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.