The Real Estate Sector

Engulfing the period of stagnation, the Indian real estate sector’s evolution has been phenomenal, propelled by a growing economy, conducive demographics, and a liberalized foreign direct investment regime. However, this unceasing phenomenon in the real estate sector has started to exhibit contraction signs.

What are the reasons for this trend in this sector, and what is its future course? This article tries to answer these questions.

Overview of the Indian real estate sector

Since 2004-05, the Indian realty sector has grown tremendously. Registering a growth rate of 35 percent, the realty sector is estimated to be worth US$15 billion and is anticipated to grow at the rate of 30 percent annually over the next decade. It is attracting foreign investments worth US$30 billion, with several I.T. parks and residential townships being constructed across India.

The Real Estate Sector 1

Real estate covers residential housing, commercial offices, trading spaces such as theaters, hotels, restaurants, retail outlets, industrial buildings, factories, and government buildings. It involves purchasing, selling, and developing land and residential and non-residential buildings. The real estate sector’s activities embrace the housing and construction sectors.

The sector accounts for a country’s major source of employment generation and is the second-largest employer after agriculture. It has backward and forward linkages with about 250 ancillary industries, such as cement, brick, steel, building materials, etc.

Therefore, a unit increase in expenditure in this sector has a multiplier effect, and the capacity to generate income is as high as five times.

All-round emergence

The major component of the real estate sector is housing, which accounts for 80% and is growing at 35%. The remainder comprises commercial segments, offices, shopping malls, hotels, and hospitals.

Housing units: The Indian economy is surging at a rate of 9 %, accompanied by rising middle-class income levels, growing nuclear families, low interest rates, a modern approach to homeownership, and a change in the attitude of the young working class from saving and buying to buying and repaying, which has contributed to soaring housing demand.

Earlier, the cost of houses used to be in multiple of nearly 20 times the buyers’ annual income, whereas today, the multiple is less than 4.5 times.

According to the 11th five-year plan, the housing shortage in 2007 was 24.71 million, and the total housing requirement during (2007-2012) will be 26.53 million. The absolute fund requirement in the urban housing sector for the 11th five-year plan is Rs 361318 crores.
The summary of investment requirements for the XI plan is indicated in the following table.

SCENARIO Investment requirement

Housing shortage at the beginning of the XI plan period 147195.0
New additions to the housing stock during the XI plan period, including the additional housing shortage during the plan period 214123.1
Total housing requirement for the plan period 361318.1

Office premises: The rapid growth of the Indian economy is simultaneously deluging commercial property demand to help meet business needs. Commercial office space requirement growth is led by the burgeoning outsourcing and information technology (I.T.) industry and organized retail. For example, I.T. and ITES alone are estimated to require 150 million sqft across urban India by 2010. Similarly, the organized retail industry will likely require an additional 220 million sqft by 2010.

Shopping malls: Over the past ten years, urbanization has increased at a CAGR of 2%, with the growth of the service sector, which has not only pushed up the disposable incomes of the urban population but has also become more brand-conscious. If we go by numbers, the Indian retail industry is estimated to be about U.S. $350 billion and is forecast to double by 2015.

Thus, rosining income levels and changing perceptions towards branded goods will lead to higher demand for shopping mall space, encompassing strong growth prospects in mall development activities.

Multiplexes: Another growth driver for the real-estate sector is the growing demand for multiplexes. The higher growth can be witnessed due to the following factors:

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1. Multiplexes comprise 250-400 seats per screen against 800-1000 seats in a single-screen theater, which gives multiplex owners an additional advantage, enabling them to optimize capacity utilization.

2. In addition, non-ticket revenues, such as food and beverages and leasing excess space to retailers, provide extra payments to theatre developers.

o Hotels/Resorts: As mentioned above, the rising major boom in the real estate sector is due to the middle class’s rising incomes. Therefore, an increase in income propensity to spend part of their income on tours and travel is also increasing, leading to higher demand for hotels and resorts across the country. Apart from this, India is also emerging as a major destination for global tourism in India, pushing up the demand for hotels/resorts.
The path set by the government

The sector gained momentum after a decade of stagnation due to the Indian government’s initiatives. The government has introduced many progressive reforms to unveil the sector’s potential and meet increasing demand.

O 100% FDI permitted in all reality projects through automatic route.
The minimum area to be developed in the integrated townships has been reduced from 100 acres to 25 acres.
Many states have abolished the Urban Land Ceiling and Regulation Act.
o Legislation of special economic zones act.
o Full repatriation of original investment after three years.
O 51% FDI is allowed in single-brand retail outlets, and 100 % is in cash and carried through the automatic route.

Therefore, all the above factors can be attributed to this sector’s phenomenal growth. With significant growth and investment opportunities emerging in this industry, the Indian realty sector became a potential goldmine for many international investors. Foreign direct investment (FDI) inflows into the industry are estimated to be between US$5 billion and US$5.50 billion.

Topmost real estate investors in the foray

Investors profile

The two most active segments are high-net-worth individuals and financial institutions. Both these segments are particularly active in commercial real estate. While financial institutions like HDFC and ICICI prefer commercial investment, high-net-worth individuals are interested in investing in residential and commercial properties.

The third most important category is NRIs ( non-resident Indians). They mostly invest in residential rather than commercial properties. Emotional attachment to native land could be a reason for their investment. Moreover, the necessary documentation and formalities for purchasing immovable properties, except agricultural and plantation properties, are simple. Therefore, NRIs are more interested in investing in the Indian realty sector.

MAJOR INVESTORS

Emmar Properties of Dubai, one of the largest listed real estate developers globally, has partnered with Delhi-based MGF developments to attract the largest FDI investment in the Indian realty sector for malls and other Gurgaon facilities.

Dlf, India’s leading real estate developer, and the famous Laing O Rourke (LOR) in the U.K. have joined hands to participate in modernization and infrastructure projects.

A huge investment was made by Vancouver-based Royal Indian Raj international cooperation in a single real estate project named Royal Garden City in Bangalore over ten years. The retail value of the project was estimated to be around $ 8.9 billion.

Indiabulls Real Estate Development has agreed with Dev Property Development, a company incorporated in the Isle of Man, whereby Dev got a subscription to new shares and minority shareholding. But in recent developments, Indiabulls has acquired a stake in Dev Property Development in a 138 million-pound sterling (10.9 billion rupees) share-swap deal.

Real estate developments also open opportunities for associated fields like home loans and insurance. Several global companies have shown interest in this sector, including Cesma International from Singapore, American International Group Inc (AIG), High Point Rendel of the U.K., Colony Capital and Brack Capital of the U.S., and Lee Kim Tah Holdings tew.
Following are the names of some companies that have invested in India.

International developer Country Investment

(US $ million)
Emma Properties Dubai 500
Ascendas Singapore 350
Salem & Ciputra group Indonesia 350
GE commercial finance U.S 63
Tishman Speyer Properties U.S. 300

Simultaneously, many Indian retailers are entering international markets through significant investments in foreign markets.

The Embassy group has signed a deal with the Serbian government to construct a U.S. $ 600 million I.T. park in Serbia.
o Parsvanath developers is doing a project in Al – The hasan group in Oman
o Puravankara developers are associated with the project in Srilanka- a high-end residential complex comprising 100 villas.
o Ansals API tied up with Malaysia’s UEM group to form a joint venture company, Ansal-API UEM Contracts PVT Ltd, which plans to bid for government contracts in Malaysia.
Kolkata’s south city project is working on two projects in Dubai.
On the eve of liberalization, as India opens up the market to foreign players, there tends to be a competitive edge in providing quality-based performance for customer satisfaction, consequently bringing in quality technology and transparency in the sector. Ultimately, winners are buyers of this situation.