India Real Estate is the second largest industry next only to agriculture in terms of the contribution it makes to the gross domestic product (GDP) and the employment generation. Moreover, its share of contribution to the country’s GDP is expected to increase only in the years to come.
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The GDP contribution of this sector at current prices is approx. 6.5% or Rs.1, 37,000 crores i.e., over 30 billion US dollars. Similarly the commercial property market has compounded annual growth rate of over 30% during the last 5 years across major cities in India along with a phenomenal increase in demand for office space. To be more precise, the next five years will see a rise of six percent from its present share of five percent contributed towards the GDP.
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.
According to a report, India is one among the four countries (the other three being Brazil, Russia and China) that are likely to achieve a much faster growth rate in the domain of property development and housing construction activities as compared to the UK and US real estate markets.
The BRIC report, as it is called, has also projected a higher real estate investment over a period of the next five years. The forecast for the year 2010 has put a significant portion of the Foreign Direct Investment (FDI) towards investment in the Indian real estate market.
With around 1.1 billion people, India is the second most populous country after China and it is expected to overtake it by 2030. Its economic transformation over the past decade has pushed up real GDP growth to an average of 6 per cent per annum since1992.
India is emerging as an important business location, particularly in the services sector. Its favourable demographics and strong economic growth make the country an attractive place for property investors, given that demand for property is determined chiefly by business development and demographic trends. Historically, the real estate sector in India was unorganised and characterized by various factors that impeded organised dealing, such as the absence of a centralized title registry providing title guarantee, lack of uniformity in local laws and their application, no availability of bank financing, high interest rates and transfer taxes, and the lack of transparency in transaction values. In recent years however, the real estate sector in India has exhibited a trend towards greater organisation and transparency, accompanied by various regulatory reforms. These reforms include:
â€¢ Government of India support to the repeal of the Urban Land Ceiling Act, with nine state governments having already repealed the Act;
â€¢ Modifications in the Rent Control Act to provide greater protection to homeowners wishing to rent out their properties;
â€¢ Rationalization of property taxes in a number of states; and
â€¢ The proposed computerization of land records
The trend towards greater organisation and transparency has contributed to the development of reliable indicators of value and the organised investment in the real estate sector by domestic and international financial institutions, and has also resulted in the greater availability of financing for real estate developers. Regulatory changes permitting foreign investment are expected to further increase investment in the Indian real estate sector. The nature of demand is also changing, with heightened consumer expectations that are influenced by higher disposable incomes, increased globalization and the introduction of new real estate products and services.
These trends have benefited from the substantial recent growth in the Indian economy, which has stimulated demand for land and developed real estate across the real estate industry. Demand for residential, commercial and retail real estate is rising throughout India, accompanied by increased demand for hotel accommodation and improved infrastructure. Additionally, the tax and other benefits applicable to Seas are expected to result in a new source of real estate demand.
The real estate industry is one of the fastest growing industries in our economy, with a Compound Annual Growth Rate of approximately 30%.(Ernst and Young)
A US$ 16 billion industry at present, it is expected to touch US$ 60 billion in the next five years. (Ernst and Young)
The sustainability of growth in the real estate industry has its roots in strong demand fundamentals:
a. Rapid expansion of the IT/ ITES and business outsourcing industry (including knowledge process outsourcing and clinical testing outsourcing);
b. Rising demand in the residential sector, encouraged by rapidly increasing income levels;
c. Acceptance of shopping malls as “one stop destinations” for consumers; and
d. Growing popularity of Special Economic Zones as preferred destinations for both manufacturing and service industries.
Source: CMIE Industry Reports
There is an estimated requirement of 80 million housing units over the next
Fifteen years and 200 million sq. ft. of office space over the next five years.
With a view to catalyzing the investment required to plug the aforementioned
Supply deficits, the Government, has allowed FDI up to 100% under the automatic route in specified real estate development projects, including but not restricted to townships, built-up infrastructure and construction development projects.
The investment is permitted subject to compliance with the following guidelines specified in Press Note 2 (2005):
Minimum area to be developed under each project would be as under:
i. In case of development of serviced housing plots, a minimum land area of 10 hectares.
ii. In case of construction-development projects, a minimum built-up area of 50 ,000 sq.mts.
iii. In case of a combination project, anyone of the above two conditions would suffice.
The investment would further be subject to the following conditions:
i. Minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.
ii. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPS.
c. At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor would not be permitted to sell undeveloped plots.
Source: Department of Industrial Policy &Promotion – Press Note 2 (2005)
In December 2007, SEBI, the domestic stock market regulator, issued draft regulations clearing the way for introduction of Real Estate Investment
Trusts (REITs) in India. This move is also expected to favourably serve the booming property market, by serving as an alternative source for meeting the capital needs of the sector, particularly for builders who otherwise work with internal accruals and high-cost borrowings.
Dewan P.N. Chopra Consultants Private Limited
Initial Public Offerings have become another popular theme as a means of raising requisite capital in the real estate industry. This has resulted in the creation of a robust marketplace where retail investors can participate in the growth story while also offering ability for promoters and investors to project forward into yet another exit strategy.
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As a result of the aforementioned stimuli, this industry has been receiving increasing focus from the private equity sector, with PE investments in this industry as a percentage of total PE investments soaring from 14% in 2005-06 to over 32% in 2006-07. (KPMG)
It is estimated that more than US$ 5 billion in foreign funds was invested in projects sponsored by rapidly growing developers in 2007.
The significant development potential of the real estate industry, coupled with favourable FDI regulations and increasing focus from the private equity sector, has created substantial investment opportunities for real estate companies.
As at December 2007, total outstanding investment in 1,885 real estate development projects was US$ 195 billion. (CMIE Industry Reports)
As this rapidly growing industry matures into a stable and sustainable economic sector, three key trends, which are likely to shape its future, are emerging:
a. Increased focus on execution risks;
b. Increased investments in mixed-use development projects with a view to extracting maximum synergic benefits; and
c. Syndication among real estate developers on execution of “big-ticket” development projects, i.e. shift from competition to partnership.
Why Invest In Indian Real Estate?
Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:
It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector.
India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space.
Presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space.
Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even.
Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.
The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate in India is seemingly the most lucrative ground at present. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden change in investment policies, the overseas firms can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space.
Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards.
The strong fundamentals of the Indian economy are having a favourable impact on all asset classes of Indian real estate viz. housing, commercial – office space and retail and hospitality. In recent years, the growth has spread out to tier-II and III cities as well. High growth in services as well as manufacturing sector has resulted in high demand for commercial and industrial real estate. Further the economic growth has trickled down to the large Indian middle class increasing affordability and affluence. Improving living standards are driving the demand for better quality housing and urban infrastructure. In fact, housing in India is today moving from being viewed as a purely basic need to an aspiration purchase. Though high interest rates coupled with soaring property prices have temporarily impacted affordability of home buyers the demand-supply mismatch and low home loans to GDP ratio in India (a meagre 5 per cent as against more than 50 per cent in US, UK and Germany) are expected to fuel demand for housing in the medium long run. The growth of the sector has been complemented by favourable policy changes like liberalisation of Foreign Direct Investment (FDI) guidelines and significant increase in investment on physical infrastructure. The recent times have also witnessed an evolution of the sector – towards greater institutionalisation and corporatisation. With the entry of global players, inflow of foreign capital, evolution of capital markets, geographical diversification and introduction of reforms, the sector has undergone some significant structural changes. Even critical concern areas like transparency in the sector is also improving significantly. The trend is expected to continue in the coming years.
Advantage India key points
The Indian real estate industry is expected to reach a size of US$ 180 billion by 2020.
High growth in the services sector -telecom, financial services, IT & ITeS, etc.
Growing penetration of mortgage finance into the urban housing finance market.
There is a growing demand for affordable housing and high rate of urbanisation.
The real estate sector in India is on a rapid growth trajectory. Over a short span of time, the industry has evolved from a highly fragmented and unorganised market into a semi-organised market, with a large number of listed companies.
The Indian Government and private developers, realising the growing demand for affordable housing, are strongly focussing on affordable housing.
The Government of India has well-drafted regulations for the Indian real estate sector.