The Real Estate Boom: A Euphoria
Rakesh Saxena, Advocate
India is reckoned as one of the fastest growing economies of the world and owing to its inherent advantages of a large consumer base, raw material resources, world class manufacturing capabilities, competitively priced talent base, a comprehensive legal & tax system and a strong operating financial system, it has become a preferred investment and business destination. Real estate, a “Sunshine Industry” in India, is flourishing rapidly, propelled by strong demand drivers and significant transformations such as deregulation of the sector, increasing transparency and professionalism, improved product quality and service standards etc. India's economic performance has provided another strong impetus to the real estate sector, which has been witnessing heightened activity in the recent years. Large scale investment in infrastructure and rapid urbanization has contributed to the growth trajectory of the Indian real estate sector which is evident with urban centers such as Delhi, Mumbai and Bangalore acquiring global character and recognition. According to a recent estimate the total size of the Indian real estate market in terms of total economic value of development activity, is US$ 40-45 billion representing 5 - 6 per cent of Gross Domestic Product (GDP). Driven by increasing urbanization, rising incomes and decreasing household sizes, the residential segment in India has been on an upswing over the past few years. In terms of value, the residential property market constitutes almost 75 per cent of the real estate market in India. A number of global investors/developers are now keen on real estate investment opportunities in India. Consequently, the share of real estate in Foreign Direct Investment (FDI) has been rising. It has already raised from a low 4.5 per cent in 2003 to 25 per cent in FY 2006 and an estimated 26 per cent in FY 2007. With higher growth in FDI and even further increase in real estate's share of FDI it is expected that the sector would witness inflows to the tune of US$ 8-10 billion by FY 2010. The Indian real estate sector has witnessed a revolution, driven by the booming economy, favorable demographics and liberalized foreign direct investment (FDI) regime. Growing at a scorching, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent 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 second largest employing sector in India (including construction and facilities management), real estate is linked to about 250 ancillary industries like cement, brick and steel through backward and forward linkages. Consequently, a unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. Initiatives by the Indian Government The Government has introduced many progressive reform measures to unlock the potential of the sector and also meet increasing demand levels. 100 per cent FDI allowed in realty projects through the automatic route.
In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres. Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly larger number of states. Enactment of Special Economic Zones Act. Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million, respectively. Full repatriation of original investment after three years. 51 per cent FDI allowed in single brand retail outlets and 100 per cent in cash and carry through the automatic route.
Major Global Players in the fray: With the significant investment opportunities emerging in this industry, a large number of international real estate players have entered the country. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion per annum. Investment in the Indian realty market is set to increase to US$ 10- 20 billion by 2010 with a boost from Real Estate Mutual Funds and Real Estate Investment Trust. The sector, which is growing at an annual rate of 35 per cent, is currently worth US$ 12 billion, according to a study by Deloitte. A unit of Deutsche Bank aims to invest more than US$ 1 billion over three years in Indian construction and real estate projects. Downey Day International, a London-headquartered group with gross assets to the tune of US$ 4 billion, is setting up a chain of four-star hotels in India, starting with a Jaipur property that is expected to be opened in November 2008. Russian conglomerate Sistema plans to develop hotel, offices and residential complexes in major cities with an initial investment of US$ 100-200 million, eyeing huge potential in India's construction and realty market ahead of the 2010 Commonwealth Games. India Land Ventures (ILVL), a part of the Madrid-headquartered Americorp Group, will invest US$ 585.48 million in eight infrastructure projects across the country over the next two years. Jones Lang LaSalle (JLL), the world's leading integrated global real estate services and money management firm, plans to invest around US$ 1 billion in the country's burgeoning property market. Merrill Lynch & Co bought 49 per cent equity in seven mid-income housing projects of India's largest real estate developer DLF in Chennai, Bangalore, Kochi and Indore for US$ 375.98 million. Landmark to invest US$ 993.38 million in 12 projects across the northern region in the next three-four years. Several Dubai-based companies, who have invested billions of dollars in many real estate and infrastructure projects in India, are keen to boost it further in one of the fastest growing economies in the world.
Global real estate majors such as Dubai World, Trump Organization of US, Smart City of Dubai, Kishimoto Gordon Dalaya, Khuyool Investments, Bonyan Holding, Plus Properties, ABG Group and Al Fara's Properties among others have all firmed up their plans for the Indian real estate market with an investment of around US$ 20-25 billion in the next 12-18 months.
Realty Funds The boom in the real estate industry has attracted a large number of realty funds to tap into this market. According to Cushman & Wakefield, foreign investors have raised nearly US$ 30 to 40 billion since March 2005 for investing in Indian real estate. Prominent global players like Carlyle, Blackstone, Morgan Stanley, Trikona, Warbus Pincus, HSBC Financial Services, Americorp Ventures, Barclays and Citigroup among others have all already checked into the Indian realty market. In fact, real estate has been instrumental in India emerging as the top destination in Asia (excluding Japan) in attracting private equity investments during the first ten months of this year. Real estate accounted for 26 per cent of total value of private equity investments, with 32 deals valued at US$ 2.6 billion. And according to industry estimates, another US$ 10-20 billion would pour into the sector in the next three years. The flow of private equity (PE) continues in 2008. During the first five months of 2008, private equity commitments into the Indian real estate companies has surpassed US$ 3 billion, which incidentally is the total PE investment into the Indian real estate companies for the whole of 2007. Indian Real Estate Companies working abroad Simultaneously, many Indian realtors are making a name for themselves in the international market through significant investments in foreign markets. Prudential Real Estate Investors has acquired Round Hill Capital Partners Kabushiki Kaisha, a Japanese asset management firm. Embassy Group has inked a deal with the Serbian government to construct a US$ 600 million IT park in Serbia. Parsvnath Developers has tied up with the Al-Hasan Group in Oman. Puravankara Group is doing a project in Sri Lanka - a high-end residential complex, comprising 100 villas. The Hiranandanis are constructing 5000 5-star hotel rooms, which will come up between Abu Dhabi and Dubai. 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 projects in Malaysia. Kolkata's South City Projects is working on two projects in Dubai.
Development in other Segments of the Real Estate Sector Rising income levels of a growing middle class along with increase in nuclear families, low interest rates, modern attitudes to home ownership (the average age of a new homeowner in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young working population from that of 'save and buy' to 'buy and repay' have all combined to boost housing demand. According to 'Housing Skyline of India 2007-08', a study by research firm, Indicus Analytics, there will be demand for over 24.3 million new dwellings for self-living in urban India alone by
2015. Consequently, this segment is likely to throw huge investment opportunities. In fact, an estimated US$ 25 billion investment will be required over the next five years in urban housing, says a report by Merrill Lynch. Simultaneously, the rapid growth of the Indian economy has had a cascading effect on demand for commercial property to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centers. 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. Future of the Real Estate Sector: At present, the domestic real estate market is expected to be of US$15bn in which the FDI contribution is estimated around less than US$4bn. Despite real estate market confronting with a temporary depression with interest rates hovering between 12-16%, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected that FDI element in real estate market would increase by about US$21bn to touch US$25bn in next 10 years. The ASSOCHAM forecast in this regard is based on the fact that since real estate in India would be a hot market, the foreign investors are constantly looking at India for parking their surpluses, as returns on such investments would be quite high in the near future. Releasing the assessment on FDI’s contribution to the domestic real estate market, ASSOCHAM President, has said that in future, higher interest rates would subside and India is likely to scale a GDP growth of over 10% for at least a decade, creating huge space for overseas investors in the real estate sector. At present, the domestic real estate market is expected to be of US$15bn in which the FDI contribution is estimated around less than US$4bn. The bank credit to this sector by the end of 2007-08 has been estimated at over Rs 3500bn which will multiple substantially in the coming years in view of the growth that the sector is expected to register, adds the ASSOCHAM analysis. Another reason as to why the real estate sector would witness a boom is that currently the foreign developers could undertake construction activities in a minimum space of 50,000 sq. ft. as a result of which the FDI component in domestic real estate market has been restricted. The ceiling of 50,000 sq. ft. would be lifted by the Government as it is under constant pressure to increase it so that higher FDI in real estate sector can be facilitated. ASSOCHAM expects the ceiling of 50,000 sq. ft. would be enhanced to a minimum of 2 Lakh sq. ft. in the next 10 years in a gradual manner and result in much higher foreign capital absorption. The only problem the real estate sector is currently confronting is lack of approvals for setting up townships, as there is involvement of the Center and a number of state agencies. In view of ASSOCHAM, as the real estate sector opens up, the multiple approvals will have to be done away with. This will be particularly so because in the Asian region, India is the only country which offers returns ranging between 20-25% on commercial and residential properties as against 15-18% in rest of Asia.
Interestingly, ASSOCHAM has also projected that the foreign investments in the real estate development will come through private equity instead of institutional mechanism. The real estate story in India would grow bigger as the IT sector alone is expected to require about 200mn sq. ft. of space. It is also estimated that in India, in residential sector, the housing shortage is around 20mn units, of which nearly 7mn units are estimated to be in urban India. The increase in purchasing power and exposure to organised retail formats has also redefined the consumption patterns for dwelling units. As a result, retail projects have been mushrooming in smaller towns and cities. The retail market is likely to grow at around 35% which will again create scope for real estate developers, the ASSOCHAM Chief said. As per ASSOCHAM estimates, nearly 30mn sq. ft. of organized retail space is currently available. Another 100mn sq. ft. is likely to be added by end of 2008 from over 300 malls. Out of these, 20mn sq. ft. is slated to come up in Delhi and Mumbai. With the retail sector experiencing a boom, the country is witnessing a spurt in extremely large retail spaces. Shopping malls with over 1mn sq. ft. of space have become the order of the day. About 20 of these are now at various stages of construction. Majority of retailers are now planning to expand within the current city and equally large number of them are willing to open new stories in other cities. With the economy surging ahead, the demand for all segments of the real estate sector is likely to continue to grow. The Indian real estate industry is likely to grow from US$ 12 billion in 2005 to US$ 90 billion in by 2015. Given the boom in residential housing, IT, ITeS, organised retail and hospitality industries, this industry is likely to see increased investment activity. Foreign direct investment alone might see a close to six-fold jump to US$ 30 billion over the next 10 years.
References: 1. Press Release :Associated Chambers of Commerce and Industry of IndiaAug.5, 2008 2. Real Estate: Market & Opportunities Indian Brand Equity Foundation Report: July , 2008
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'Housing Skyline of India 2007-08', a study by research firm, Indicus Analytics Logistics Industry in India: Real Estate’s New Power House: Cushman & Wakefield
Reports by Ernest & Young & Deloitte. w.w.w Economy Watch.com Indian Realty News Economic Times