-capital-requirements.html
Komninos I. (2002). Product Life Cycle Management. April 22, 2010. http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf
Levin E. & Pryce G. (2009). What Determines the Responsiveness of Housing Supply? The Role of Real Estate Interest Rates and Cyclical Asymmetries. April 22, 2010. http://www.gla.ac.uk/media/media_133560_en.pdf
Marshall (2006). Data Collection Methods. Retrieved on April 22, 2010, from http://www.sagepub.com/upm-data/10985_Chapter_4.pdf
Olsen W. (2004). Triangulation in Social Research: Quantitative and Qualitative Methods can Really be Mixed. Cause Way Press. Retrieved on April 22, 2010, from http://www.ccsr.ac.uk/staff/Triangulation.pdf
Property Wire (2010). Real Estate and Construction Industry in UK more Confident than a Year ago, Report Indicates. Retrievedon April 22, 2010, from http://www.propertywire.com/news/europe/uk-property-build-hope-201008204425.html
Price Waterhouse Coppers (2011). Europe’s Real Estate Industry must Adapt to Tougher Regulations, Tighter Credit: Emerging Trends in Real Estate. April 22, 2010. http://www.pwc.com/sk/en/tlacove-spravy/assets/2011/2011-02-11_Emerging-Trends-Real-Estate-Europe_EN.pdf
Ward D. (2009). An Overview of Strategy Development Models. April 22, 2010. http://129.3.20.41/eps/get/papers/0506/0506002.pdf
Walayat N. (2009). UK Housing Market Crash of 2007- 2008 and Steps to Protect your Wealth. The Market Oracle. April 22, 2010. http://www.marketoracle.co.uk/Article1893.html
Wyche S. et al. (2006). Historical Analysis: Using the Past to Design the Future. LNCS, 35-51. Available at citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.92… –
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