Myth #8 : Geographically Diversified Developer offers better Risk-Return Proposition

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(Category: Finance)
Also published in CNBCTV18



As an equity investor should you prefer investment inequities of a geographically diversified or that of a developer focussed in limited locations. The obvious answer would possibly the former. Unfortunately, the same is not true


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On the face, a geographically diversified developer appears to have lower risks than a developer operating in limited locations. So, the former is often believed to be a better equity investment option for a portfolio investor. Is it indeed true?

One of the key criteria for assessing the investment potential of any equity stock is the competitive advantage enjoyed by the company. In case of a real estate developer, the Competitive Advantage to an extent lies in things like construction skills, design skills, etc. But most of these skills can actually be outsourced and therefore, the power of these advantages gets diluted. The true competitive advantage of a developer lies in the “Local Knowledge”. This comprises knowledge of land parcels, of regulation, of local markets etc. 

It is almost impossible for any developer to build expertise in Local Knowledge across a large number of geographical locations.  Moreover, due to the complex web of activities involved in the real estate operations, pre-defined processes cannot handle the challenges of real estate business. Regular intervention by top management becomes essential.  For these reasons, expanding operations beyond a few geographical locations does not result in superior returns for the developer. It surely results in increasing the risk of the business.  

Therefore, for a portfolio investor, developers focussed on few geographies, generally, offer better Risk-Return proposition than developers present in a large number of locations across India. 








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