Construction by factica


									                  CONSTRUCTION & REAL ESTATE
•     India is on the verge of witnessing a sustained investment in        housing demand and rising cost of capital. The increase in
      infrastructure build up. With construction component                 housing and capital loans have reduced immensely, causing a
      accounting for 42% of the total investment in infrastructure,        liquidity crunch for real estate firms, while a slowdown in the
      the construction industry has been witness to a strong growth        demand has led to a fall in real estate prices between the
      wave powered by large spends in housing, road, ports, water          range of 15% to 30% even in the normally price-inelastic metro
      supply and airports development. The construction sector has         regions. However, genuine demand exists for good quality
      grown at a CAGR of 16.5% during the last seven years and             homes and the stimulus packages offered by the government
      now accounts for nearly 7% of India's GDP compared to 5.7%           to sustain economic growth are likely to support the sector
      in FY00. The Planning Commission of India has proposed an            growth. Going forward, the present environment of
      investment of around US$ 500 bn in the Eleventh five-year            investments in infrastructure by the State and Central
      plan (2007-2012), which is nearly 2.3 times more than the            Governments would support growth.
      previous five-year plan.
•     From a policy perspective, there has been a growing                 KEY POINTS
      consensus that a private-public partnership (PPP) is required
      to remove difficulties concerning the development of                Supply: Past 2-3 years have seen a substantial increase in
      infrastructure in the country. During the tenth five-year plan      the number of contractors and builders, especially in the
      (2002-07), the share of private players in the total investment     housing and road construction segment.
      was 18%, which has increased to 30% during the eleventh             Demand: Demand exceeds supply by a large margin. Demand
      five-year plan. The balance will be borne by the public sector.     for quality infrastructure construction is mainly emanating
•     The real estate industry comprising of construction and             from the housing, transportation and urban development
      development of properties has grown from family based               segments.
      entities with focus on single products and having one market        Barriers to entry: Low for road and housing construction.
      presence into corporate entities with multi-city presence having    However, high working capital requirements can create
      differentiated products. The industry has witnessed                 growth problems for companies with weak financial muscle.
      considerable shift from traditional financing methods and limited
                                                                          Bargaining power of suppliers: Low. Due to the rapid
      debt support to an era of structured finance, private equity
                                                                          increase in the number of contractors and construction
      and public offering.
                                                                          service providers, margins have been stagnant despite
•     The construction sector is a major employment driver, being         strong growth in volumes.
      the second largest employer in the country, next only to
                                                                          Bargaining power of customers: Low. The country still lacks
      agriculture. This is because of the chain of backward and
                                                                          adequate infrastructure facilities and citizens have to pay for
      forward linkages that the sector has with other sectors of the
                                                                          using public services.
      economy. About 250 ancillary industries such as cement, steel,
      brick, timber and building material are dependent on the            C o m p e t i t i o n : Ve r y h i g h a c r o s s s e g m e n ts l i k e r o a d
      construction industry. A unit increase in expenditure in this       construction, housing and urban infrastructure development.
      sector has a multiplier effect and the capacity to generate         Relatively less in airport and port development.
      income as high as five times.
                                                                          CURRENT SCENARIO AND PROSPECTS
                                                                    •      India is on the verge of witnessing a sustained growth in
•     Order inflows for the construction industry had slowed down          infrastructure buildup. Infrastructure investments continue to
      in FY09 owing to global economic meltdown, which blocked             be the most important growth driver for construction
      the capital inflows required for expansion. Slowing economic         companies. The proposed increase in allocation in the eleventh
      growth also led buyers to defer their investment plans in            five-year plan (2007-2012). will translate into business for
      property. Owing to waning demand, low absorption levels and          construction companies.
      cash crunch issue scenario faced by majority of the players, •       Real estate investments account for about 60% of the total
      construction of projects has been delayed. Fresh construction        construction investments. Demand-supply gap for residential
      of commercial and retail projects would take place in those          housing, favourable demographics, rising affordability levels,
      regions where there is genuine demand.                               availability of financing options as well as fiscal benefits
•     The 2009-10 Budget saw increase in allocation towards                available on availing of home loan are the key drivers
      various infrastructure development schemes. Allocation for           supporting the demand for residential construction. In addition
      National Highway Development Programme (NHDP) has been               to this, demand for office space from IT/BPO segment is
      increased by 23% in FY10 as against Rs 129.7 bn in 2008-09.          expected to continue due to emergence of India as a preferred
      Th budget also enhanced the allocation towards housing and           outsourcing destination. Also, boom in organized retail is
      provision of basic amenities to urban poor and increased             expected to result in huge demand for real estate construction.
      sepnding under Accelerated Irrigation Benefit Programme by           As per the ASSOCHAM, the Indian real estate industry size is
      75%. The government has set up IIFCL to finance PPP projects         pegged at US$ 16 bn and growing at the rate of 30% p. a.
      in the sector and it will refinance 60% of commercial bank •         While long-term factors are likely to work in favour of the real
      loans for PPP projects in critical sectors over the next fifteen     estate developers, the outlook for the short term remains bleak.
      to eighteen months. Moreover, IIFCL and Banks are in a position      Also the fact that the realty companies have lined up huge
      to support projects involving total investment of Rs.1 trillion.     projects, across all the segments - residential, commercial,
      With a slew of announcements in housing, road, port and              industrial and retail, is likely to widen the supply-demand gap
      airport development, we are seemingly on a path of sustained         going forward. This may end up in softening of real estate
      recovery in the economic growth on the back of increased             prices, hurting the margins of the developers. The total area
      focus on the infrastructure construction in the country.             to be developed over the next few years by them is nearly 20
•     Post the US subprime crisis and the slow down in the economy,        to 30 times the size of projects executed so far and hence,
      the real estate developers are caught between sluggish               there are likely to be delays as well.

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