Myth # 5: Real Estate Development is a very scalable Business model
Also published in CNBCTV18.com
Real Estate can be very profitable but is it a scalable business?A lot of people believe real estate is a very scalable business, but in reality, it is not. There are numerous factors which hinder the future growth of real estate, making it non-scalable.
Huge profits made by developers, quite often makes 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 a larger number of activities. Thus, the overall complexity of operations is quite high, and every new project comes with different kind of complications. 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 real estate business can give large profits but remains low on scalability.