Zillow Group Inc (NASDAQ:Z), Opendoor Technologies Inc (NASDAQ:OPEN) and Offerpad Solutions Inc (NYSE:OPAD) all told investors that they had the better mousetrap when it came to iBuying. But recently, investors have begun to question whether iBuying is a sustainable business model.
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
Long-Term iBuying Economics
A key question to ask when thinking about long-term iBuying economics is: what value are business models providing to their customers? In the US, iBuying companies allow homeowners to sell their homes instantly rather than wait for an average of two months to incur the related costs of mortgage, staging, and real estate agent fees.
The issue for iBuying companies in the US, however, is that these expense categories for consumers are decreasing over time. The average thirty-year mortgage rate in the US, for example, is currently 3.4%. This means that the average holding cost between listing to sale is just 0.56% of the value of a home.
At the same time, there has been a marked reduction in customers’ willingness to accept a large discount (as they had in the past) and multiple iBuyers have entered the market, increasing competition and reducing the margin available to each company. Although each iBuyer has a unique pricing algorithm, the publicly available data set amongst US Multiple Listing Services (MLS) means U.S. buyers are paying a premium.
iBuyers In India
The situation with iBuyers in India is fundamentally different.
First and foremost, the Indian market is focused on selling brand new homes from developers to first time homebuyers, whereas in the US, iBuyers are focused on old homes sold by homeowners.
India’s investor-owned private sector banks are renowned for their high lending spreads and high return on equity, which are a result of the Indian central bank’s judiciousness with distributing bank licenses. There are less than 30 private sector banks in India.
Because of the high interest rates (12%-24%) charged by these banks to both their customers and non-bank financial companies for onward lending, even real estate developers with pristine reputations for quality and on-time delivery, pay double-digit interest rates.
As a result, holding on to finished housing inventory for an extra six months is a real expense. This opens the window of opportunity for proptechs to arbitrage the high cost of capital and purchase finished or nearly finished housing directly from developers who are keen to transact on large volume sales at a discount to relieve some of the cost pressure.
Another fundamental difference is the opacity of the Indian residential market. India doesn’t have a unified Multiple Listing Service(MLS), which, in the US, allows for information arbitrage, particularly around pricing. The Indian market is not as transparent, however. There is a lack of data across the landscape including recent transaction data and location/mapping software. Data, when available online, is in archaic formats, and vernacular state level languages. It’s often cumbersome to obtain the data and more often than not one needs to resort to a brute-force online approach to obtain it. The data available offline needs to be obtained by a combination of real estate reconnaissance or a feet-on-the-ground approach.
Collecting Offline-Online Data
Case in point: the endeavor of collecting this offline-online data is a massive one and can only be done neighborhood by neighborhood using a combination of the processes mentioned above.
Despite the cumbersome process of data collection, proptechs like Clicbrics have seen an opportunity in building proprietary databases using government databases, developer relationships, aggregators of data for institutional investors, and broker contacts, to guide the transactional experience of the founding team, which has invested close to $1bn in development projects and has built and sold over ~15,000 homes across India. This on the ground experience in Indian real estate is extremely hard to replicate for a new entrant or a current proptech, which are mainly focused on lead generation.
In essence, the Indian market offers both cost of capital arbitrage and information arbitrage, elements that we believe are missing in the US iBuying model and are necessary for sustainable positive unit-level economics.
Clicbrics is in the unique position of being the only proptech company in India with the appropriate risk management experience and developer and banking relationships to scale quickly, without striving to buy market share like models in the US.
Article By Rohit Malik, ClicBrics founder and CEO
About the Author
Rohit Malik is the founder and CEO of Clicbrics, India's leading proptech company focused exclusively on solving the first time homebuyer's pain points. Please visit us @ clicbrics.com