The Real Estate Sector

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

What can be the reasons for such a trend in this sector and what future course will it take? This article tries to find answers to these questions…

Overview of Indian real estate sector

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

The term real estate covers residential housing, commercial offices and trading spaces such as theaters, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves purchase sale and development of land, residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.

The sector accounts for major source of employment generation in the country, being the second-largest employer, next to agriculture. The sector has backward and forward linkages with about 250 ancillary industries such as cement, brick,steel, building material etc.

Therefore a unit increase in expenditure of this sector have multiplier effect and capacity to generate income as high as five times.

All-round emergence

In the real estate sector, the major component comprises a housing, which accounts for 80% and is growing at 35%. Remainder consist of commercial segments office, shopping malls, hotels and hospitals.

o Housing units: With the Indian economy surging at the rate of 9 % accompanied by rising incomes levels of the middle class, growing nuclear families, low-interest rates, modern approach towards homeownership, and change in the attitude of the young working class in terms of from save and buy to buy and repay having contributed towards soaring housing demand.

Earlier cost of houses used to be in multiple of nearly 20 times the buyers’ annual income whereas today 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 requirement of housing during (2007-2012) will be 26.53 million. The total fund requirement in the urban housing sector for the 11th five-year plan is estimated to be 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

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

o Shopping malls: over the past ten years, urbanization has upsurge 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 Indian retail industry is estimated to be about US $ 350 bn and forecast to be double by 2015.

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

o 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 comprises 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. Apart from these non-ticket revenues like food and beverages and the leasing of excess space to retailer provides excess revenues to theatre developers.

o Hotels/Resorts: as already 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 travels is also going up, which leads to higher demand for hotels and resorts across the country. Apart from this India is also emerging as major destination for global tourism in India which is pushing up the demand hotels/resorts.
The path set by the government

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

O 100% FDI permitted in all reality projects through automatic route.
o In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres.
o Urban land ceiling and regulation act has been abolished by a large number of states.
o Legislation of special economic zones act.
o Full repatriation of original investment after 3 years.
O 51% FDI allowed in single-brand retail outlets and 100 % in cash and carry through the automatic route.

Therefore all the above factors can be attributed towards such a phenomenal growth of this sector. With significant growth and investment opportunities emerging in this industry, the Indian realty sector became a potential goldmine for many international investors. Currently, foreign direct investment (FDI) inflows into the sector 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 show a high preference for commercial investment, the high net worth individuals show interest in investing in residential and commercial properties.

Apart from these, the third most important category is NRI ( non-resident Indians). They mostly invest in residential properties than commercial properties. Emotional attachment to native land could be reasons for their investment. Moreover, the necessary documentation and formalities for purchasing immovable properties except agricultural and plantation properties are quite simple. Therefore NRI’s are showing greater interest in investing in the Indian realty sector.

MAJOR INVESTORS

o Emmar properties of Dubai, one of the largest listed real estate developers globally, has tied up with Delhi based MGF developments for the largest FDI investment in the Indian realty sector for malls and other Gurgaon facilities.

o Dlf India’s leading real estate developer and UK’s famous Laing O Rourke (LOR) has joined hands for participation in airport modernization and infrastructure projects.

o 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 period of 10 years. The retail value of the project was estimated to be around $ 8.9 billion.

o Indiabulls real estate development has entered into agreement with dev property development, a company incorporated in Isle of Man, whereby dev got subscription to new shares and minority shareholding  But in recent developments, Indiabulls has acquired an entire stake in dev property development in a 138 million-pound sterling (10.9 billion rupees) share-swap deal.

o Apart from this real estate developments opens up opportunity for associated fields like home loans and insurance. Several global have shown interest in this sector. This includes companies like Cesma International from Singapore, American International Group Inc (AIG), High Point Rendel of the UK, Colony Capital and Brack Capital of the US, and Lee Kim Tah Holdings tew.
Following are the names of some of the 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 into international markets through significant investments in foreign markets.

o Embassy group has signed a deal with Serbian government to construct US $ 600 million IT park in Serbia.
o Parsvanath developers is doing a project in Al – 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.
o 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 is tend to be a competitive edge to give a quality based performance for customer satisfaction, which will consequently bring in quality technology and transparency in the sector, and ultimate winners are buyers of this situation.