A Study on Indian Real Estate

Agenda

India Growth Story Today, India is one of the fastest growing economies of the world. Expected to be the 3rd largest economy by 2025 and the largest economy by 2050. 70% of the future employment opportunities will be created in the cities. India needs Rs.60000 Crores in the next 20 years to meet its infrastructural needs of approx. 68 cities that will have above one million population. Needs Holistic development with emphasis on construction and real estate sector. The real estate sector will be the one that writes the Indian growth story

Evolution of Real Estate Initially land was used as a tool to hijack a countrys economic independence and subvert its social processes. Post independence, Indian real estate sector was unorganized and disaggregated. Land prices were low because of low demand. FDI policies were too stringent, defensive and discouraging. Post liberalization, real estate sector has seen impressive growth owing to the following Multinational Entrepreneurialism. Buoyant local stock markets. Robust economy. With great demand for housing and commercial and industrial premises for a booming economy, it transformed into one of the most lucrative sectors in terms of investment and employment opportunities

Stand Point Real estate sector is the second highest in employment generation. Contributes almost 5% to Indian GDP which is expected to be 6% in coming years. Increase in residential & commercial real estate, hotel accommodation and SEZ demand. IT/ITES sector and rising outsourcing trends have driven up demand for premium offices. Rapid growth in retail, hospitality, infrastructure makes it most lucrative investment area for next 5 to 10 years. It contributes to countrys infrastructure by buildings, roads, flyovers, highways etc. Overall it can be concluded that a unit increase in real estate sector can generate a fivefold increase in national income.

Residential Real Estate Traditional mainstay of Indian property market - largely driven by rising disposable incomes, growing middle class, fall in interest rates, fiscal incentives, increase in nuclear families and urbanization. There will be a shortfall of 2.6 crore housing units by 2012. It is anticipated that India will add another 22 crore people to cities by 2025 which is going to increase the demand-supply gap in housing sector. As a result of the immense growth potential in housing, many retail investors are viewing real estate as an attractive investment option compared to mutual funds and stocks. The global recession in 2008 has slowed down the growth in housing market.

Commercial Real Estate It mainly consists of office spaces, retail, hospitality, multiplexes and malls. Demand for commercial properties was 40 mn sq.ft. in 2011. Driving forces for the commercial real estate: Increased revenues of service sector companies particularly IT/ITES. Retail sector is expected to grow at the rate of 25-30%. Overall increase in room rent and occupancy rates of hotels is expected to create demand for development of new hotels. Increase in demand for schools, colleges, hospitals, roads, airports to cater rapidly growing population. Education industry and healthcare sector boosted by medical tourism will create higher demands for commercial real estate.

Derived Demand

Government Policies, Regulations and Restrictions Domestic Scenario: Government of India has realized the significance of real estate sector and has given some relaxation of the norms and regulations keeping in view of - Employment Generation - Tax Revenues - Encouraging Investment In addition to changing the tax tariffs, it has also setup some regulatory bodies. Some of the key policy decisions taken by Govt. of India are : Indirect tax World Contract Tax (VAT) Activities like Construction of commercial and residential complexes and renting immovable land are brought under this tax. Stamp Duty Sale of flats attract Stamp Duty up to 10 percent of the sale consideration.

Land Reforms Traditionally, Indian Approach to Real Estate was restrictive. First Land Reforms bill in 1950 Land Reform Legislation that abolished Zamindari, Maheshwari and Ryotwari systems. Land reforms has become an important issue from 1991 liberalization period. Current Land Acquisition law for Government : Allows the government to take over land for a public purpose sometimes without compensation leading to public acrimony. This Scenario is causing difficulties in acquiring the lands and many multibillion dollar projects have been held up for years.

Policy Initiatives by the Govt. Land Acquisition ,Rehabilitation and Resettlement bill (2011) Aimed at giving farmers better deal while helping fast track industrialization. Model Real Estate (Regulation and Development Act) Seeks to regulate realty sector by casting detailed obligation and duties on the builders to bring transparency. National Real Estate Development Council (NREDCO) Formed to induce transparency and ethics in Indian real estate to transform it into a matured and globally competitive business sector. National Land Recordisation and Modernisation Program (NLRMP) Based on computerization, updating and maintenance of land records and the validation of titles. Direct Tax Code The income from all properties held for earning rentals shall be computed under the head income from house property.

Risks Faced by Real Estate Sector: Liquidity Risk The time required for liquidity of real estate property can vary depending on the quality and location of the property. Regulatory Risks : The rules, regulations and legalities, demonstration of frequent changes make real estate sector a cumbersome investment option in India. Property Marketing Transparency Risks : Being a market with less than 100% transparency, a strong professional valuation and regulatory institutions are needed. Macroeconomic Risks : Interest rates, inflation and exchange rate risks are amongst the important macroeconomic indicators. Land Ownership and Title Issues : Lack of information and old property related issues also add to the risks faced by the investors.

Foreign Investments

FDI in Real Estate India is the second most attractive destination for the Foreign Direct Investments for the years 20082010.(world Investment Report). However, FDI in real estate is only 1% of the total GDP in India. (US$ 4billion) Can be improved by liberalizing the restrictive laws ensuring transparency in operations and by confidence building measures in the foreign investors.

Policy Changes by Govt. to facilitate foreign investments Before 2012 Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture. After 2012 India fully opened FDI in real estate. However, a minimum capitalization of $10 million for whollyowned subsidiaries and $5 million for joint ventures was mandatory.

Policy Changes Cont. The department of industrial policy and promotion ,in March 2012, allowed FDI in real estate in projects in a minimum area of 25 acres. The finance ministry has allowed external commercial borrowing (ECB) in realty projects involving integrated townships of 25 acres or 50,000 sq m In the Union budget 2011-12, FII limit for investment in corporate bonds having a residual maturity of over five years has been increased by $20billion, taking the over all limit to $40billion. Foreign Venture Capital Investors (FVCIs) may invest in real estate assets, within the framework of SEBI. This has paved the way for capital infusion into the market and a significant weight of foreign capital is now chasing Indian real estate

FUTURE COURSE

A China Model Second largest economy in the world and also the most attractive FDI destination in the world. The graph shows the real estate growth statistics in comparison to the GDP growth and population growth for China and India. India holds many similarities with China in terms of the size of the population, size of the economy, FDI investments etc. The contribution to GDP by the real estate sector in China is 11% where as in India it is approximately 6%.

Lessons from China Attracted foreign investors. Brought accountability and transparency in the operations. Licenses and approvals for construction projects were granted easily. The Policies and regulations have been framed in order to create encouraging and effective business environment in the construction and real estate sectors. The new Policies have more substantive implications & are expected to reshape the real estate sector for positive long-term growth. Stress Laid on regulation of real estate investment demand, improving the land supply policy & to strengthen the market order regulation.

Opportunities Vs Impediments Opportunities High domestic demand for housing Increase in income levels of the public. Strong economic growth and promising future. Availability of both technically skilled and unskilled labor. Impediments Several procedural complexities for a foreign individual or an entity to invest. Serious discrepancies in urban planning. The opaque nature of business in India. The bureaucratic processes in the legislation, archaic rules, complexities and ambiguities in the laws.

Can India Open up? India requires large amount of capital in real estate industry. FDI can be encouraged and permissions may be given to foreign real estate firms to operate in India. The sector is currently dominated by a very small no of players & entry of foreign companies will affect the opportunities of the small and medium real estate firms. Indian Govt. can permit foreign companies to enter into lease agreements with the Indian companies or builders for a specific project for a particular period of time. The decisions should be taken in after seriously considering the impact on not just real estate sector, but also on other sectors and on the Indian economy as a whole.