Tech is the Best Way

Nestaway don't have competition with Oyo

If you were the incumbent market leader in the fragmented shared rental business in India, and a giant competitor with far more funds and a solid brand was planning to enter it, chances are you would be a little hassled. But not Sahu.

There are good reasons to remain cool. You may not have heard much about it, but Nestaway Technologies, a property management service company, is one that’s done something fairly special. It’s one of the few tech companies that has made significant inroads into the real-estate sector. Several tried and either failed or struggled, and finally merged with larger entities. Housing. Common Floor. Grabhouse. The rental business is a tough business. But Nestaway broke through. Through a combination of smart services, the right value proposition, and careful, targeted expansion, the company now sits at the top of the shared rentals business in India with 25,000 homes on its platform across eight cities, with a revenue of Rs 25 crore ($3.39 million) last year. Where many floundered, Nestaway succeeded.

Market sizing is more art than science, but the 2011 census states that nearly 31.56 million people rent homes in urban India. Most of them served by brokers and middle-men, fragmented all over.

That gives Nestaway a little less than 0.08% market share. And, until very recently, there was little competition from a monolithic player. It looks like Nestaway is one of those companies that has found itself in the rare position of being in the right place at the right time, with a huge potential upside ahead of them.




Others seemed to think so, too. Last year, investors pumped in Rs 329.45 crore ($44.9 million) into the company. The message seemed to be, ‘Go and get the rest’. Nestaway set out to do exactly that. Double down, execute, grow, and start taking more and more of the pie. No hurry. No tension.

That’s changing though.


For starters, Nestaway is taking time to break into other lucrative markets such as Delhi and Mumbai. Their expenses are going up, and profitability isn’t in sight. It probably won’t be for a while. There are reports that Nestaway’s investors are taking a hands-on approach. Then the big one. Seeing the scope of scale in the shared rentals space, Oyo, which raised nearly $1 billion from Softbank in September, is stepping up to the plate, with its investment into a vertical called Oyo Living. There is a large need for affordable housing in Indian cities and the shared living model is something other players are betting on as well. Could the entry of a well-capitalised company in this space upset Nestaway’s plans?

“I am really not too concerned,” insists Sahu.

He’s still smiling.

Nestaway and its pot of golden porcelain


Sahu calls Nestaway the Kotak Mahindra Bank for property owners. He’s used it as a shorthand for a company which moved nimbly, focused on the right areas and kneecapped the larger, better-funded incumbents. The bank analogy doesn’t stop there.

“Imagine we are a bank,” he says. “You are a homeowner. You come deposit your house with me. ‘Please start renting, manage all the headache. Deposit the rent at the end of the month in my account.’” Right from finding the tenant, furnishing the home, if required, depositing the rent payments in the owner’s account; Nestaway does everything.

It then goes further. It adds services. Some of which are quite creative. This includes providing insurance to the house owner against damage. Or provide for arbitration services. Or against tenant squatting. Or other hassles. If there’s a problem, a Nestaway executive is just a call away.

This is what makes Nestaway an attractive option for house owners.

All these services have a very important effect – they bring down the security deposit that tenants ordinarily need to pay. Nestaway started its operations in Bengaluru, the city which still constitutes 50% of the homes on its platform, and where homeowners usually charge around 10 months of the monthly rent as security deposit. Money that single, young, first-time house renters do not have lying in their bank accounts. Nestaway figured out that the security deposit was leverage that owners applied on tenants due to a trust deficit, and if an intermediary took responsibility, then there would be little reason for owners to demand this anymore.

This is what makes Nestaway an attractive option for tenants.

By creating a loop between these two sides – demand and supply, Nestaway started to become more and more entrenched.

“We aren’t in the house renting business. We are in the asset management business”, says Sahu.

Really?

Yes. He proceeds to explain.


The houses on Nestaway do work a bit like assets as the homeowners deposit their homes, after which, Nestaway finds tenants, either shared or family, and then, it collects a cut from the rent. The business is built on recurring payments of rent or annuity.

Sahu calls the annuity model “living as a service.” It hopes to build this into a sustainable business by offering more services to tenants and house owners, such as home insurance, deposit financing, baby care and transport, which, Sahu says, will make the business profitable. It seems outlandish, but the fundamentals appear to be there. Once a customer is locked into Nestaway, upselling seems like the most obvious next step.

Nestaway initially got funding from venture capital firm IDG Ventures India (now Chiratae Ventures). It also counts Tiger Global, Schroder Adveq, UC-RNT Fund and Goldman Sachs among its investors. Till now, Nestaway has managed to raise nearly $100 million.

“It’s a very large opportunity and the value of this opportunity is slowly being discovered [in metros—Bengaluru, Delhi or Mumbai],” says Karthik Prabhakar of Chiratae Ventures. “It’s a very fragmented space dependent on the local brokers. Somebody who can consolidate them and co-work and co-exist with the existing brokers is something which makes the platform scalable.”

Oyo vs Nestaway


But shouldn’t Oyo Living—Oyo’s entry into shared the shared living space—be a concern? Sahu says Oyo Living will only compete with half of Nestaway’s business: shared rentals. And as the remaining is family housing, Sahu is optimistic. “I am a bank of homes. I am not playing the trade game.” He says there are 50 million homes in the market, at any given point in time, and believes that the market is big enough for multiple players.

If there are more competitors entering a space (like Oyo), then it’s a very clear sign that there is a market opportunity

KARTHIK PRABHAKAR OF CHIRATAE VENTURES

With its bags of cash, Oyo Living has entered Noida, Gurgaon, Bengaluru and Pune. While it currently has 2,000 beds across 35 properties, it has a very concentrated focus. It will take up standalone buildings by partnering with large real-estate construction companies and create shared living accommodation, mainly targeted at working professionals and students. It also plans to offer space for reading books, doing yoga and creating meditation zones.

Within a year, Oyo plans to expand to India’s top 10 metros with 50,000 beds for tenants. That’s half of Nestaway’s business that Oyo is looking at, but with the same number of tenants.

It’s not a winner-takes-all market, says Prabhakar. “As long as you can do it in a very economical and…sound commercial model, there’s space for 2-3 players here,” he adds.

There’s one important thing that Oyo can do with its bank balance, which may make it incredibly attractive to homeowners. Oyo can guarantee rent to them initially, says an industry official who didn’t want to be named. This is crucial. On the other hand, Nestaway says that it doesn’t do this, except in some unusual circumstances. Like when it wants to enter a particular locality, or if it’s interested in acquiring a homeowner who has multiple properties. And that, too, only initially, just to sweeten the pot. Sahu says that this is a small part of Nestaway’s business – around Rs 5.33 crore($0.7 million).

But Nestaway’s cash burn to run its operations nearly doubled in 2016-17 to Rs 88.9 crore ($12.1 million). It had Rs 11.55 crore ($1.57 million) in the bank as on 31 March 2017. In 2017-18, Nestaway raised around Rs 329.45 crore ($44.9 million) which helped it run its operations.

Could Oyo make Nestaway bleed by offering tenants and landlords a better deal? Sahu disagrees. A house being an emotional asset, the owner will wonder why someone is offering him more money, he says. This is counterintuitive. Will a landlord who is looking to rent out his home for a higher rent refuse it? The question is rhetorical.

“The proposition is more [than] just a financial thing,” explains Karthik Prabhakar of IDG Ventures India, an investor in Nestaway. The hook in shared accommodation for the owner is the higher yield he may earn if his property is split into beds and sold on Nestaway.com. “But that’s only the entry hook. Not every owner is looking at getting that higher yield. They are also looking at having a predictable cash flow.”

Oyo’s approach to take away a chunk of the supply of houses through these bulk deals for apartments would work initially, says the industry official, and this could hurt Nestaway.

Out of a total 50,000 tenants on its network, Nestaway has a 50:50 split between shared and family rental tenants

In the face of competition, the promise of “family tenants” to landlords, along with its property management service, is what Sahu believes will help the company grow. But is that enough?

Hard to scale


Here’s a significant concern for the company: Expansion beyond its strongest market hasn’t been easy for Nestaway. Sahu admits that penetrating the Delhi-NCR region has been tough. “In NCR, there is a slump. There is more supply than demand and owners…need to come to terms with it.” The two-month deposit offer to landlords didn’t fly in this market. Neither did the structural and content insurance product Nestaway offered to landlords.

A former Nestaway employee says landlords in Delhi-NCR, as a norm, charge just about a month’s rent as security deposit, which made Nestaway’s solution to the problem in Bengaluru irrelevant in the capital.

Gurugram is a small piece in the overall scheme of things. “If you see the amount of search that happens in NCR, you are in a conundrum. It’s abysmally low (around) 1/10th of what it’s in Bangalore. Are people not searching online? Are they finding it offline?” Sahu wonders.

Nestaway also recently entered Mumbai, where supply is always short of demand. So creating supply in localities where it is required will be difficult. Add to that the local housing societies which place multiple restrictions on whom landlords can rent their flats. Cracking this market will take some time, Sahu says.

While it expands to other cities, Mumbai will be the most difficult market to crack for Nestaway, says Roshan D’Silva, founder and chief executive officer of holiday home rental portal Tripvillas. But to succeed, the company will have to wait for tenants also to grow up, he adds. Going by the complaints from unhappy tenants—ranging from payment issues to repairs and maintenance—that Nestaway receives on social media and other reviewing websites, it doesn’t seem like tenants are going to change their behaviour very soon.

Beyond this, the company has entered student housing in Pune and Kota with five properties. This business is a little tricky. “I am not good at handling people below 18 years,” Sahu admits. It’s like a paying guest accommodation, which is difficult to manage, he lets on.

In the past year or so, Nestaway has been getting complaints on reviewing platforms and social media that could potentially ruin its brand. Some complaints are regarding pending repairs of fixtures, water leakage, tiffs between tenants and also issues related to pending payments not being acknowledged. Sahu says Nestaway gets around 300 unique complaints a month.

Then there is also the matter of how much money the business is making. In 2016-17, Nestaway posted a loss of Rs 97.7 crore ($13.29 million), widening from Rs 37.21 crore ($5.06 million) a year ago. A huge chunk of this expenditure was towards employee cost of Rs 40 crore ($5.45 million). All this to earn a revenue of Rs 24.73 crore ($3.37 million). If it weren’t for other income of Rs 11.78 crore ($1.60 million), Nestaway’s loss could have been higher.

Besides, Oyo isn’t the only external threat facing Nestaway.

There are also smaller players such as Co-ho, Stanza Living, Zolostays and Placio that offer shared or co-living accommodation. Their forte is that they have a limited focus like student housing, and their assets or housing stock that earns them rent are concentrated in a specific area. This means lower costs. These are companies who are doing exactly what Nestaway did to others.

When I ask Sahu if it would be better to have houses concentrated in a particular area, he uses the analogy of hotel room and holiday home marketplace Airbnb to explain why it’s not so. Airbnb has many non-standardised properties all across the world in terms of price, size and where they are located. “You can’t decode them. The market didn’t know how to compete with them.”

The magic number
Sahu has been talking to us for nearly two hours, and it’s evident all of this boils down to one aspect – Time.

Nestaway’s benchmark for success is different. Most companies in other sectors have to keep fighting it out, dropping prices, increasing marketing, all in a war of attrition, wearing down their competitors, until they are the last ones remaining. All with the hope and expectation that when that happens, they can finally start monetising their customers.

Not for Nestaway. Nestaway has a finish line. It has a magic number. It’s a number that Amarendra Sahu is aware of, and likely thinks a lot about. Once Nestaway reaches the magic figure of one million tenants, it will give it the right density. That’s when collective bargaining power and the crucial snowball effect will start to kick in. This is the point at which Nestaway’s value-added services will become cost-effective and start to become viable revenue streams. Group Transportation along fixed routes. Home insurance at rates lower than anywhere else. Financial services at attractive terms. Child-care that’s inexpensive. House cleaning staff who are professional, reliable and work around your schedule. Plumbing and electrical work that’s cheaper than your local guy. The list is endless.

Once this happens, it can be argued that Nestaway isn’t going anywhere, the switching costs for tenants will mount, and even well-funded, powerful competitors will find it near impossible to dislodge them.

One million tenants. Twenty times where Nestaway stands today.

How long does Sahu think it will take for him to get here? He says five years. Maybe less.

Five years back, an 18-year-old Ritesh Agarwal founded a company called Oravel Rooms, which pivoted to Oyo Rooms. Today it stands in front of Nestaway and its finish line.

In 2010, Myntra Designs Pvt. Ltd, had revenue of Rs 18 crore ($2.45 million). It found itself in a similar position. And it managed to win, fighting off a much larger competitor—Jabong, which was then funded by Rocket Internet, then got acquired by Flipkart, and then, it acquired Jabong as well. In five years, it posted revenues of over Rs 1000 crore ($135.84 million). The Nestaway office in Bengaluru is where Myntra operated from in 2010. And Sahu is walking the same corridors where Myntra fought its battles.

Five years.

The industry official quoted above says that Nestaway is in the market looking to raise money. This isn’t particularly surprising. It’s usually a good idea to be well-funded if your competitor is backed by Softbank. So, is he looking to raise money? Sahu says, quite candidly, that if he gets the money he would take it.

“There are very good investors with me. Hopefully, they are going to see us through.”

He’s still smiling.
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