Updated: Jun 12
There can be economies of scale in the development of large-scale projects, but large development does not necessarily mean higher profitability. In this article, we will analyze the cause of the oligopolistic real estate industry, the reason for the emerging trend of small to mid-scale development today, and the advantage of investing in “the missing middle” market sector.
The real estate industry- an oligopolistic concentrated market
Throughout history, the real estate market has been an oligopolistic concentrated market with a high barrier to entry, predominantly controlled by a few major institutional players. The real estate industry tends to have numerous restrictions when it comes to letting new participants in, the majority of which revolves around geographical and financial limitations. At the same time, as a result of the highly concentrated market characteristic, supply elasticity is usually low and developers' pricing power is high thus allowing high-profit margin in the industry.
However, financial globalization has helped to create numerous investment vehicles to solve the problems inherent in this asset class, thus pushing down barriers to entry in the real estate industry. Fueled by better capital mobility and information dissemination, the real estate development industry today is no longer confined to its geographical and capital limitations with international retail investors' foreign direct investment (FDI). As a result, enabled by these retail investments, the real estate industry sees an increasing number of small to mid-scale developments booming in the market, as evidenced in CBRE's recent report on real estate capital flow (2020 Q1).
The missing middle: how mid-size development can operate below institutional players' radar
Smaller developers can operate below the radar of larger players with much better scrutiny. Their management team usually has more hands-on experience and a closer relationship with the project under their management compared to asset managers in big corporations. According to John Mcnellis, partner at McNellis Partners, a commercial development firm specializing in mixed-use and retail projects, "no matter how well-intentioned institutional investment managers are, it’s not the same as if they were using their own money. They’re competing with one another and are satisfied if their purchases are made at a capitalization rate competitive with that of their peers. Thus, they often pay significantly more for a given property than an individual using his own money would."
-Better local market insights and more flexibility
Compared to big international institutes, small to mid-size developers understand local markets and individual nuances better. With their deep roots in the market, these developers stay active in the market and have access to all the resources and connections to seize investment opportunities. Also, they can see the trends in the local market faster and change their strategies more quickly without "having committee meetings, without seeking a corporate philosophical change". (Small-Scale Development Outlook, ULI)
-More agile investment decision making allowed by reduced bureaucracy
Investing with mid-scale developers provides small individual investors with passive involvement, limited liability, and the opportunity both to gain access to professional investment management and to enjoy the financial benefits which are traditionally only available to institutional investors. Undeniably, institutional-grade real estate development enjoys economies of scale over smaller ones, yet various factors suggest otherwise. Lengthy decision-making, complex process flows, and long-term orientation of big corporations in fact result in competitive disadvantages in the dynamic and ever-changing real estate market.
Qualive is a mid-scale developer backed by individual investors and family funds. We strive to maintain efficiency with a compact structure. A well-selected team makes sure we operate with high standards of professionalism. We curate a selection of development deals that represent the quality of space-making and design. Our close relationship with capital investors gives our company autonomy in managing our developments. We embrace opportunities presented to independent real estate developers and deliver above-market results to our investors and clients.