Business Diversification of Real Estate Company

Thailand’s economy grew at the lowest rate in the past several years resulting in a slow growth in construction. Construction companies encounter financial problems from external factors such as price fluctuation of raw materials and internal factors such as cash flow shortage. Therefore, financial relationship is quite complex, is contacted with lenders, investors, sub-contractors, employees, and customers. The company is careful for managing finance in each function and considering financial problem that can affect financial management in the company.

Business diversification is widely used and the supply chain is one form of diversification. The real estate is one of the business diversify into related business including material supplier, construction, and real estate. The fundamental of the diversification is to create value for stockholders. The additional value is created through synergetic integration of a new business into the existing one thereby increasing its competitive advantage. The real estate company should concentrate on each link between real estate developer and its members especially operation and financial inter-relation. The real estate company decides to diversify because it is more benefits in term of operation and financing. To study business diversification can decrease the cost of construction and can generate the diversity of incomes. It can also make more profit margins and increase the strength of financial capability in Real Estate Company.

Ms. Pichaya Bhanubhak made a study aimed to identify the inter-relationship among real estate developer and supply chain members. Next step, this study is to define the financial relationship through the business diversification and propose the guideline in financial strategy to Real Estate Company. To attain the main objective, three sub-objectives were needed to accomplish: i) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification; ii) to investigate how the real estate developer can diversify business into construction, and iii) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.

Conclusions:

The Financial and Operational Inter-relation of Business Diversification in Real Estate Developer

Based on the inter-relation between real estate developer and its parties, it is found that organization business process consists of three major issues including financial, spending, and revenue. There are three parties including material suppliers, land agents, and skilled contractors/skilled labors significantly affect on the operating and financial conditions in the business. Construction material cost, land cost, and labor cost are the main cost of real estate so these expenses relate to sale prices of housing units. Customers are the key parties also relate to the major source of revenue in the company. The key factor has impact on the number of customers who buy the housing products is the sale prices of housing units.

1.There are two parties including financial institutions and investors related to financial. Financial institutions give loan to the company and the company pay back principal and interest payment to them. Investors invest in equity in the company and the company pay dividend back to investors at the end of year. Financial is the process to find funds for operation and investment. The company uses fund for operation to spending to material suppliers, land agents, skilled contractors/skilled labors, and employees. Company uses fund to invest into subsidiaries.

2.Spending comprises of four parties are material suppliers, land agents, skilled contractors/skilled labors, and employees. Cost of materials is the one of the major part in cost of real estate because company purchases materials in high volumes which are more costly for the company. So, company purchases the major construction materials by inviting tenders and entering into long-term price agreement as 3-6 months or 1 year to protect fluctuation of material price.

3.Company purchases land from owners and agents when it develops a project. Skilled contractors and skilled labors hire as outsource contract. High value projects or urgent tasks, company uses bidding process to find competent contractors.

4.Customers are the major source of revenue and the company receives revenue from sales of real estate. More than 90 percent of company’s home buyers borrow by mortgage. Customers lend money from the commercial banks or Government Housing Bank to buy houses and they use their land and house as collateral. They pay principle and interest payment at MRR 4.75% (in 2009). However, the economic slowdown and changing policy of commercial banks or Government Housing Bank on mortgage loans impact confidence and spending of the customers so these situations affect company’s revenue. The company will take the risks of rejection rate of customers that will decrease the revenue from sales of real estate. Thus, the company has appointed a working committee to regularly monitor and track on the bank’s loan policy and the economic status in order to adapt the appropriate strategy.

The business diversification of real estate developer

From the case study, real estate developer diversified into construction business and it also diversified business into sales of real estate. Moreover, the company expands its business in traveling city such as Phuket and Chonburi and foreign markets to capture the business opportunity.

The company diversified into seven subsidiaries that are divided by type of business as following:
1) Subsidiary A to operate as a contractor for home decoration and construction

2) Subsidiary B and Subsidiary C to operate as property developers to sale of real estate

3) Subsidiary D as investors for investment

4) Subsidiary E to operate as real estate developer and housing construction for construction and development of oversea projects.

5) Subsidiary F to operate as real estate developer and housing construction in India

6) Subsidiary G operates as a contractor in India. Furthermore, company manages construction works and constructs houses by itself.

Company A, Subsidiary B, and Subsidiary C sustain in the old market by capture the real estate business. Subsidiary A expands business into construction but it still capture in the old market. Subsidiary E and Subsidiary F expand into new market to capture the real estate business. Moreover, Subsidiary E, Subsidiary F, and Subsidiary G expand to capture the contractor business into new market. There are several benefits from the business diversification as following:

1.The company can reduce the construction period that are shorter than conventional method. The construction of one-story townhouses can build 30 days and two-story townhouses are complete in 60-80 days. The construction period of single-detached houses is about 75-90 days.

2.The company diversified into subsidiary so it can invest more in R&D to improve the efficiency of the business and to improve in high technology to build houses. The company can reduce the cost of construction. Thus, the company can set the sale price that is lower than other developers. The company’s sale prices for townhouses are 15-20% lower than other developers and the prices of the single-detached houses are 10-15% lower than other developers.

3.The company is granted with the Board of Investment (BOI) to exempt tax from BOI promotion privileges because it can build houses that not exceeding 600,000 baht at a unit price including land cost. The company gets the exemption the corporate income tax on net profits receives from sale of residential units in the promoted projects for a period of five years.

4.The company invests into subsidiary A as home decoration and contractor. The company is more flexible to get some benefits. Company separates into two contracts when customers buy houses. The first contract is to sell land and houses that not exceeding 600,000 baht at a unit price to exempt tax from BOI promotion privileges and second contract is decoration by the subsidiary company. The company hires the subsidiary to work in its project.

5.The company invests into subsidiary B and subsidiary C to sales of real estate. It is more flexible in some laws and regulations for the EIA report. Land development for residence, the number of units is more than 500 units or the area is more than 100 rai so the company must do EIA report to office of Natural Resources and Environmental Plans and Policy. Subsidiary B or Subsidiary C develops project after the company in the exceed units to avoid the EIA report.

Her thesis abstract is copied and pasted below.

Abstract

The property market was volatile and impacted by political instability and global financial crisis. These causes affect consumer confidence. However, real estate company adopts business strategy by diversifying business to maintain the business growth. The study focused on diversification of real estate into construction which can affect the operating and financial inter-relation in organization business process to determine the financial outcome of business diversification. The objectives of study are 1) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification 2) to investigate how the real estate developer can diversify business into construction 3) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.

The study used qualitative method by using case study as a research design. The research methodology begins with modeling of business diversification which comprise of preliminary modeling and verification. It continued with the data collection by using the modeling to design the case study questions for interviewing and to select the case study. Data analysis is conducted by using explanation which all important evidences are described.

The result from the study showed that there are three main issues in business organization process including financial, spending, and revenue. The financial is the part to find funds for operation and investment. The spending is divided into material cost, land cost, skilled contractors/skilled labors cost, and wages. The revenue comes from to sales of real estate to customers. Finally, the benefits of diversification are to exam tax from BOI promotion privileges, to reduce the cost of construction, to reduce construction period, and more flexibility to operate business such as in some laws and regulations for the EIA report. The modeling of business organization process, business diversification, and money management are developed and discussed in this study. Moreover, the analysis of causes and effects of business diversification are also proposed in this study.