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Indian Real State Sector Report. Land of Opportunities. Today’s Scenario. The real estate sector is a critical sector of our economy. It has a huge multiplier effect on the economy and therefore, is a big driver of economic growth.
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Indian Real State Sector Report Land of Opportunities..
Today’s Scenario • The real estate sector is a critical sector of our economy. It has a huge multiplier effect on the economy and therefore, is a big driver of economic growth. • It is the second-largest employment-generating sector after agriculture. Growing at a rate of about 20% p.a. and this sector has been contributing about 5-6% to India’s GDP. • Not only does it generate a high level of direct employment, but it also stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, consumer durables and so on. • The Indian real estate industry has been on a roller coaster ride since 2005. Consequent to the government’s policy to allow Foreign Direct Investment (FDI) in this sector, there was a boom in investment and developmental activities. The real estate sector has been riding through many highs and lows since then. The industry achieved new heights during 2007 and early 2008, characterized by a growth in demand, substantial development and increased foreign investments. However, by mid 2008, the effects of the global economic slowdown were evident here too, and the industry took a ‘U’ turn.
Outlook for Real Estate Industry Real Estate industry had a dream run over the past few years with prices across the verticals moving in northward direction. The industry saw the sea change in their fortunes due to many factors like robust demand due strong economic activity in India and access to financial resources have increased significantly. Many real estate players have scaled up their development plans and want to monetize their land bank over next 6-7 years. Most of the recent real estate IPOs has tremendous success on the bourses. Booming economy has opened many new business opportunity in the sector like SEZs, IT/ ITES Parks, service apartments, hotels, entertainment parks, multiplexes and innovation leading to luxurious living due to growing middle income earning class. Players have already started going to locations mainly in tier II and tier III cities where they have been seen as next growth drivers of real estate industry. Real estate industry is expected to grow due to increasing urbanization and working middle class, easier access to finance, higher disposable incomes, tax incentives for housing loans, one of the most attractive destinations for the IT and BPO industry, organised retail gaining momentum, increasing tourism and heavy inflow of foreign money wanting a pie in Indian real estate growth story. Growth of the sector is dependent on the availability of finances to individual players for executing its development plans. Inorganic growth might also start happening in the industry with smaller players selling out to the larger and organised players. Last 6-7 months have seen very few deals happening in all major cities in residential market. This is now closely watched by observers as festive season is expected to increase the off take in the residential space with little help from lower bias from mortgage loans. RBI is cautioning government on the heavy inflow of money into the sector through FDI and ECB route. Government might tinker the FDI guidelines for real estate industry by routing the proposals through FIPB (Foreign Investment Promotion Board). This might pose some serious problems for the growth plans of many developers. Having said that, the genuine demand is so huge and the housing shortage is so large that the industry is all set to grow at a robust rate. We feel, more organised and bigger real estate players will overcome most of the difficulties faced by the industry and will continue to grow at healthy pace.
SEZs CLASSIFICATION OF THE BASIS OF INDUSTRY
FINANCIAL SUPPORT TO THE SECTOR • In the Financial Years 2007-08, 2008-09 and 2009-10, the housing and real estate sector attracted FDIs of 8.9%, 10.3% and 11% respectively, of the total FDI in India. • However, the financial year 2010-11 saw a mere 6% FDI in this sector. The year 2010 saw the Indian real estate sector spring back into action after the gloom and recessionary pressures experienced in the aftermath of the global downturn. • The focus on ‘affordable housing’ helped the sector tide over the financial crunch it had witnessed.
THE CHALLENGES The key challenges that the Indian real estate industry is facing today are: • Lack of clear land titles, • Absence of title insurance, • Absence of industry status, • Lack of adequate sources of finance, • Shortage of labour, • Rising manpower and material costs, • Approvals and procedural difficulties.
GOVERNMENT REGULATIONS AND CHANGES REQUIRED • The Government of India vide Press Note No. 2 of 2005, permitted FDI up to 100%, under the ‘automatic route’ in townships, housing, built-up infrastructure and construction development projects. • The main reason for opening up the real estate sector to 100% FDI was to bridge the huge shortage of housing in the country and to attract new technologies in the housing sector. • Further, lack of consistency in rules relating to development of SEZs, increased monitoring of the sector by regulatory agencies, tightening of rules for lending to the real estate sector and increase of key rates by the RBI several times during the last one year, have arrested the growth of the sector.
Recent Developments Emaar planning to set up a 100% subsidiary in India… Emaar, the Dubai based Real Estate Company, is planning to set up a 100% subsidiary in India. Emmar already has joint venture with Delhi based realty company MGF. The new venture will be executed through Hamptons International, one of the UK’s premier international residential agents which Emaar acquired in 2006 for US$500mn. There is no obligation for the company to go with the current joint venture. The subsidiary will operate independently as Hamptons does in UAE with its own distinct identity and operations. • JP Morgan to invest Rs4bn in Indian Realty… JP Morgan Property Fund, which has already invested over US$300mn to carve out a significant niche in Indian real estate, is soon to come up with a residential project in Chennai, with the investment of Rs4bn. Arihant Foundations and Housing Ltd. (AFHL), Chennai's leading developer, will develop the residential property over an area of 45 acres of land. The company is taking up the project in a joint venture with JP Morgan. JP Morgan has formed a 50:50 joint venture with AFHL. • DLF to develop new city centre in Gurgaon… Indian property giant DLF Ltd plans to come up with a modern city centre near the 18- hole Golf Course Road in the north Indian city of Gurgaon. The company will take up the construction in collaboration with global construction major Hines. The complex will be designed by the famous architecture Robert A M Stern. The centre will be developed over a large area of 20 acres with the total 2.5 mn sq ft of constructed area.
Areas of concerns… Despite the strong growth of the sector in recent years, areas of concerns remain. Prominent concern being that the foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors’ margins significantly. Finally, concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. All these factors are tempering investors 'appetites for Indian real estate. Government needs to pursue financial Reforms… The government needs to pursue the financial reforms in order to help the real estate industry to move to the next level of growth. The Planning Commission of India recommends the following measures for healthy growth of real estate sector in India. Allow the pension funds, provident fund and insurance sector to invest in real estate. Provident and pension funds must be allowed to invest in deposits/bonds of housing finance companies. • Encourage creation of real estate mutual funds/real estate investment trusts. • Promote trading in mortgage-backed securities. The introduction of foreclosure norms and establishment of recovery tribunals is essential. Though securitization of mortgage debt has just started in India it has not succeeded due to the high incidence of stamp duty on documents. • The present stipulation that FDI will only be allowed for the development of integrated townships of a minimum area of 100 acres needs to be relaxed to 50 acres or less, as such vast expanse of land may not be available in urban areas. FDI in the rest of the real estate sector may be permitted up to 74% with a lock-in period of three years and there should be no repatriation of dividend during the construction period. Repatriation thereafter may be allowed. • Develop a grading system among real estate developers to keep fly-by-night operators out and control default rates among developers. This will help investors (end user/buyer of property) be aware of the risks regarding the developer’s ability to deliver as per specified terms and quality parameters and transfer of ownership on time.
Challenges Facing the Indian Real Estate Sector Regional reach of existing players… Most of the real estate developers in India have regional focus where the conditions are most suitable to them. There are very few players in the country having a pan-India presence. The challenge for real estate developers is to move ahead in the value chain and expand in other areas of the country as the boom in the real estate encompasses almost the entire country. • Mushrooming of smaller players…: New comers are mushrooming and affecting the credibility and reliability of the system. • Majority of market belonging to unorganised segment… The Indian real estate sector is highly fragmented with the unorganised segment comprising of small builders and contractors accounting for a majority of the housing units constructed. As a result, there is not a large degree of transparency in sharing of data across the industry. • Soaring land prices… Soaring land prices and price resistance from buyers are narrowing investors’ margins significantly. The land prices have risen tremendously since the past two years forcing many real estate developers to change their strategy of rapid expansion to other geographies. For example, around two years back, land cost as a percentage of total project cost was around 25-30% in tier I cities, which has now increased to around 60-65% in recent times. • Increasing raw material prices… Construction activities are often funded by the client, which makes cash advances at different stages of construction. In other words, the total amount of revenue from a project is predetermined and the realisation of this revenue is scattered across the period of construction. A significant challenge that real estate developers face is dealing with adverse movements in costs. The real estate sector is dependent on a number of raw materials, such as cement, steel, bricks, wood, sand, gravel and paints. As the revenues from sale of units are predetermined, adverse price changes in any of the raw materials directly affect the bottom lines of developers.
Contd. • Appreciating Rupee… Indian currency has appreciated by almost 12% on a year-on-year basis. Rising rupee severely hurts exporters and IT companies. Further appreciation of rupee from the current levels will see top line as well as bottom line of IT companies nosedive sharply. These might force IT companies to put on hold their expansion plans thus putting pressure on demand for commercial as well as residential space. • Interest rates…: The Government is working on a plan to offer housing loan to urban poor at a subsidized rate of around 7% per annum. The Government may offer subsidized rate for loans up to Rs150,000 for 5-7 year period. The Government may consider an easy financing scheme for the rural population as well at a later stage.
Regulatory Issues India has plethora of laws governing the real estate sector, as both the central and state governments has jurisdiction over the real estate sector. Most of the laws governing various aspects of real estate sector are almost a century old. Despite the existence of numerous laws, the situation appears to be far from satisfactory and major amendments to existing laws are required to make them relevant to modern day requirements. The Central laws governing real estate includes the following. • A. ULCRA (Urban Land Ceiling and Regulation Act, 1976): Act gives power to state governments to acquire any excess vacant land above the limits set by the Act. B. Transfer of Property (TP) Act C. Registration Act D. Land Acquisition Act, 1894: The Act authorizes governments to acquire land for public purposes. E. Rent Control Act: Rent legislation provides payment of fair rent to landlords and protection of tenants against eviction. F. The Indian Stamp Act: Most state governments charge very high registration fees and stamp duties on property transactions.
THE ROAD AHEAD • India has huge potential to attract large foreign investments into real estate. With real estate reaching a point of saturation in developed countries and the demand and prices falling, global real estate players are looking at emerging economies such as India for tapping opportunities in real estate. Indian real estate will stay attractive due to its strong economic fundamentals and demographic factors. • Investments in Indian real estate will fetch higher returns for investors as compared to other global markets. In the coming years, the opportunities in the real estate sector will attract more global players to India and hence will help the industry to mature, become more transparent, improve management and adopt advanced construction techniques.
