real estate
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“INDIAN REAL ESTATE INDUSTRY”
Research on Real Estate Development
Dissertation Submitted to the Padmashree Dr. D.Y. Patil University in partial fulfillment of the requirements for the award of the Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by: Kumar Agnani (Roll No. 64)
Research Guide:
Prof. Manish Rai
Department of Business Management Padmashree Dr. D.Y. Patil University CBD Belapur, Navi Mumbai April 2009
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CERTIFICATE
This is to certify that the dissertation entitled “ Indian Real Estate Industry and its Development ” is the bona fide project work carried out by Mr. Kumar M. Agnani student of Masters of Business Administration, at Padmashree Dr. D.Y. Patil University’s Department of Business
Management during the year 2007 -2009, in partial fulfillment of the requirements for the award of the Degree of Master in Business Management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title. Signature of Director Signature of Project Guide
Place: Mumbai
Date:
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DECLARATION
I hereby declare that the dissertation “Indian Real Estate Industry” Submitted for the MBA Degree at Padmashree Dr. D.Y. Patil University’s Department of Business Management is my original work and the dissertation has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles.
Place: Navi Mumbai Date:
(Kumar Agnani)
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“Acknowledgement is an art, one can write glib stanzas without meaning a word, on the other hand one can make a simple expression of gratitude.” I take the opportunity to express my gratitude to all of them who in some or other way helped me to accomplish this challenging project in Real Estate Industry. No amount of written expression is sufficient to show my deepest sense of gratitude to them. I am very thankful to Guide Prof. Manish Rai, and very grateful to, Faculty Department of Business Management, Padamshree Dr. D.Y.Patil University, Belapur for their everlasting support and guidance on the ground of which I have acquired a new field of knowledge. The course structure created for this curriculum has benefited with the inclusion of recent development in the organizational and managerial aspects.
KUMAR AGNANI MBA (Core, Marketing) ROLL NO. 64
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TABLE OF CONTENTS
Chapter. No Page. No.
Title
A B 1 2 3 4 5 5.1 5.2 6 6.1 6.2 6.3 6.4 6.5 6.6
List of Tables List of Abbreviations Executive Summery Objectives of the Study Research Methodology Literature Review An Introduction Introduction Real estate regulations Indian Real Estate Industry – An Insight Background MAJOR MARKET PLAYERS Size Structure Growth Rates Statistical Data
A B 14 17 19 23 24 25 26 34 35 37 38 39 39 42
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6.7 6.8 6.9 6.10 7 7.1 7.2 7.3 7.4 7.5 8 8.1 8.2 8.3
Regulations and Foreign Ownership Various Industrial Conditions Foreign Tie-Ups Current Deals Indian Real Estate Industry – Current Scenario Current Scenario Current demand and supply Property Price Charts Of Major Cities EVOLUTION OF THE MARKET ENTRY STRATEGIES AND MODELS FDI In Indian Real Estate Industry The Foreign Investment Boom FACT SHEET ON FOREIGN DIRECT INVESTMENT
43 50 51 53 55 56 58 63 65 67 72 73 78
Conditions for Foreign Investment in Real Estate 82 Sector in India Factors Affecting The Indian Real Estate 84 88 89 91 93
9 10 10.1 10.2 10.3
Industry Major Market Players Sobha Developers Peninsula Land Marg Construction
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TABLE OF CONTENTS (Contd)
Chapter. No 10.4 10.5 10.6 11 12 12.1 12.2 Page.No. 95 97 99 Market 101 106 108 114 118 119 And 123 127 129 130 134 139
Title Prajay Engineers Syndicate D S Kulkarni Developers Arihant Foundations & Housing Research on Emerging Real Estate
Indian Real Estate Industry – SWOT Analysis STRENGHTS WEAKNESSES
12.3 OPPURTUNITY 12.4 KEY THREATS 13 “The Ground Floor” - Real Estate Industry Recession 13.1 RECESSION 13.2 13.3 13.4 13.5 Slowdown across sectors Real estate & Recession Indian real estate sector in recession mode MIGHTY BUILDERS TUMBLE
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“RENOVATING REAL ESTATE” COUNTER RECESSION
-EFFORTS TO 151
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14.1 15
EFFORTS TO COUNTER RECESSION Conclusion ANEXTURES Reference Bibliography
158 165 168 169 170
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LIST OF TABLES
No. Title Page. No. 5.1 5.2 6.1 6.2 7.1 7.2 7.3 Turnover of Automobile Manufacturers Key regulations in the real estate sector Major Market Players Industry Profile Demand forecast Demand forecast Cumulative Office supply across 7 Key Cities Across India 7.4 8.1 8.2 11.1 12.1 Addition in retail Space Amount of FDI inflows(In Rs. Crore) FDI Equity inflows during calendar year 2007 Research Nominees Long Term Growth Rates 65 83 84 106 116 32 35 40 41 59 60 63
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LIST OF FIGURES
No.
Title
Page. No.
6.1 6.2 6.3 7.1 7.2 11.1 11.2 11.3 12.1 12.2 12.3 12.4 12.5
Real Estate Developers Planning Exponential Growth Indian Real Estate market Growth Drivers Growth Potential and Expected Trends Distribution of India New Office Space by 2008 India’s Mall space to rise fourfold in three years Chart 1 Chart 2 Chart 3 SWOT Analysis Favourable Demographics Growth Chart (FCI) Role Of Aggregators Market Oppurtunities Snapshot
43 44 45 64 65 107 108 109 111 113 115 119 121
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12.6 12.7
Interest Rate Movement For 25 Years Decreasing Spreads
122 125
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LIST OF ABBREVIATIONS
ABBREVIATION FULL FORM
SEZ CRZ CAGR CAN FDI GDP IT MNC R&D SWOT
Socio-economic zone Coastal Regulation Zone Compounded Annual Growth Rate Controller Area Network Foreign Direct Investment Gross Domestic Product Information Technology Multi National Corporation Research & Development Strength, Weakness, Opportunity & Threats
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Chapter 1
Executive Summary
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EXECUTIVE SUMMARY
Indian real estate has huge potential demand in almost every sector especially commercial, residential, retail, industrial, hospitality, healthcare etc. Commercial office space requirement is led by the burgeoning outsourcing and Information Technology Industry. The leaders of the IT/ITES world have set up or are setting up their centers in India. Estimated demand from IT/ITES sector alone is expected to be 150mn sq.ft. of space across the major cities by 2010. In residential sector there is housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organized retail formats has redefined the consumption pattern. As a result the country has experienced mushrooming of retail projects across the cities.The main growth thrust is coming due to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors. India, like many other parts of the world is zooming away in the face of a real estate boom. In India there is a real estate boom in any direction you wish to see. Whether it is Bangalore, Pune, Calcutta or Chennai or Hyderabad or even already sky high Mumbai and Delhi - the story is the same. Now apartments are more than just houses. They are about lifestyle. So while the first housing colonies had nothing but a security guard, these new housing colonies have a gym (spa, jacuzzi, steam), swimming pool (heated, lined with Italian marble). Some have a multiplex, shopping
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complex. There are those which offer a servant entrance. The next step is creating an ambience. Along the length and breath of India, there are many small and big Indian real estate companies. Each has a geographical stronghold, but there are also bigger companies, which have a national presence. There are innumerable agents, brokers, architects, property consultants, builders and home finance companies in the metros and smaller cities. Indian real estate news is hot news in the global real estate market. And Indian real estate companies have geared up to meet the high demand from domestic as well as international buyers. If you are looking for a reputed Indian real estate company to help you with your property dealing, look no further. The development of real estate in India focuses on two primary areas: retail and residential. The global real-estate consulting group Knight Frank has ranked India 5th in the list of 30 emerging retail markets and predicted an impressive 20 per cent growth rate for the organized retail segment by 2010.The organized segment is expected to grow from a mere 2 per cent to 20 per cent by the end of the decade, it said.
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Chapter 2
Objectives of Study
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OBJECTIVES OF THE STUDY
Management Objective
To fuel initiative and foster activity by allowing individuals freedom of action and innovation in attaining defined objectives.
People Objective
To help HCL Insys people share in the company’s success, which they make possible; to provide job security based on their performance; to recognize their individual achievements and to help them gain of satisfaction and accomplishment from their work. Core Values
♦ ♦ ♦ ♦
It is uphold the dignity of individual It is honour all commitments It is committed to quality, Innovation and growth in every endeavor It is responsible Corporate Citizens.
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Chapter 3
Research Methodology
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RESEARCH PROBLEM
• Real Estate Corporate facing financial crunch.
• Decreasing business of Real Estate Companies
RESEARCH DESIGN • Determined the Information Sources: The researcher gathered data through secondary sources. • PRIMARY DATA is collected through questionnaire, search and research from developers and market watchers. • SECONDARY DATA is being search sites like magazines, newspapers, journals, websites and the data has been collected through other approaches.
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DATA COLLECTION The researcher collected information through the official websites, magazines and journals.
DEVELOPED THE RESEARCH FRAME: This included deciding upon various aspects for the project on which the entire research is based. The research frame included:
NATURE OF STUDY The project on which the researcher worked is descriptive and inferential in nature. DATA SOURCE: The researcher took the help of both primary as well as secondary sources. Secondary sources being interaction with various Real Estate people of the selected and has been chosen for the research by the researcher. Secondary sources being the internet as the medium and the official sites of the companies of Real Estate sectors and corporate selling and feedback on real estate Companies.
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INSTRUMENT USED The researcher for the research used a Questionnaire cum Schedule for market research for both the segments horizontal and vertical. The Questionnaire was prepared by the researcher and Schedule was provided by the company in which the researcher did its research report.
SAMPLE SIZE Sample size for the research is fixed. It counts to 30. That is the Real Estate companies and Developers and feed of Real estate in comparison between other sectors.
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Chapter 4
Scope of Study
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SCOPE OF THE STUDY The study is to know the latest crisis faced by the real estate companies and how it can effect the growth of the country. The study is to also determine the demand and future expectation of real estate companies.
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Chapter 5
Real Estate – An Introduction
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5 1INTRODUCTION
“It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate.” – Donald Trump
1.1.1 What is Real Estate ?
The most basic definition real estate is "an interest in land". Broadening that definition somewhat, the word "interest" can mean either an ownership interest (also known as a fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If you rent an apartment, you have a leasehold interest in real estate. If you own a home, you have an ownership interest in that home. Some jurisdictions recognize other interests beyond these two, such as a life estate, but those interests are less common in the investment arena.
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As a real estate investor, you will most likely be purchasing ownership interests and then earning a return on that investment by issuing leasehold interests to tenants, who will in turn pay rent. It is also not uncommon for an investor to acquire a long-term leasehold interest in land, which then has a building constructed upon it. At the end of the land lease, the land and building become the property of the original land-owner.
5.2 Real estate regulations
1.2.1 Central laws
1.2.1.1 Laws relating to land acquisition
The Urban Land (Ceiling and Regulation) Act, 1976 prescribes the limits to urban areas that can be acquired by a single entity. It has, however, been repealed in some states and union territories under the Urban Land (Ceiling and Regulation) Repeal Act, 1999. Further, land holdings are subject to the Land Acquisition Act, 1894, which provides for the compulsory acquisition of land by the central Government or the appropriate state Government for public purposes, including planned development and town and rural planning. However, any person with an interest in such land has the right to object to such compulsory acquisition and the right to compensation.
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1.2 1.2 Laws regulating transfer of property
Transfer of Property Act, 1882
Transfer of property, including immovable property, between living persons, as opposed to the transfer of property by the operation of law, is governed by the Transfer of Property Act, 1882 (TP Act). The TP Act establishes the general principles relating to the transfer of property, including among other things, identifying the categories of property that are capable of being transferred, the persons competent to transfer property, the validity of restrictions and conditions imposed on the transfer, and the creation of contingent and vested interest in the property.
Registration Act, 1908
The Registration Act, 1908 (‘Registration Act’) has been enacted to provide public notice of the execution of documents affecting transfer of interest in immoveable property. The purpose of the Registration Act is to conserve evidence, assurances, title, and publish documents and prevent fraud. It details the formalities for registering an instrument. Section 17 of the Registration Act identifies documents for which registration is compulsory and includes, among other things, any non-testamentary instrument which purports or operates to create, declare, assign, limit or extinguish (whether in present or in future) any right, title or interest (whether vested or contingent) in immovable property of the value of Rs100 or more, and a lease of immovable property for any term exceeding one year or reserving a yearly rent. A document will not affect the property comprised in it, nor be
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treated as evidence of any transaction affecting such property (except as evidence of a contract in a suit for specific performance or as evidence of part performance under the T.P. Act or as collateral), unless it has been registered.
The Indian Stamp Act, 1899
There is a direct link between the Registration Act and the Indian Stamp Act, 1899 (‘Stamp Act’). Stamp duty should be paid on all documents specified under the Indian Stamp Act and at the rates specified in the Schedules there under. The rate of stamp duty varies from state to state. The stamp duty is payable on instruments at the rates specified in Schedule I of the said Act. The applicable rates for stamp duty on these instruments, including those relating to conveyance, are prescribed by the state legislation. Instruments chargeable to duty under the Stamp Act, which are not duly stamped, are incapable of being admitted in court as evidence of the transaction contained there in. The Stamp Act also provides for impounding of instruments which are not sufficiently stamped or not stamped at all.
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Table 5.1 : Stamp Duty And Legal Costs
The Easements Act, 1882
The law relating to easements is governed by the Easements Act, 1882 (‘Easements Act’). The right of easement is derived from the ownership of property and has been defined under the Easements Act as a right which the owner or occupier of land possesses for the beneficial enjoyment of that land and which permits him to do or to prevent something from being done in respect of certain other land not his own. Under this law an easement may be acquired by the owner of immovable property, i.e. the dominant owner, or on his behalf by the person in possession of the property. Such a right may also arise out of necessity or by virtue of a local custom.
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1.2.1.3 Laws relating to employment
The employment of construction workers is regulated by a wide variety of generally applicable labour laws, including the Contract Labour (Regulation and Abolition) Act, 1970, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and the Payment of Wages Act, 1936.
1.2.2 State laws
1.2.2.1 Urban development laws
State legislations provide for the planned development of urban areas and the establishment of regional and local development authorities charged with the responsibility of planning and development of urban areas within their jurisdiction. Real estate projects have to be planned and developed in conformity with the norms established in these laws and regulations made there under and require sanctions from the government departments and developmental authorities at various stages. For instance, in certain states such as Haryana, for developing a residential colony, a licence is required from the relevant local authority. In cases where projects are undertaken on
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lands which form part of the approved layout plans and/or fall within the municipal limits of a town, generally the building plans of the projects have to be approved from the concerned municipal or developmental authority. Building plans are required to be approved for each building within the project area. Clearances with respect to other aspects of development such as fire, civil aviation and pollution control are required from appropriate authorities, depending on the nature, size and height of the projects. The approvals granted by the authorities generally prescribe a time limit for completion of the projects. These time limits are renewable upon payment of a prescribed fee. The regulations provide for obtaining a completion/occupancy certificate upon completion of the project.
1.2.2.2 Agricultural development laws
The acquisition of land is regulated by state land reform laws, which prescribe limits up to which an entity may acquire agricultural land. Any transfer of land which results in the aggregate land holdings of the acquirer in the state to exceed this ceiling is void, and the surplus land is deemed, from the date of the transfer, to have been vested in the state government free of all encumbrances. When local authorities declare certain agricultural areas as earmarked for townships, lands are acquired by different entities. After obtaining a conversion certificate from the appropriate authority with respect to a change in use of the land from agricultural to non-agricultural for development into townships, commercial complexes etc. such ceilings are not applicable. While granting licences for development of townships,
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the authorities generally levy development/ external development charges for provision of peripheral services. Such licences require approvals of layout plans for development and building plans for construction activities. The licences are transferable on permission of the appropriate authority. Similar to urban development laws, approvals of the layout plans and building plans, if applicable, need to be obtained.
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Table 5.2 : Key regulations in the real estate sector
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Chapter 6
Indian Real Estate Industry – An Insight
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6.1 BACKGROUND
India is considered the birthplace of the number zero. In recent years, however, the subcontinent has hit the headlines with rather larger numbers. Home to roughly 1.1 billion people, India is the second most populous country after China and 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% p.a. since 1992.
Indian realty sector will grow from US$ 12 billion in 2007 to US$ 90 billion by 2015.
The size of the real estate industry in India is estimated to be around $12 billion. And iti s continuously growing at the rate of 30% for the last few years. Almost 80% of real estate developed in India is residential space and the rest comprises of office, shopping malls, hotels and Hospitals. The main reason for growth is mainly due to off-shoring business, including high end technology consulting, call centers and software programming houses which covers 15 million square feet of real estate development. With an ever increasing influx of funds, the real estate sector in India is growing bigger. In the first half of 2007, there will be atleast 20 more funds making an entry in India while 35 big ticket foreign funds have already made their presence in India. Northbridge Research expects that the Indian
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realty sector will grow from US$ 12 billion in 2007 to US$ 50 billion in 2010 and to US$ 90 billion by 2015. Global funds like Carlyle, Blackstone, Morgan Stanley, Trikona and Warbus Pincus are sitting on a total corpus of US$ 12-15 billion. Even the most aggressive retailers expands their business creates a huge demand for real estate.
The real estate development in India focuses on two primary areas : Retail and Residential. Northbridge research has predicted growth rate of 20% in the organized retail segment by 2010. Lot of foreign players are attracted to invest in real estate market in India. Examples are : Morgan Stanley Real Estate has invested $68 million in mantri Developers private limited, a private Banglore based Real Estate Developer.Vancouver-based Royal Indian Raj International Corporation (RIRIC) will invest $2.9 billion in a single real estate project named Royal Garden city in Banglore over a period of ten years and the retail value of project is estimated at $8.9 billion.
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Table 6.1 : Market Players
6.2 MAJOR MARKET PLAYERS
Real Estate Developers Construction Companies Corporate Houses Property consultants Real Estate brokers
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Housing finance companies Banks & Financial Institutions Architects Vendors & Suppliers
Table 6.2 : Industry Profile
6.3 SIZE
Real Estate and Construction is a $12 billion (by revenue) industry in India.
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The industry has seen a rapid growth in the past few years.
6.4 STRUCTURE
In India, Real Estate sector is fragmented market - Most real estate developers have only a local or regional presence - There is participation of large corporations in these sector - India has higher margins (20%) as compared to the developed markets (5-6%). Institutional finance in Real estate is just beginning. Various foreign Real Estate and Finance companies like GE Commercial Finance, Tishman Speyer, Ascendas and Farallon Capital have entered the Indian market.
6.5 GROWTH RATES
Real Estate sector is growing at an annual growth rate of 30% Returns in India range between 12-15% compared to 3-4% in the advanced countries. Northbridge research estimates that the 70% of the new construction will be for the IT sector.
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Figure 6.1 : REAL ESTATE DEVELOPERS PLANNING EXPONENTIAL GROWTH
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Figure 6.2 : Indian Real Estate market Growth Drivers
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Figure 6.3 : Growth Potential and Expected Trends
6.6 STATISTICAL DATA
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The growth in commercial office space requirement is mainly due to outsourcing and Information Technology (IT) industry. Northbridge research estimates that there is going to be housing shortage of 19.4 million units out of which 6.7 million are in urban India. Even the purchasing power and exposure to organized retail markets has increased the scope of the market. Projections are made that US$ 10 billion will be injected into Indian real estate sector in the next 12 to 18 months. Almost over 90 foreign investors are already in the country to tap investment avenues. Nearly 12 US funds are raising US$ 3.5 billion for investments in Indian realty.Those raising the funds include Wall Street powerhouses such as the Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup PropertyInvestors (US$ 125 million), Morgan Stanley (US$ 70 million) and GE Commercial Finance Real Estate (US$ 63 million). Organised retail is currently 4.6% of the US$ 270 billion Indian retail sector whichis expected to grow at the rate of 37% in 2007 and 42% in 2008.
6.7 REGULATIONS AND FOREIGN OWNERSHIP
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Till recently, FDI in real estate was restricted to development of industrial parks, hotels, integrated townships and SEZ’s. From March 3, 2005 onwards, Government of India replaced the integrated township policy to permit FDI upto 100% in townships, housing, built-up infrastructure & construction – development projects.
A significant change is the lowering of the minimum development size from 100 acres to25 acres. The lower threshold is more manageable for a firsttime foreign investor. Further, there are limited holdings of 100-acre plots available in major cities. Another significant change is the removal of sectoral restrictions. The scope is expanded to cover residential, commercial or shopping malls. The new guidelines for India can trigger an investment of $1-1.5 billion annually. IT and IT-enabled services would require an estimated 50-70 million sq ft of space in the next two to three years, while the nationwide housing shortage is estimated at 20 million residential units.
The FDI in Indian real estate sector is permitted through the automatic route across all real estate segments except agricultural and plantation properties subject to the conditions mentioned below :-
i. Investment
Minimum Capitalization - for wholly owned subsidiaries - US$ 10 million
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- for Joint Ventures with Indian Partners -US$ 5 million, to be brought in within 6 months of commencement of business. Original Investment cannot be repatriated before a period of three years from completition of capitalization. The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
ii. Minimum Area Requirements:
The minimum area to be developed under each project would be as follows: Minimum land area to be developed is case of serviced housing plots is 10 hectare or approximately 25 acres. In case of construction development projects, a minimum built-up area of 50,000 sqm. In case of a combination of the above two projects, any one of the above two conditions should suffice. This limit has been brought down from 100 acres that was required to invest in integrated townships subject to FIPB approval.
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iii. Time Frame & Rules
Atleast 50% of the project to be developed within 5 years from the date of obtaining all statutory clearances. Investor cannot sell undeveloped plots- where roads, water supply, street lighting, drainage, sewerage and other convenience are not available.
iv. Other Legal Compliances
The Foreign company intending to invest shall be registered as an Indian Company under Companies Act 1956. In case of joint ventures, an SPV other than the parent company of the joint venture partners needs to be formed to invest in real estate. Development of at least 50 per cent of the integrated project within a period of five years from the date of obtaining all statutory clearances has to be completed instead of from the date of procurement of land. The investor would not be permitted to sell underdeveloped plots (where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available). The investor must provide these infrastructures and obtain the completion
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certificate from the concerned local body/service agency before being allowed to dispose of the serviced housing plots. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down in the applicable building control regulations, by-laws, rules and other regulations of the State Government/Municipal/Local Body concerned. The State Government/ Municipal/ Local Body concerned, which approves the building/development plans, will monitor the developer’s compliance to the above conditions.
v. Other Amendments
IT/Business Park: Foreign investment in IT parks subject to such IT parks providing space to atleast 3 tenants. Industrial/Logistics/Warehousing: FDI policy in these properties is liberalized and now foreign investors can invest in them at the construction stage subject to a minimum of 50,000 sqm. In addition to the above, the guidelines have also been relaxed for investment by foreign and domestic venture funds in real estate. Venture funds fall under the Foreign Institutional Investment (FII) category rather
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than FDI and have to be registered with the SEBI. Venture funds can invest in real estate if each investor brings in not less than US$ 11,111 and eighty percent of the funds are invested in companies not listed on the stock exchanges or financially weak companies.
FDI is now permitted in:
Housing Townships Commercial Premises Hotels Resorts Hospitals Industrial parks Educational institutions Recreational facilities SEZ’s etc
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Key Regulatory Developments
Securities & Exchange Board of India (SEBI) has allowed Indian venture capital firms to invest in real estate .
100% Foreign Direct Investment (FDI) is now allowed in the construction sector under Automatic route.
Foreign investors can now invest in commercial real estate development projects having minimum built up area of 50,000 m2.
Minimum area threshold for FDI in Integrated Townships reduced to 25 acres from 100 acres.
Minimum equity investment cap of $10 million for 100% FDI projects and $5 million in Joint ventures.
Foreign investors only barred from trading in undeveloped land.
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6.8 Various Industrial Conditions
6.8.1 CONDITIONS OF DEVELOPMENT
Minimum 10 hectares/ 25 acres area to be developed for serviced housing plots. Minimum built up area of 50,000 sq mts for constructiondevelopment projects. Atleast 50% of project to be developed within 5 years from date of statutory clearances.
6.8.2 CONDITIONS FOR INVESTMENT
Minimum capitalization of $10 million ( wholly owned subsidiary) and $5 million (joint venture with Indian partner).
There
should be
infusion of funds
within 6
months
of
commencement of business.
Original investment cannot be repatriated prior to 3 years from completion of minimum capitalization. Early exit is permitted with prior approval of Government.
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6.8.3 MISCELLANEOUS CONDITIONS
Investor is not permitted to sell undeveloped plots. ( Where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available. It is necessary for investor to provide this infrastructure and obtain a completion certificate prior to sale of land).
Concerned
authority
will
monitor
compliance
of
above
conditions by developer.
6.9 Foreign tie-ups
Residential
JP Morgan invested in Lodha group Keppel Land ( Singaporean Company) – Joint venture with Puravankara Salim Group (Indonesia) had a township in West Bengal
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Office
Farallon (US) had a joint venture with India bulls Vornado – joint Venture with TCG.
Hotels
GMR Infrastructure – Accor Hotels and Resorts EMAAR –Budget Hotels India Limited Hilton Group – DLF JV ACCOR- Emaar- MGF for budget hotels
Domestic Player promoted funds
ICICI Funds HDFC Fund Kotak realty fund Urban Infrastructure Opportunities Fund IL&FS Realty Fund
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CIG Realty Fund Peninsula Realty Fund
Foreign player promoted Funds
Ascendas – GE Blackstone Starwood Capital Sun- Apollo Walton Street Capital AIG Real Estate Fund JP Morgan Real estate
6.10 CURRENT DEALS
Morgan Stanley closed a deal with Oberoi Constructions in Mumbai for $150 million. The Nakheel Group in Dubai signed a deal with DLF for development of residential projects in Tier I & Tier II cities worth $10 billion.
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Yatra capital buys 49 percent in Indian real estate company for 21.6 million Euro.
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Chapter 7
Indian Real Estate Industry – Current Scenario
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7.1 Current Scenario
The estimated current size of Indian real estate market at US$57bn or 6.2% of India’s GDP. In terms of value, the real estate market would likely grow at 12.8% CAGR in the next five years to US$105bn or 7.1% GDP by FY12E. In the next five years, the average annual investments required in the real estate sector are ~US$85bn, of which the residential segment constitutes 88% at US$74bn. The estimated annual investments for office space ais US$5.7bn and retail segment is US$4.8bn. These are based on requirements of investment in land and construction cost to meet the intrinsic real estate demand in India and not on sales as the mark up on costs could vary with market conditions.
Table 7.1 : Demand Forecast
As of end-FY07, the stock estimates (in terms of constructed area) were as follows – residential - ~38bn sqft, office - ~135mn sqft and retail - ~90mn sqft. In FY07, ~1.8bn sqft residential, 35mn sqft office and 24mn sqft retail space was added. We estimate the market to grow at 4.6% CAGR with
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4.2%, 15.2% and 14.3% CAGR in residential, commercial and retail segments respectively. Also, we expect the next five-year average annual demand for residential, office and retail space at 2bn sqft, 65mn sqft and 37mn sqft respectively.
Table 7.2 : Demand Forecast
Going forward, hotels, logistics and warehousing would create significant real estate demand. As per industry estimates, 100,000-125,000 hotel rooms would be added in the next five years, with setting up of around 100 economy hotels in India. There is tremendous opportunity for developers to capture the burgeoning real estate market. However, the developers need to re-invent themselves to meet changing customer needs and offer differentiated, quality products at the right price point.
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7.2 Current demand and supply
The demand and supply are on an even keel across India and estimate that there would not be significant oversupply in either residential, office or retail segments till end-CY09. However, further tightening of interest rate could reduce demand, leading to lesser absorption of supply. There would not be a sharp correction in real estate prices, although a mild correction can not be ruled out. However, such a correction should not last long and would be predominantly confined to a few overheated locations. Given the significant capital appreciation in the past two years and higher operating margins enjoyed by developer (50-80%), a marginal drop in prices should not impact the sector significantly.
Residential segment
Residential markets are stabilizing and prices are not expected to rise beyond the normal inflationary growth. Given the current supply scenario and recent hikes in interest rate, home buyers have adopted a wait and watch stance, implying that differentiated product offerings and brand name would play a critical role in closing a sale. Further, this would increase the possibility of a sporadic drop in prices in certain pockets. However, once the interest rates stabilize, improving demographics and the latent housing
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demand would again push up the residential demand. As this market in various Indian cities matures (i.e. no supply-side constraints for quality homes), developers with business competencies/skills will differentiate themselves and move forward. As per the National Housing Bank (NHB), there was a housing shortage of 19.4mn units (12.7mn units in rural areas and 6.7mn units in urban areas) in FY03. As per the five-year plan, there would be a shortage of 22.7mn housing units by ’07. Industry estimates of cumulative demand supply gap stand at 4.1bn sqft. The demand for residential units in urban India is estimated to be ~2bn sqft/annum. Although, it is difficult to estimate residential demand within the target segment of real estate developers, the estimated demand is ~450550mn sqft. This is based on the new housing demand created by rising middle and upper income households. Demand for the high-end residential segment (properties with a ticket size >Rs2.5mn) is 100- 130mn sqft. As per a recent AC Neilson report, supply from the high-end residential segment is ~120mn sqft. This implies that the demand & supply situation is comfortably matched; and the equilibrium is not expected to shift significantly.
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Office segment
Currently, demand for office space is far exceeding supply in most locations across India. This can be gauged by the large number of preleases and the low vacancy rates. Office properties have hardly seen drop in prices except in Whitefield, Bangalore, where poor infrastructure was a damper. It is estimated that the current supply pipeline would not lead to an oversupply; however, the rentals might not move further, signalling an end to capital appreciation on office properties. The development of IT/ITES SEZs remains a key risk to our estimate, which could create additional 33mn sqft supply annually. The estimated office space demand in India is 65mn sqft/annum, 67% of which is from the IT/ITES sector. We estimate the demand from the sector to be driven by an annual 565,000 employee addition over the next five years. The estimated office space supply in India is ~50-55mn sqft in CY07. The cumulative development pipeline for the key seven cities is ~105mn sqft.
Table 7.3 : Cumulative Office supply across 7 Key Cities Across India
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Figure 7.1 : Distribution of India New Office Space by 2008
Retail segment
The retail sector demand is estimated to be 37mn sqft/annum; currently, there is high demand for quality retail space across India. The supply is expected to exceed demand in the next two years as many large projects would come on stream across most metros. In the next two years, we expect rentals to remain flat or drop marginally. However, the oversupply situation post CY09 is a critical issue. Oversupply is likely to hit retail before office and residential segments and would have a more severe impact given the high land and construction cost (input costs).
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Table 7.4 : Addition in retail Space
Figure 7.2 : India’s Mall space to rise fourfold in three years
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7.3 Property Price Charts Of Major Cities
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7.4 EVOLUTION OF THE MARKET
3 YEAR SCENARIO
Realty sector is growing at the rate of 30% per annum to reach $4550 billion by 2010.
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IT sector alone is expected to require 150 million sq ft of space across major citites by 2010.
Organised retail has the potential to add over US$ 45 billion business by the year 2010.
This will create a demand of 220 million square feet of retail space by 2010.
27 million square feet of organised retail space is currently available. Another 90 million square feet is expected to be added by 2008 from 263 mall projects.
Of these, 18 million square feet is slated to come up in Delhi as well as in Mumbai, 9.5 million square feet in Ludhiana, 6 million square feet in Chandigarh and 3.6 million square feet in Ahmedabad.
India will have 2.9 million hotel rooms by 2010 as compared to today’s 1.2 million. The demand for hotels rooms will grow at a compounded annual growth rate of 10% over the next five years.
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5 YEAR SCENARIO
It is projected that the market size will be $90 billion by 2015.
IT and ITES sector are expected to continue to grow at 30%. It is estimated that additional 367 million square feet of office space will be required by 2012-2013.
A revenue of $333 million was generated from 1,80,000 medical tourists in 2004 and it is expected to rise to $ 2 billion by 2012.
Construction industry is currently worth $70 billion and would rise to $120 billion by 2010.
7.5 ENTRY STRATEGIES AND MODELS
A foreign company planning to set up business operations in India has the following options:-
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7.5.1 AS AN INDIAN COMPANY
A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through:
i) Joint Ventures ii) Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
7.5.2 AS A FOREIGN COMPANY
i) Liaison Office/Representative Office ii) Project Office
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iii) Branch Office
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
Liaison Office/Representative Office
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general
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permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
i) Export/Import of goods ii) Rendering professional or consultancy services iii) Carrying out research work, in which the parent company is engaged. iv) Promoting technical or financial collaborations between Indian
companies and parent or overseas group company. v) Representing the parent company in India and acting as buying/selling agents in India. vi) Rendering services in Information Technology and development of software in India. vii) Rendering technical support to the products supplied by the parent/ group companies.
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viii) Foreign airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). Branch Office on “Stand Alone Basis” Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India. No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
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Chapter 8
FDI In Indian Real Estate Industry
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8.1 The Foreign Investment Boom
India’s real estate sector is undoubtedly on a high growth path and recognized as global investors’ choice. India is holding ninth position among retail markets in the world with organized retailing and growing at the rate of 30 percent per annum. India has played up to its image of being one of the most attractive FDI destinations. The positive outlook of Indian government is the key factor behind the sudden rise of the Indian real estate sector. The Institute of International Finance (IIF)expects FDI in India to rise to $8 billion in 2007 from $6.5 billion in the last year. Following FDI groups have already spread their wings in Indian real estate sector.
1.Emaar MGF has brought in the largest FDI of over US$1 billion in the Indian real estate sector. In addition, the company is focusing on pan-India projects in residential, commercial, infrastructure and hospitality sectors in integrated master plans and SEZ.
2. Keppel land , a singapore based group has aleady signed JV agreement with M/ S Purvankara group, banglore based group for residential and commercial project.
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3.DSP Merrill Lynch, Barclays Bank and Mauritius-based TH Holdings and groups have do far invested Rs.11, 460 crore in the first half of this The collective investment that got parked in real estate and construction sector was to the tune of Rs. 1,252.79 crore.
4. AEA Holdings is searching for the efficient partners to expand its business horizons and wants to grab the deals and opportunities aggressively and quickly, says industry source.
6. RREEF, the real-estate investment arm of Deutsche Asset Management, is planning to invest over $200 million in a joint venture with realty major Emaar- MGF.
8. Capital Land, Hong kong based group is also planning to invest in India.
9. Royal RaJ Indian, A Canadian group has has already signed JV agreement for residential and commercial.
10..Morgan Stanley Real Estate Fund is known to have made the largest private equity transaction in property market till date and invested $125million Mumbai based Oberoi Constructions.
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10. Mauritius-based IREO Investment Holding grabs the honor of making the highest FDI in the sector with the whopping investment of Rs. 321.70 crore.The company also has plans for related projects and heavier inflows.
11. Emaar MGF Land Private Limited is India’s pioneering joint venture in real estate with projects being implemented on a pan-India basis across top 30 cities.
12.DSP Merrill Lynch Limited, India’s leading investment bank and broking firm that pump in more than Rs 2,230 crore between April 2006 and October 2006.
13. Barclays Bank made an investment totaling Rs 1,711.23 crore pitching itself to the second investor slot.
14. Mauritius-based TH Holdings has invested of Rs.1697.35 crore.
15. French firm Carrefour has been showing interest in entering Indian retail industry.
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16. World’s largest financial services group, Citi, which has sewed up property deals of around $400 million in the past few weeks. This prestigious group is also looking forward to enter into a joint venture with HDFC and US based Portman Holdings.
17. Citigroup is all set to enter in the red Citigroup Property Investors (CPI) India.
hot property market through
18. A Mauritius based company financed by a fund in Cayman Islands, was recently in the news to have raised $500 million through an India-dedicated fund. The conglomerate is likely to raise more money to invest in realty.
19. Hong Kong based AEA Holdings announced that it plans to invest more than $2 billion over the coming years in Indian realty projects.
21. Italian firm Rino Greggio’s plan to set up a joint venture for selling silverware and UK-based Alpha Airport Group’s proposal to establish a wholly-owned subsidiary for setting up duty-free shops, flight kitchens and food and beverage outlets at airports in the country at an investment of Rs 22.5 crore was also approved other allied products.
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22. A proposal by the Netherlands-based Diageo Highlands Holdings to set up a joint venture has received clearance as well from Indian Government.
23. Solitaire Capital Investments Pte and Solitaire Ventures Pte, a Singapore based group are investing Rs 511-crore of in India’s booming real estate sector.
24.Mauritius-based power producer Bijlee Bharat Holdings’ plan to set up a subsidiary in India with an initial investment of Rs 308 crore,
25. NSK Limited of Japan which has committed Rs 41.25 crore to set up a new JV in Chennai.
26. Spain-based Lladro Commercials S.A. will pump in Rs 5.85 crore for increasing its equity in Spa Agencies (India) from 26 per cent to 49 per cent.
27. Sri Lanka-based Damro Exports Pvt Ltd’s proposal to sell furniture under the single brand name ‘DAMRO’ and Italian firm Rino Greggio’s plan to set up a joint venture .
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28. UK-based Alpha Airport Group’s proposal to establish a wholly-owned subsidiary for setting up duty-free shops, flight kitchens and food and beverage outlets at airports in the country at an investment of Rs 22.5 crore was also approved.
29. Hong Kong based AEA Holdings announced that it plans to invest more than $2 billion over the coming years in Indian realty projects.
8.2 FACT SHEET INVESTMENT
ON
FOREIGN
DIRECT
A. CUMULATIVE FDI EQUITY INFLOWS
1. Cumulative amount of FDI inflows (from August 1991 to March 2006) Rs. 1,61,411 crore US$ 38,902 million. 2. Amount of FDI inflows during 2006- 2007 (from April 2006 – January 2007) Rs.50,652 crore US$ 11,194 million . 3. Cumulative amount of FDI inflows (updated up to January 2007) Rs. 2,12,063 crore US$ 50,096 million.
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B. FDI EQUITY INFLOWS DURING YEAR 2006-2007
FINANCIAL
Financial Year 2006-2007 (April-March)
Period
(In Rs. Crore)
(In US$ mn)
April 2006
2,972
661
May 2006 June 2006 July 2006 August 2006
2,443 2,405 5,235 2,878
538 523 1,127 619
September 2006
4,222
916
October 2006 7,718
1,698
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November 2006 December 2006 January 2007 2006-2007 January 2007 2005-2006 January 2006) (up up
5,157 9,108 8,514 to 50,652
1,151 2,040 1,921 11,194
to 18,535
4,179
Table 8.1: Amount of FDI inflows(In Rs. Crore)
%age growth over last year (+) 168 %.
Period
(In Rs. Crore)
(In US$ mn)
January 2007 Calendar 2006(upto 2006)
8,514 Year 2,141 January
1,921 482
Table 8.2 : FDI EQUITY INFLOWS DURING CALENDAR YEAR 2007
8 0
%age growth over last year (+) 298 % .
Foreign Direct Investment is encouraged and permitted, in the following real estate sectors in India:
Hotel Development Tourism Hospitality Township development Developing Commercial Real Estate Built-up infrastructure Housing and construction projects Building Resorts Building Hospitals Building Educational institutions Building Recreational facilities Infrastructure projects: regional and local level Special Economic Zones (SEZ)
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8.3 Conditions for Foreign Investment in Real Estate Sector in India
Foreign Direct Investment in some of the aforesaid areas (not all) is subject some conditions, some of which are as follows:
•
Develop a minimum land area of 10 hectares for serviced housing plots, and a minimum built-up area of 50,000 sq m in case of construction projects. The policy does not clearly define ‘built-up’, though FSI (Floor Space Index)/FAR (Floor Area Ratio) could be used as a basis for the same. Fulfill the minimum capitalization norm of $10 million for a whollyowned subsidiary and $5 million for JVs. The funds would have to be brought in within six months of commencement of business (which needs to be defined) of the subsidiary or JV. Complete at least 50% of the integrated project within five years from the date of obtaining all clearances. Do not sell undeveloped plots (with no infrastructural backup). Provide infrastructure and obtain the completion certificate from the concerned local body before disposal. This clause needs amendment because certificates are sometimes not issued for months on end, even years, an uncertainty which tends to raise project cost, often beyond viability.
•
•
•
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•
Do not repatriate original investment before three years from completion of minimum capitalization. Early exits require approval of the Foreign Investment and Promotion Board. prior
• Conform with all applicable local and state laws, and abide by all regulations and norms.
FDI up to 100% is permitted under automatic route in:
Townships,
housing,
built-up
infrastructure
&
construction-
development projects (including housing, commercial premises, educational institutions, recreational facilities, etc).
Establishment and operation of hotels.
Set up of SEZ.
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Chapter 9
Factors Affecting The Indian Real Estate Industry
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The real estate industry is not an isolated industry and the various happenings in the market affect the real estate market at any place ,demand and supply .These factors may or may not have a direct impact on the real estate market, but play a vital role in determining how the real estate market would fare out. Some of the major factors are : -
DEMOGRAPHICS :
The demographics of a particular place play a vital role in determining the market behavior of property there. The demography determines the overall spending power of the people and decides how and foe whom the real estate product and services would shape up. Further more ,the class of people inhabiting a particular area would determine what type of buildings ,structures, complexes etc, would be best suited to the place.
STATUS OF THE ECONOMY :
The economy of a particular place would directly determine the spending power of the people and how prosperous they are. An economy that is booming shows great opportunities for investors to invest as the demand for the provided service is higher.This is one of the reasons why India proves to be a lucrative real estate abode.
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GOVERNING LAWS AND REGULATIONS
The local land laws as well as those imposed by the governing bodies at a particular place is another factor that determines the growth of real estate industry at that place .If the laws at a particular area are to stringent, it increases the vows of the developer as well as investor. Thus a sound government backing is always desired to urge the development and buying of property at a particular place.
MONETARY POLICIES AND LENDING RATES
The monetary policies and laws about lending rate directly hit the demand for real estate at a particular place. The lending rates should be low in order to urge investors to invest both in development as well as buying of property.The monetary policy also determines how well the investors would welcome a new initiative in the real estate segment.
FOREIGN DIRECT INVESTMENT
India’s real estate sector is undoubtedly on a high growth path and recognized as global investors’ choice. India is holding ninth position among retail markets in the world with organized retailing and growing at the rate of 30 percent per annum. India has played up to its image of being one of the most attractive FDI destinations. The positive outlook of Indian government is the key factor behind the sudden rise of the Indian real
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estate sector.The Institute of International Finance (IIF)expects FDI in India to rise to $8 billion in 2007 from $6.5 billion in the last year.
OVERSUPPLY :
Real estate has a long duration cycle; hence, oversupply and undersupply in different phases of the realty cycle is inevitable. India’s real estate cycle has witnessed a bull run since ’03. We estimate the cycle to remain on the upswing till end-CY09.
MANAGEMENT/TRANSPARENCY RISK :
Another crucial risk area is the level of transparency/disclosures by the management, which include the developer’s track record, litigations, professional management, best practices and under capitalized balance sheets (high leverage).
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Chapter 10
Major Market Players
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10.1 Sobha Developers
Sobha Developers is one of the leading real estate developers in India. The Bangalore-based company has excellent reputation for its quality of construction and timely execution. Also, the company has the requisite capability to outperform its peers. Its real estate and contractual businesses are growing at a fast pace supported by sound and visionary management. We estimate Sobha’s NPV at Rs96.5bn or Rs1,324/share. The company is among the finest large-cap stocks in the sector and will continue to trade at a premium against peers.
Strong core competencies. Sobha is well known for its quality of construction and superior execution capabilities. Apart from in-house
construction, the company follows a unique backward integration model, which helps keep a check on quality standards and execution timelines. The company is led by sound and visionary management.
Growing project pipeline. Till date, Sobha has developed 17mn sqft property with another 18.7mn sqft in the pipeline. The company has a large land bank of 3,489 acres having a saleable area of 134mn sqft, to be
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developed over the next nine years. We estimate the total NAV of existing projects (137.4mn sqft) at Rs72.9bn or Rs1,001/share.
Contractual business, impressive margins and steady growth. Sobha has developed 10.15mn sqft via contractualprojects (93% developed for Infosys). The business is expected to grow at a fast pace, generating steady cashflow without undue risk to the capital. The contractual business is valued at Rs10.7bn or Rs143/share.
Attractive valuations. We estimate Sobha’s NPV at Rs96.5bn or Rs1,324/share, factoring in the value of current projects and contractual business, Rs6.6bn terminal value and Rs6.6bn of net current assets. The company reported FY07 EPS of Rs22.2; we estimate the earnings to grow at 46% CAGR in the next three years, implying FY08E, FY09E and FY10E EPS of Rs36, Rs47.8 and Rs68.6 respectively.
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10.2 Peninsula Land
Peninsula Land (PLL), the erstwhile Morarjee Realties, is a South Mumbaibased real estate developer. The company is well known for its innovative and superior construction. PLL is bestowed with an upbeat management and a strong project pipeline. The company is an interesting play on highend real estate development, SEZs and townships. We estimate the NPV of the company at Rs28bn or Rs596/share. PLL is among the best developers in West India. There exists an upside to our NPV estimate.
Current project pipeline generating strong cashflows and capital gains. At present, PLL has four ongoing projects in Parel (South Central Mumbai), with cumulative saleable area of 3.5mn sqft. The company has gained significantly through 3x rise in land value in the area. Additionally, advance payments from residential projects (~100% sold) have boosted the cash situation considerably.
SEZs, real estate mutual fund and townships – Future growth engines. PLL is developing four SEZs with ~300 acres cumulative area and current estimated value of these projects is at Rs9.4bn. The company is also developing two bio-tech SEZs, a gem & jewelry SEZ in Goa and an IT/ITES SEZ in Pune. These projects are expected to come on stream in
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the next 4-5 years. Two SEZs – bio-tech (Verna) and the IT SEZ in Pune – have already been approved by the Ministry of Commerce. PLL is developing two large township projects in Pune and Nashik with an estimated total value of Rs2.9bn. The company is also managing a real estate mutual fund (REMF) and has already raised close to Rs100bn.
Valuations. We estimate the NAV value of PLL at Rs28bn or Rs596/share. For the fifteen months ended June ’06, the company reported revenues and PAT of Rs2.7bn and Rs1.4bn respectively. On a fully-diluted basis, 15MFY06 EPS was Rs30.6. We estimate FY07E, FY08E and FY09E EPS at Rs40, Rs91, and Rs157 respectively and initiate coverage with BUY recommendation. Also, we believe there will be significant earnings growth in the coming years as SEZs and townships materialise.
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10.3 Marg Construction
Marg Construction is a Chennai-based real estate and infrastructure developer. We believe the company has tremendous earnings growth potential from its SEZ and port projects. We estimate Marg’s NPV at Rs9.6bn or Rs385/share. Marg is an interesting triple play on real estate, SEZs and port.
Attractive SEZ projects. Marg is developing two SEZs (one each for multi services and light engineering) near Chennai, spread over 612 acres. The SEZs have been approved by the Government in the Board of Approval meeting. We estimate the NPV of both SEZs at Rs2.8bn.
Profitable Karaikkal Port project. Karaikkal Port is a dry cargo port between Chennai and Tuticorn, the second and the third busiest ports in India respectively. While the first phase of the project (4mnte capacity) would commence by October ’08, the second phase (7.3mnte capacity) would come on stream by November ’09. The NPV is estimated to be Rs4bn.
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Lucrative real estate ventures. Marg is developing a mix of real estate projects, including a mall, a township, serviced apartments and villas in Chennai. Further, the company has a significant amount of additional land banks and owned assets. The estimate of the cumulative NAV of Marg’s real estate projects is Rs3.2bn.
Construction business. Marg is primarily a construction company with its order book encompassing construction cost on infrastructure and real estate projects. We estimate the construction division’s NPV at Rs3.4bn. Also, Marg has formed a joint veture – SIGNA – with the Housing and Urban Development Corporation (HUDCO) for participating in infrastructure and urban development projects.
Discounted valuations. We estimate Marg’s NPV at Rs9.6bn or Rs385/share. For FY06, the company reported revenue and PAT of Rs576mn and Rs82mn, up 3.6x and 3.5x respectively. We estimate Marg to register FY09E earnings growth of 19x to Rs63.4 from fully-diluted Rs3.3 EPS in FY06. Initiate coverage with BUY recommendation.
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10.4 Prajay Engineers Syndicate
Prajay Engineers Syndicate is the largest real estate developer in Hyderabad, offering differentiated real estate and hospitality products. The company has made significant capital gains on account of its well located land bank of 850 acres. We estimate Prajay’s NAV at over Rs480/share and believe that the company will emerge as one of the fastest growing developers in India.
Hyderabad, a sprawling growth opportunity. Hyderabad has emerged as one of the fastest growing real estate market, led by the booming IT/ITES sector and lower real estate prices. The city boasts of skilled and comparatively cheaper human resources, proactive Government and fewer infrastructural bottlenecks. We remain positive on the Hyderabad real estate market and on the tremendous growth opportunities that the city offers. Strong project pipeline. Prajay has around 35 projects under various stages of development, with cumulative saleable area of 26mn sqft. These include high-end residential apartments, villas, townships, and retail and entertainment complexes. The NAV of these projects is estimated at Rs8.9bn or Rs226/share.
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Capital gains on land bank. Prajay has been acquiring land in the peripheral areas of Hyderabad for the past 10-15 years. With increasing scale of development in the region and the ongoing work on arterial outer ring road, which will reduce the distance from the airport, the capital value of Prajay’s land bank has significantly appreciated. The current land bank of the company is 850 acres.
Attractive valuation. We estimate Prajay’s NPV at Rs19bn or Rs480/share. In FY07, the company reported revenues and PAT of Rs2bn and Rs772mn, up 2.9x and 3.4x respectively. FY07 fully-diluted EPS of the company was at Rs19.5 against Rs5.7 in FY06. Over the past two years, the company’s revenues and PAT have grown 10.5x and 12.4x respectively. We estimate FY08E, FY09E and FY10E EPS at Rs30, Rs55 and Rs78 respectively and initiate coverage with BUY recommendation. Prajay would likely post impressive earnings growth at 59% over the next three years.
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10.5 D S Kulkarni Developers
D S Kulkarni Developers (DSK) is the largest Pune-based real estate developer and is emerging as one of the fastest growing companies in West India. The company has a land bank of 650 acres with 23mn sqft developable area. DSK’s vast project pipeline includes high-end to low-end housing and mega SEZ & township projects. The company boasts of a high-quality management, superior execution capability and robust project pipeline. We estimate DSK’s NPV at Rs9.4bn or Rs427/share and believe that the company has immense growth potential on the back of its strong project pipeline.
Pune real estate – Potential for further appreciation. Availability of extensive pieces of land, low real estate prices and presence of a plethora of IT/ITES & manufacturing units and recognised educational institutes in Pune would lead to further price appreciation in the region. Robust project pipeline. At present, DSK has 17 projects with 23mn sqft cumulative saleable area in various development phases. The majority (97%) of the projects are in the peripheral areas of Pune with a few developments forthcoming in Mumbai and Bangalore. We estimate the projects’ NAV at Rs6.3bn or Rs284/share.
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Rapid earnings growth. Over the next three years, we estimate earnings CAGR at 87% to Rs1.16bn in FY09E on the back of strong buildup in the project pipeline. Similarly, we expect revenue CAGR at 79% through the next three years.
Impressive valuations. We estimate DSK’s NPV value at Rs9.4bn or Rs427/share based on the sum of project, terminal and other asset values at Rs6.3bn, Rs3bn and Rs1.7bn respectively. In FY06, DSK registered Rs1.3bn revenue, Rs176mn PAT and Rs8 EPS. Our FY07E, FY08E and FY09E EPS estimates are at Rs16.3, Rs29.1 and Rs52.5 respectively. We initiate coverage with BUY recommendation on the back of attractive discount to NPV and strong earnings growth.
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10.6
Arihant
Foundations
&
Housing
Arihant Foundations and Housing (AFHL) is a Chennai-based real estate company with 25 years of track record. On the back of sound management, the company is focussed towards strong and steady growth in South India, particularly Chennai. We estimate the NPV for AFHL at Rs3.2bn or Rs460/share and believe that it can increase further as only the project pipeline for the next three years has been factored in. AFHL is among the best emerging real estate companies from Chennai.
Robust Chennai market. Over the past one year, Chennai has been one of the fastest growing real estate markets with increasing demand for quality residential, commercial and retail properties due to comparatively lower prices, improving demographics and corporate investments in IT/ITES, manufacturing and auto sectors. Other reasons for growth are the availability of skilled manpower and lowest attrition rates across India. Chennai is likely to emerge as a key manufacturing and outsourcing hub of India.
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Land bank and projects creating significant value. AFHL has a total land bank of 130 acres, of which 45 acres are strategically located on the IT corridor and another 45 acres are close to the Mahindra City. AFHL is currently developing 15 projects with 10mn sqft saleable area, out of which, the company’s share stands at 6.2mn sqft. We estimate the project value of the current land bank at Rs1.6bn. Also, two of AFHL’s larger projects are in a JV with Unitech and JP Morgan, lending further credence to timely execution.
Attractive valuations. We estimate the NPV for AFHL at Rs460/share; however, there exists an upside to our NPV as new projects come on stream. For the financial year ended September ’06, the company reported revenues and PAT of Rs1.6bn and Rs201mn, up 29% YoY and 167% YoY respectively. The fully-diluted FY06 EPS of the company was Rs28.7. We expect the company to deliver 50%+ earnings growth in the next three years.
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Chapter 11
Research Market on Emerging Real Estate
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LOCAL & INDUSTRY VIEWS In order to no more about the real estate sector I decided to conduct a little research on the above parameters discussed so far. I prepared a Questioner having three to four relevant questions which can give me the exact picture of this fast growing sector.
The persons I asked are as follows: SR. No 1 2 3 4 5 6 7 8 9 Name Mr. Latiff Balaji Builders Mr. Patel Sangvi Builders Mrs. Ponnam Sharma Mr. Raja Mr. Bharat Jain Lucky Homes Dream Homes Business Real consultant Builder Real consultant Builder Real consultant Real consultant Builder Real consultant Real Estate Estate
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consultant 10 11 12 My Homes Ritu Paradise Paradise Properties Real consultant Builder Real consultant Estate Estate
Table 11.1 Research Nominees
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Question discussed and their result: 1) Do you think there is a growth in real estate business over the years? Result: surprisingly all of them said yes.
12 12 10 8 6 4 2 0 Growth in Real Estate YES NO
Fig 11. Chart 11
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2) Did you experience any downfall in sales due to inflation and hike in home loan Rates? Result: 83% said yes and 17% said No
10 9 8 7 6 5 4 3 2 1 0
10
YES NO
Down Fall due to Inflation / Home loan rates
Fig 11.2 Chart 2
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3) How do you see the future of real estate market? Is it going to grow or fall? Result: Surprisingly all of them were positive.
12 12 10 8 6 4 2 0 Will it grow in future or not
Fig 11.3 Chart 3
YES NO
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Chapter 12
Indian Real Estate Industry – SWOT Analysis
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Figure 12.1 : SWOT ANALYSIS
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12.1 STRENGHTS
Powerful demographic impetus
About one in every sixth person on earth lives in India, and the growth rate of the population is still rapid. The present fertility rate is just over three children per woman. Although considerably lower than in the 1960s or 70s when women gave birth to an average of five to six children, it is still far higher than in, say, China (1.7 children per woman) or Europe (1.4 children per woman). Since the lower birth rate is primarily a reflection of better living conditions in India, the rate of population growth has moderated to just 1.5% p.a. Since 1970, the improved conditions have also caused life expectancy to increase by 15 years to around 65 years at present. In addition, during this period, infant mortality has been halved. The high birth rates and fall in infant mortality over the past few decades imply that India’s population is very young. One in every three Indians is under the age of 15, and only one in three is older than 35. This compares it favorably against China, where nearly 50% of the population is older than 35, and roughly 60% in Europe. The three demographic trends, i.e. high but falling birth rate, increasing life expectancy and declining infant mortality, are expected to persist in the coming years. Only during the third decade of this century will the population growth rate drop below 1%. Consequently by 2030, India looks set to be the most populous
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country on earth. By 2050, roughly 1.6 billion people will live on the Indian subcontinent, 200 million more than in China.
The already impressive number of 700 million people of employable age1 in India is expected to grow by another 250 million in the next 20 years. Additionally, the valuable economic reform policies implemented since the early 1990s have created the growth. proper foundation for translating population growth into powerful economic
Figure 12.2 : Favourable Demographics
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The economy is booming
In the past ten years, real GDP accelerated to an average of 6% p.a., growing much faster than in earlier decades. In 2005, real GDP is expected to accelerate at least 8% from the previous period, with investment to remain a strong impetus to growth. There are at least three reasons for its sustained acceleration. First, the economic liberalisation in the early 1990s has integrated the country into world trade. This has benefited the services sector in particular, with many companies from the United States and Europe discovering the subcontinent as an attractive offshoring destination. Second, India possesses a vast pool of highly skilled technicians and engineers. Some 200,000 engineers graduate from Indian universities each year, roughly six times as many as in Germany. But even this large number of graduates may fall short of meeting the strong demand for highly skilled staff. A survey of Indian headhunters revealed that the number of urban jobs soared by 21.5% in 2005, with a further 23% forecast for 2006.4 This implies that salaries for university graduates are on course to increase markedly. This is already an ongoing phenomenon. In a publication on salary trends in Asia, Hewitt Associates, a consultancy, illustrated that salaries in India rose by an average of 13.5% in 2005 from 2004, the steepest climb among the countries reviewed. In the IT industry, pay packets were almost 18% bigger.
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Figure 12.3 : Growth Chart (FCI)
Third, public spending on road and transportation infrastructure is expected to climb. This is key to the government’s long-term growth strategy – and will serve as a positive stimulus to the construction industry.
High growth trend in the long term
The current engines of economic growth – population trend, human capital, openness of the economy and rising investment – will remain the key drivers of India’s economic growth in the long run. Deutsche Bank Research’s long-term growth model, Formel-G, depicted India as the growth star performer over the period 2006 to 2020 among 34 developed and developing economies. This puts it ahead of China
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and Turkey. GDP per capita in terms of purchasing power parity (PPP) is expected to climb by almost 4% a year over the next 15 years, with purchasing power doubling over the period. Real GDP is expected to average 5.5% – with potential to rise even further to 6%, reflecting India’s huge efforts to build up its infrastructure.
Table 12.1 : Long Term Growth Rates
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12.2 WEAKNESSES
Archaic and Retrogressive regulations
India’s real estate market is characterized by heavy and frequent archaic regulations,that have discouraged large scale private ownership of property in urban areas.
Urban Land(Ceiling and Regulation )act ULCRA
The Urban Land Urban Land Ceiling and Regulation act restricts the area of land/property that can be owned by an individual.Land in excess of the ceiling can be acquired by the government under the law of developing mass housing.This has made it extremely difficult for developers to consolidate large land parcels and take up projects of any meaningful scale in urban areas.
Rent Control Act
Rent Control laws have historically placed great emphasis on protecting the rights of tenants rather than the owner of the property.Over a period of time ,the controlled rent does not keep pace with the market rent,and
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therefore tenants never move out of the premesis . Moreover, with the rental income falling too short of the maintenance cost, the landlord loses interest in the repairs and maintenance of the premises and the property dilapidates over a period of time. The landlord is also discouraged to sell the premises as he is forced to share the proceeds with the tenant (under the ‘pagdi’ system).The combined effect of all the above converts the property into a redundant asset for the landlord and the land on which it stands is not reallocated for rebuilding or redevelopment. This creates artificial supply constraints in the urban areas. In addition to ULCRA and the rent control act, there exist many rules and regulations Coastal Regulation Zone (CRZ), Slum Development, property transfer rules and charges etc., which govern land acquisition and use. These laws tend to result in long approval procedures, litigation and disputes as also general delays in land development, thereby stymieing growth of the sector.
Scattered Land Holdings
In India, land is predominantly privately owned and most of it is inherited. A given land parcel keeps splitting between successive inheritors with the result that the size of the holding keeps getting smaller with each passing generation .Futher,in India, the tendency of keeping written laws is not much prevalent , making establishment of
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ownership rights on property extremely difficult.
Moreover, the
landholding pattern arising due to inheritance results in multiple ownership claimants for the same family, for a single plot of land. This makes it extremely difficult to acquire land with a clear title. Consequently, developers find acquisition of large tracts of contiguous land with large ownership extremely difficult.
Use Of Aggregators for land Acquisition
The combined effect of archaic property laws, scattered land holdings and disputed ownership has resulted in the emergence of a unique kind of service providers in the Indian Real Estate context, called aggregators. Aggregators operating mainly in suburbs and rural areas, buy land from individual holders of smaller land parcels. The aggregators establish ownership and settle all legal disputes between multiple claimants to clear the title of the land. They also get land converted for non agricultural use from the local revenue assessing authority. Contiguous parcels of aggregated land, with clear titles and designated for use in real estate development are then transferred to the developer. Moreover, aggregators remain discrete in their activities and donot reveal the final buyer of the land, as the land prices tend to shoot up, in case word spread of a leading developer accumulating land parcels.
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Figure 12.4: Role of Aggregators
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12.3 OPPURTUNITY
Figure 12.4: Market Opportunities Snapshot
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12.4 KEY THREATS
Increase in interest rates is the biggest threat to the sector as it reduces the purchasing potential of home buyers, affecting the demand of new homes significantly. Assuming no change in loan tenor, a 1% increase in interest rate could reduce buying capacity by ~5-7%. Further, taking an equivalent drop in the selling price (to compensate for decrease in buying potential), the discounted profitability of a project can decrease 13-16%. However, due to rise in loan tenor and increasing salaries, the actual impact of interest rate hike is not as high.
Figure 12.5: Interest Rate Movement for 25 Years Recent moves by the RBI to increase cash reserve ratio (CRR) & repo rates and raise risk weightage of home & commercial real estate
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loans have pushed home loan rates up by 300-400bps. ICICI Bank increased its floating reference rate of consumer loans (including home loans) to 12.75% and HDFC hiked its key lending rates to 14.25%. Growth in housing loan disbursal has also slowed down. Total home loan disbursals, that grew from Rs537.37bn in March ’04 to Rs1, 132.3bn in September ’06 (up 111%), have slowed down since March ’07 when they reached ~Rs1,350.52bn. Growth in home loans disbursal by HDFC (second largest home loan originator) has also fallen.
Decreasing spreads between rental yields versus lending rate and g-sec.
Gsec yields have moved up significantly from <6% two years ago to >8% as on date; lending rates have increased even more sharply. On the other hand, rental yields have not moved up more than 100bps. Given the regulated scenario of gsec and lending rates, money flow (particularly from foreign investors) into the real estate market has been easier. That aside, reducing spreads also imply the assumption of capital gains priced into the real estate assets or a possibility of rental yields moving upward. Currently, the trend of reducing spread between rental yields and other risk-free asset classes has been witnessed across the globe. This highlights that in the long term, investor’s world over view real estate as lower risk asset class.
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Figure 12.6: Decreasing Spreads
Government intervention. The central and state governments have been impeding the natural developments in the real estate sector. Changes in policies/regulations, tax incentives and bureaucratic processes are significant risks to the sector.
Oversupply. Real estate has a long duration cycle; hence, oversupply and undersupply in different phases of the realty cycle is inevitable. India’s real estate cycle has witnessed a bull run since ’03. We estimate the cycle to remain on the upswing till end-CY09.
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Land ownership. A check on the title and historical land record is crucial. Occasionally, realty companies sign development agreements with land owners and claim development rights as a part of their land bank. However, this is not the best practice as the risk to execution of projects based on development rights is higher as against owned land. Inaccuracyindisclosures of risk. fully-owned, agreement to purchase, JVs and development rights poses a key
Management/transparency risk. Another crucial risk area is the level of transparency/disclosures by the management, which include the developer’s track record, litigations, professional management, best practices and under capitalized balance sheets (high leverage).
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Chapter 13
“The Ground Floor” - Real Estate Industry and Recession
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The Development of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centers and programming houses. The demand from the information technology sector certainly has changed the urban landscape in India. Several multinational companies (MNCs) continue to move their organizational operations to India to take advantage of lower manpower and other costs. Providing human resources and home at their work place assumes great significance and therefore, the requirement to create space for people to live and work that in turn causes the development of other related infrastructure. It has been a predominant trend to set up the world’s best business centers, often campus-style establishments, bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ´temples of new or modern India´. It is just an indication of the extent to which the development of real estate has been taking place. The real estate market in India remains unorganized, fairly fragmented, mostly characterized by small players with a local presence. Traditionally, real estate developers were viewed with an element ofskepticism. Developers were often identified dealingwithlarge amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals. The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs, etc. This boom however is restricted to areas such as commercial office space, retail and housing
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sectors. The impending concerns of this sector namely- skill shortage, non availability of statistics, lack of low cost-affordable housing, lack of sustainability, high RE prices and last, to meet a future that might have downturn due to oversupply.
The industry is presently facing a major resource crunch – an obvious lack of qualified skilled people from construction firms, PMC firms, etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics which has created an ambiguity as to how much construction activity is actually taking place and one can’t gauge the demand and supply trends accurately. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing, so there is a dearth of low cost affordable units. The negative version of Indian real estate industry is “they have complete disrespect for sustainability” and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed.
Presently, the impact of recession in US economy has impacted Indian Real Estate Market as well as it is also witnessing the recession. Till now the real estate industry was a very booming industry in India which were in pace with IT industry. Accordingly, the demand for IT space and Commercial spaces has been grown. Also the high net worth of individual
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investors has created a very fast pace of demand in Indian real estate sector which have gain a very high impact image of investing in India. As the money was coming in terms on investment in India from NRI as well as Private Equity funds, the well known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. SEZ has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So the booming market has created a niche as modern living in India and created a very mass employment in Indian segment.
The recent changes which happened in American market such as Bankruptcy of Lehman Brother an oldest financial firm of American market and sell process of PE Firm Merryl lynch by the largest US bank Bank of America has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds in to real estate sector without having the proper analyzing or effect. They also have given the funds for mortgage industry of US which is currently facing the hurdle of Sub prime lending and have impacted many players to bankrupt.
All of these changes in US economy have impacted in Indian economy as well as Real estate segment as most of the Indian players have their
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liquidity funded by both of these firms. Also the IT segment which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also impacted the Sensex which has bullish very sharply and brings down the net worth of the leader of Indian real estate player very low. The impact can be shown in share price of DLF, Unitech, GMR group, Reliance group, Wipro, Satyam etc groups.
All of these sudden changes in Indian and US market created a point of thinking to investors & individuals that where it will go and what will be best option in real estate investment. The market rates in India are also dropped by 10 to 30% in most of prominent as well as upcoming cities and the trend appears to be still continuing till it will not recover the effects of this financial crisis.
13.1 RECESSION
We expect a GDP growth rate of 6.0% during FY10E. Our FY09 growth forecast has also been revised down to 7.4% from 7.8% earlier. At 6%, the FY10 GDP growth will be the lowest since FY03.
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Our projection of growth slowdown is against the backdrop of a rapid deterioration of the global economic scenario. Several advanced economies are almost certain to face recession in CY09. Business and consumer confidence indices are at multiyear lows, indicating no possibility of a quick turnaround in either consumer spending or industrial activity. Weakening demand is also depressing prices of several commodities.
In India, investment activities, particularly corporate capex, have taken a backseat in recent quarters and are unlikely to improve, at least for the bulk of FY10. Discretionary consumption demand is likely to stay muted as well. Nondiscretionary consumer demand, however, is likely to be largely unaffected and will provide GDP some resilience.
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13.2 Slowdown across sectors
We expect a modest 5.4% growth in manufacturing in FY09E and a further fall to ~3% in FY10E. Overall index of industrial production (IIP) is estimated to grow at ~5.1% and ~3.3% during FY09 and FY10, respectively.
The projection is factoring in further intensification of slowdown in construction activities with base case expectations of 8.5% and 5.0% for FY09E and FY10E, respectively. This is a sharp slowdown for the construction sector from the average rate of ~10% over the past 10 years. Despite fears of a sharp drop in corporate capex and weak demand for housing, it is believed that the risks of further downside to these projections are limited as a sizeable part of construction activities are driven by the government (e.g., roads, rail roads, bridges, tunnels,
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pipelines, ports, runways, hydro-electric and power projects, etc).
As regards the services sector, it is believed that the growth rate will dip from the current double-digits to ~9.2% in FY09E and further to ~7.9% in FY10E. Amongst larger components of services, ‘banking, real estate, and business services’ is likely to slowdown markedly from the current 12% plus level to ~9% in FY09E and further to ~6.5% in FY10E. Our estimates implicitly assume slowdown in trade, transportation, hotels and restaurants, among others, to the levels of the most recent low growth phase of FY1999-03. Communication (weight ~5% in overall GDP), however, is likely to stay strong. The social and community services segment (~14% of GDP) is likely to hold steady as well, as it is driven largely by government activities.
13.3 Real estate & Recession
Real estate markets in the United States could hit to bottom in 2009 and then flounder for much of 2010. During this period, ongoing drops in property values, foreclosures, delinquencies, and a limping economy will continue to crimp property cash flows.
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Commercial real estate faces its worst year since the wrenching 1991– 1992 industry depression , which projects losses of 15 percent to 20 percent in real estate values from the mid-2007 peak. Only when property financing gets restructured will pricing recorrect and this transition could wipe out companies and people.
The industry is facing multiple disconnects.Many property owners are drowning in debt, lenders are not lending, and for many (industry professionals), property income flows are declining. There is an unprecedented avoidance of risk. Only when financing gets restructured will pricing reconcile, giving the industry a point from which to start digging out of this hole. Distress in the housing market is benefiting the apartment market, which the report lists as the number-one "buy." Moderate-income apartments in core urban markets near mass transit offer the best buy, a trend that carried over from the previous years.
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13.4 Indian real estate sector in recession mode
The US financial crisis has caused disturbing impact on the Indian real estate market, which is facing a plunge in real estate demand. The industry is facing crunch of skilled manpower and it remains unorganised, characterised by small players.
The Development of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centres and programming houses. The demand from the information technology sector has changed the urban landscape. Several multinational companies (MNCs) continue to move their organisational operations to India to take advantage of lower manpower and other costs. Providing human resources and home at their workplace assumes great significance and therefore, the requirement to create space for people to live and work that in turn, causes the development of other related infrastructure. It has been a predominant trend to set up the world’s best business centres, often campus-style establishments bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ’temples of new India’. It is just an indication of the extent to which the development of real estate has been taking place.
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The real estate market in India remains unorganised, fairly fragmented, mostly characterised by small players with a local presence. Traditionally, real estate developers were viewed with an element of skepticism. They were often identified dealing with large amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals.
The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs etc. However, this boom is restricted to areas such as commercial office space, retail and housing sectors. The impending concerns of this sector namely skill shortage, non-availability of statistics, lack of low costaffordable housing, lack of sustainability and to meet a future that might have downturn due to oversupply.
The industry is presently facing a major resource crunch – an obvious lack of qualified and skilled people from construction firms etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics, which has created an ambiguity as to how much construction activity is actually taking place and one can’t gauge the demand and supply trends accurately. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing. So, there is a dearth of low cost affordable units. The negative version of
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Indian real estate industry is ’they have complete disrespect for sustainability’ and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed.
Presently, the impact of recession in US economy has caused mammoth impact on Indian real estate market as well, as it is witnessing the recession. Till now, the real estate industry was a booming industry, which were in pace with information technology (IT) industry. Accordingly, the demand for IT space and commercial spaces has been grown. Also, the high net worth of individual investors has created a very fast pace of demand in Indian real estate sector, which has a very high impact image of investing in India.
As the money was coming in terms on investment in from non-resident Indians as well as private equity funds, the well-known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. Special economic zone (SEZ) has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So, the booming market has created a
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niche as modern living and created a very mass employment in Indian segment.
The recent changes, which happened in American market such as bankruptcy of Lehman Brother (one of the oldest financial firms of American market) and sell process of PE firm Merryl Lynch by the largest US bank, Bank of America, has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds into real estate sector without having the proper analysing or effect. They also have given the funds for mortgage industry of US, which is currently facing the hurdle of sub prime lending and have affected many players to bankruptcy.
All of these changes in the US economy have affected Indian economy as well as real estate segment as most of the Indian players have their liquidity funded by both of these firms. The IT segment, which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also affected the Sensex, which is bullish and brings down the net worth of the leader of Indian real estate player very low.
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The impact can be shown in share price of DLF, Unitech, GMR group, Reliance Group, Wipro, Satyam etc groups. All of these sudden changes in Indian and US market created a point of thinking to investors and individuals that where it will go and what will be the best option in real estate investment. The market rates in India are also dropped by 10 to 30 per cent in most of prominent as well as upcoming cities and the trend appears to be still continuing, till it recovers from the ill effects of financial crisis. With a slump in the Indian real estate sector due to excessive credit crunch and demand slowdown, home buyers can expect a further correction in real estate prices in the range of 15-20% in next six months. There are several factors working against the Indian real estate sector that can bring about such a price correction. With the Reserve Bank of India (RBI) tightening money supply and increasing interest rates to fight inflation, the developers are facing liquidity crunch. Banks are getting jittery over loan disbursals to real estate developers. Even if the developers manage to get loans from banks, they are hardpressed to keep more collateral with the banks. The five-year boom in India’s realty industry came to a crashing halt in 2008, following an acute liquidity crunch, falling sales and rising interest rates. The year, though, started on a positive note. The Dubai-based Emaar MGF raised $1.64 from the primary market in late January, and two motnhs later, Delhi-based realtor BPTP registered the country’s largest land deal, shelling out over Rs.50 bn ($1 bn) for 94 acres of land in Noida, on the outskirts of the national capital. But after that, the fairy tale run for the industry ended. As apartment prices shot through the roof, and interest
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rates soared,
buyers turned away,
which immediately hit
sales.
Subsequently, over the rest of the year, realty stocks began to get hammered on the bourses.
13.5 MIGHTY BUILDERS TUMBLE
9.5.1DLF FINANCIAL REPORT FOR FY06
The meltdown being witnessed around the world is having a significant effect on the state’s real estate business. Property dealers, who were already seeing a decline in their income, have seen a decline of 60 per cent in their earnings. New deals are hard to come by and deals already finalised are also being called off by buyers due to the liquidity crunch, though the prices remain static. “We have been sitting idle for many days,” said Parminder Singh, a property dealer in Jalandhar. NRI buyers are also not as keen on buying property here as they have been in the past. Kewal Singh, a US-based NRI from Jalandhar, said the recession in USA has made it difficult for NRIs to invest here. “We are unable to manage our own installments in the US as most of the things are bought on loan there,” he said.
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The construction sector has also got a hit as NRIs are not investing in big projects and only concentrating on the old projects, according to Anil Chopra of PPR, a leading real estate developer. The number of NRIs visiting India for vacations have also decreased this time as many of them are doing over-time to manage their loans there, said Nihal Singh, another US-based NRI. “The travel expenses are huge and many of our friends who used to come here every year are not coming this time,” said Parkash Raman, a UKbased NRI from Hoshiarpur district. Mohinder Singh, who organises various foreign tours in collaboration with SOTC, a known brand in arranging tour packages, said the travel business too has gone down by more than 50 per cent. Sales manager of Bhabhi Boutique, which has several NRIs as regular clients, said that usually by this time their business would pick up, but their sales have reduced by 50 per cent this year.
Sobha’s net profit fell by 88% to Rs7.5 crore and revenue by 49% to Rs181 crore in the December quarter against the same period a year ago. The developer is also in the last leg of restructuring its debt of Rs1900 crore. “We are restructuring over Rs1,000 crore and are in the final stage of getting approvals from various financial institutions,” said Sharma
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Big developers like DLF, Unitech, Ansals API and HDIL were particularly hit as Lehman Brothers, along with Merrill Lynch, another cash-strapped investment bank that had to be sold, had direct investments in these companies. “What hurt the overall housing sentiment was the increasing borrowing rate. The current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 3. The liquidity risk was accentuated by the slowdown in the overall real estate market and the increasing reluctance of financial institutions and banks to fund real estate developers. The impact of slowdown was also reflected in developers downsizing their manpower or whittling down pay packets. Unitech laid off 10 percent of its employees and DLF retrenched 12 percent. Similarly Parsvnath cut salaries of its employees in the top and middle level management by up to 20 percent, while Omaxe, which fired 70 employees, also cut the remuneration of those who were retained by 10 percent. Looking ahead, the industry does not foresee any upswing in fortunes in the immediate future, though the government and the central bank have been taking steps to infuse additional liquidity into the system, especially for sectors such as housing.
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9.5.2 REACTION TO RECESSION STALLING OF PROJECTS DLF stalls 2 of its biggest projects ,2008
Facing acute liquidity crunch and poorer sentiments, the country's biggest property developer, DLF, has reportedly stopped work at two of its biggest mid-income housing projects. The New Delhi-based builder has halted construction at DLF New Town Heights in Gurgaon Sector 90 and Express Greens in sector M1 in Manesar, both in Haryana. The two projects were launched in January and August 2008, respectively. Even after a year, the company has merely begun some basic work at its New Town Heights project, according to a report by Nomura Financial Advisory and Securities. In the Town Heights project, DLF has merely undertaken excavation work while in the Express Greens project, the company has just marked the boundary with its bill boards, the report said. According to sources, the company has sold most of its apartments in New Town Heights in the first few months, offering 3 and 4 BHK apartments at Rs 2,125 and Rs 2,505 square feet, respectively. However, sales in the Express Greens that offers 3 and 4-bedroom apartments for Rs 1,760 and Rs 2,125 respectively have not been very good. DLF did not respond to a detailed questionnaire sent on Friday.
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DLF's third quarter profit has dropped by 69 per cent to Rs 670.79 crore. The developer has stalled work on nearly 16 million square feet of office and retail mall space out of the 62 million square feet under development. However, ers who have booked houses at the DLF projects may be partly compensated if DLF fails to complete the project in 36 months after the launch, a company official, who declined to be identified, said. The company's debt has spiralled by Rs 1,500 crore to reach Rs 14,800 crore in the third quarter of FY09, compared to the previous quarter, according to sources. DLF had recently announced that new mid-income housing projects in Panchkula, Gurgaon, Hyderabad, Bangalore and Chennai to cater to the increased demand in this segment. However analysts say if the company could not start construction on its already sold mid - income housing projects, it is unlikely that the company can come up with any new projects.
Unitech defaults on Rs 150-cr payments
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Unitech, the country’s second largest real estate company, has defaulted on two payments on a housing project in Greater Noida in Uttar Pradesh. Unitech has not paid two installments worth Rs 150 crore to the Greater Noida Authority for the 100 acres it had purchased for its ambitious Uniworld City project.
The company is trying to reschedule the payment, but risks harming the land deal if it doesn't pay up, the sources say. The company insists the payment was stopped due to farmer agitation. Officials of the Greater Noida Authority understand that real estate companies have been hit by liquidity crunch and will be “understanding” to Unitech’s request. DLF group chairman K P Singh says the financial crisis has hurt the real estate business, particularly “fly-by-night operators”.
DLF defers projects and cuts workers
Bloomberg cited Mr Kushal Pal Singh chairman of DLF Ltd as saying that it has deferred some projects and plans job cuts to cope with the economic slowdown. Mr Singh said that prices have come substantially down, so much that projects will shut down. He said that “There is a lack of money supply to
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developers.
It
is
paying
12%
to
13%
interest
on
loans.”
He said that home mortgage loans should be brought down to 7% to boost demand. State run Bank of India on November 6th reduced loan rate to 10% from 10.75% on 15 year loans for up to INR 5 million. Mr Singh said that “There will be takers only when you bring down home loans.” Mr Singh recently said that the decline in raw materials costs including steel and cement would help bring down property prices.
Sobha Developer Cuts Workforce by 30% Sobha Developers Ltd, a leading realty firm in south India, has witnessed its monthly revenue reduce by more than half, from Rs120 crore to Rs 50 crore. With sales down, Sobha has been forced to cut its 3,000-strong workforce by about 30%, to 2,170. However, with revenue from the real estate sector going down, the company’s other source of income, its contractual business, has been the saving grace. “Unlike the real estate sector, the income from our contractual business has been steady and we don’t really have to look out for customers,” said J.C. Sharma, managing director of the Bangalore-based company, which is expecting a Rs400 crore turnover from the contractual business by 2010 and has completed
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over 120 contractual projects for various corporate customers such as Infosys The company is also looking at various funding options ranging from equity dilution, private equity funding at project level as well as land sales. Mint had earlier reported that the developer would try to sell parts of its 3,000acre land bank—the process seems to have started. It has managed to sell land worth Rs100 crore over the last few months. Sales have not picked up even after developers such as Sobha are trying out various out-of-the-box marketing techniques such as its recent Home Mela. The two-day property exhibition that showcased 18 different properties of the company concluded with only six apartments being sold. Sobha, which till now, focussed on high-end and luxury apartments and villas is finally joining the affordable housing bandwagon. It is launching its first budget housing project in the next three-four months in Bangalore, though officials didn’t divulge pricing details. “Contractual work in real estate has also been hit as most corporates have stalled expansion plans. Which is why, we find lot of contractual business coming in for developers from industrial or education sectors. Like Sobha, we will find more developers going in for debt restructuring to pull down high interest rates on short term loans and converting them to long-term loans,” said Abhinav Bhandari, research analyst (construction and infrastructure) with Pioneer Invest Corp Ltd.
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RATE CUTS
DLF cuts rates by 20-30 percent in Chennai, Bangalore
Country’s largest real estate developer DLF has cut its prices in its ongoing projects in Chennai and Bangalore by 20-30 percent, and has extended this benefit also to those customers who had earlier bought homes in these projects.
Existing customers, who have paid more than the revised apartment price, will be eligible for refund, although there may not be many such cases, as most have made only part payment, the company said. DLF’s decision, which international property consultancy firm DTZ
described as “bold”, is likely to force other realty companies to bring down prices. DLF may also bring down prices of its projects in other cities as well, a company official said.
DLF’s move is similar to what country’s largest bank, State Bank of India, did in the home loan and auto loan market. The SBI has slashed home loan rate to 8 percent for all new borrowers for the first year of the loan term, fuelling a turf war with private sector mortgage lenders. But unlike DLF, the bank didn’t extend this facility to its existing customers. DLF has revised it prices downward by 17 percent to Rs 2,650/sqft in its
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Garden city DLF OMR project in Chennai, comprising 3,500 apartments, of which 2,000 have already been sold.
The company has slashed prices by 32 percent to Rs 1,850/sqft in Bangalore’s Bannerghatta Road. The Bangalore project has a total of around 2,000 apartments. The company also recently launched a housing project in Hyderabad at Rs 1,850/sqft, which is substantially lower than the market price.
A DLF spokesperson said the company’s decision to reduce prices was in response to the changed conditions in the real estate sector due to unprecedented global events and changes in the raw materials costs. DLF’s latest move is in line with the thoughts expressed by its vice chairman Rajiv Singh at the quarterly earnings announcement almost a month ago. He had said that the property prices would fall by 15-20 percent. He had also highlighted the need to take the lead and quickly turn in products that are required in the current market.
“By the time one gets ready with products, the business cycle has already turned and there are not many takers for such products,” he had said. Several analysts have been saying a 30-35 percent decline in prices was essential to spur demand for property. Customers, wary of high property prices and finance cost, and uncertainties regarding their own
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future due to poor job market scenario, slid into the wait and watch mode late in the second half of last year. As sales dried up, credit became expensive and private equity funds vanished, property firms faced major pressure on their cash flow.
Developers though have been slow in reacting to the market changes. DLF’s latest decision to cut price can potentially influence the entire market. “DLF’s bold move will prompt other companies as well to reduce prices,” said DTZ India CEO Anshul Jain.
DLF’s closest rival, Unitech, which hasn’t launched any new project of late, said it is still watching the market. Unitech head of strategy and planning R Nagraju said company’s new launches will surely be at lower price points.
DLF’s move to extend the benefit to existing customers in ongoing projects is being seen as particularly important. Most realty companies had, so far, refused to bring down prices in existing projects saying that they will have to cut prices even for those apartments already sold. DLF, as all other realty players, has been facing pressure on sales and has put construction on more than half of its commercial projects on hold due to lack of demand. The company reported a 69 percent decline in profit in December quarter.
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Developers Likely to Slash Prices
Indian real estate developers are expected to cut prices by 30% and more over the next three to six months. At a recent TiE-Indian Angel Network, summit in the capital, industry players including real estate developers, private equity players and real estate brokers and consultants, all answered in the affirmative when asked whether they see the possibility of a price cut in future. The Indian realty sector has been in a meltdown over the past few months. Prices for both commercial and residential property have come off by 20-25% over the past few months. Industry experts and players say they expect them to go down further.
LAYOFFS
DLF confirms layoffs, freezes projects Tuesday, November 18, 2008
The liquidity squeeze-induced slump in demand has forced real estate leader DLF to fire some employees, put a number of hotel and housing projects on hold and yearn for 7 per cent home loan rates.
"We must have laid off some employees somewhere," DLF Chairman K P Singh told reporters on the sidelines of India Economic Summit, but did not
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give
the
number
of
jobs
that
were
cut.
The company has also deferred some of its projects due to poor demand.In hotels, residential and commercial everywhere... deferred because of lower demand and liquidity crisis, again without sharing the specifics.
Singh also said high interest rates have taken a toll on demand. "There are no takers for housing sector... Ideally, the interest rate should be around 7 per cent."
Asked if the current prices of the realty projects are inflationary, Singh denied and said: "It cannot be inflationary as it has to be competitive. It also depends on supply and demand."
Because of demand going down, many projects have been closed down by many developers across the country, he added.
Brokers Take Advantage of Recession in Real Estate
Property brokers are taking advantage of the slowdown in the residential real estate market by increasing the commission they charge from developers. As house and apartment sales sag, brokers, who typically charged 2-5% of the value of the property as commission, are demanding as much as 8-9%. “The slump in sales is so dramatic that developers are willing to pay a higher commission,” says Sanjay Sharma of Gurgaonscoop.com, a website on the real estate market in Gurgaon, a
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New Delhi suburb. “Earlier, an 8-9% commission was given by weak or smaller developers… Now the trend is even developers of large luxury projects are giving 8-9% commission.”
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Chapter 14
“RENOVATING REAL ESTATE” TO COUNTER RECESSION -EFFORTS
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14.1 EFFORTS TO COUNTER RECESSION
Low interest rates
LEADING real estate developer DLF has called for a 5% cut in home loan interest rates. DLF chairman K P Singh told ET that projects in the realty sector are getting delayed because of the current liquidity crunch. “Home loan interest rates should be slashed from the current 13% to 8% in order to revive the real estate market and prevent the economy from sliding into a recession,” he said. He also added that a 5-10% correction of property prices is expected in the coming months. A temporary slowdown of the economy can lead to a recession and ultimately even a depression. If the government does not take any bold actions, recession is inevitable. Emphasizing the importance of the multiplier effect of the sector, Mr Singh said that the housing industry is the indicator of an economy’s health across the world.Mr Singh also said that the government should aim at making housing a key sector in the economy and make borrowing easy.
increased government spending
Hit hard by the global slowdown, export, housing and financial sectors will get a fiscal as well as monetary package from the Government and RBI. The Government and Reserve Bank may further ease money
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supply, provide interest subsidy for specific sectors and come out with tax cuts for boosting demand. Despite RBI injecting around Rs 2,75,000 crore into the system, various sectors are facing liquidity problem and there is demand for further steps from the central bank to ease money supply.
Private real estate markets need to correct-–lenders must force distressed owners to become motivated sellers.
Debt capital needs to flow-–lenders will need to learn to deal in a more stringent regulatory landscape. The commercial mortgagebacked securities (CMBS) market must "reformulate."
Regulators need to restore confidence in the securities market. The government will insert itself into overseeing mortgage securitization markets. Systemic overhaul promises more measured debt flow.
The economy needs to improve. Falling demand for space won’t affect real estate markets severely until 2009.
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OTHER GOVERNMENT POLICY MEASURES
A high-level task force of the government has recommended setting up of a “real estate regulator” and a dedicated institutional framework to look into the issue of providing affordable houses to the people. The regulator could serve as a single window for overseeing and monitoring the affordable housing agenda and promote policy reforms like stamp duty and registration and protect consumer from real estate fraud, the task force, constituted by the Ministry of Housing and Urban Poverty Alleviation, said. Besides, it can coordinate digitisation of land records, the task force underlined. The recommendation assumes significance as high price has put housing projects in metros and emerging towns beyond the reach of the common man.
NEW SCHEMES TO ATTRACT BUYERS
With real estate prices continuing to fall, builders have been forced to come up with innovative schemes in order to woo buyers. Price guarantee scheme is one such sop being offered by the builders. This scheme — being offered by the members of Confederation of Real Estate Developers’ Association of India (CREDAI), Karnataka — is unique as it benefits the buyers and not sellers. As per the scheme, the buyer would get back the
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difference amount if the builder sells the apartment at a lower price than the amount received from the former. While a few of them honour the price guarantee scheme, others (fly-by- night builders) never bother to refund the difference. Suresh Hari wanted buyers to approach a reputed builder as they can address the problems which are bound to arise in future
MEASURES BY DEVELOPERS
Unitech, India’s second largest listed real estate compan, is looking at restructuring a Rs 800-crore loan from public sector banks, as it attempts to save itself from sinking under the huge debt burden. The company is pinning its hopes on debt restructuring, asset and stake sales to private equity (PE) funds to pay a debt of Rs 2,500 crore, which is due by March ’09. “We are in discussions with public sector banks for rescheduling our loans,” Unitech head of strategy and planning, R Nagraju told ET. Another company executive, requesting anonymity, said Unitech was seeking to restructure a loan of over Rs 800 crore. Unitech is also looking at raising funds through private equity infusion at company and project levels. Unitech is holding an extraordinary general meeting (EGM) on January 19 to seek shareholder approval to raise Rs 5,000 crore by issuing fresh equity or convertible instruments. The RBI had raised the ceiling for FII holdings in Unitech to up to 100% in November 2007. The company has been holding negotiations with multiple PE players to raise between $300-$500 million by issuing convertible debentures at the
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company level and around $200 million by selling stakes in mid-income housing projects.
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Chapter 15
CONCLUSION
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Indian real estate landscape is expected to be dotted withSEZs, international standard warehouses and specialized industrial spaces. Large integrated developments can become a norm among the working population. The Indian Property Market is fast going through a learningcurve. Rising interest rates have impacted the credit availability to the sector, global economic conditions seem to have subdued the demand from investors and occupier’s alike, Indian real estate stocks are down by more than 50 per cent from their year long high and the once soaring real estate values appear to be plunging. This, no doubt is the reality. Nonetheless, it is hoped that this is a transitory phase and the picture that would emerge once the churn is over will be a high growth curve. The economic liberalization in the 1990s and the ensuing information technology revolution have been instrumental in giving the real estate market its present form. MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations. Increased job creation and rising disposable incomes coupled with lower interest on housing loans, had in turn fuelled demand and affordability for residential space. The change in attitude and the spending habits of the consumers led to an increase in consumption and demand for retail malls. Relaxing the FDI regulations for the real estate sector opened the floodgates for foreign capital inflow into realty sector. The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to real estate markets in other developing countries around the world. We are excited about these developments as the growth that we witness today
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is a sign of the emerging far-reaching and long-term trends that will drive robust growth for the sector in the years to come. Foremost would be the institutionalization of the sector and the definite change in the ownership structure. Instead of individuals, private equity funds, hedge funds, insurance companies, pension funds, banks and other financial institutions would own, invest or manage real estate assets in office, residential, hotels, industrial, retail space etc. Public sector organizations like Life Insurance Corporation of India, UTI, Public Provident Fund, other pension funds of central and state would hopefully become active investors in the real estate industry. This will also lead to sophistication in the financial structuring of real estate investments. They will provide access to capital, both debt and equity capital from public and private sources. Apart from offering an exit route for the developers to revolve funds and improve their margins, it will also allow individuals investors to be a part of the real estate market. On the product side, there will be further advancement in construction management and project management techniques in order to optimize costs, meet construction timelines and achieve environmental and health and safety guidelines, intelligent, energy efficient green buildings will become the norm of the day. Property and facilities management services will also undergo a facelift. The provision of a good working and living environment as well as the enhancement of the asset lifespan will be key considerations and these services will be outsourced much more to firms specializing in these functions.
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Real estate activity will become more widespread and will take many smaller towns and cities in its fold. Improved infrastructure, the potential of untapped markets, increased access to capital together with the saturation and spiraling cost of metros will play a vital role in promoting new growth centers. Infrastructural projects including roads, airports, ports and inter-city connectivity will witness increased private sector participating and evolve as real estate play. This will significantly augment the availability as well as the quality of these services in the country. Rental housing as well as rented office space can become common as corporate entities will look at reducing their fixed asset liabilities, change in ownership structure would also bring in standardized, accepted practices for property valuations. Property transactions will become easier due to availability of research data, computerized land records and simpler processes for transfer of land titles and taxation. Hopefully, all these would be the prerequisites for evolving transparency and uniformity in the market. After witnessing periodic highs and lows, the interest rates and real estate process will undergo a rationalization and will finally be market driven. The above listed trends are some key real estate events that are most likely to take shape in next decade.
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Chapter 16
FUTURE SCOPE
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Real Estate Infrastructure
Sector-
potential
for
more
sophisticated
Anecdotal reports are that activity in the property market has been slowing - but that does come after an especially frenetic couple of years. The real estate sector in India has grown by 30% to 35% during the past five years, reflecting the rapidly increasing demand for office, commercial and industrial space, as well as for bigger homes, that coincided with the economic boom. To some extent, property development may have failed to keep pace with demand because of an underdeveloped investment market. Owing to oversupply, downward pressure on rents seems a likely outcome in the coming months, making occupier demand look vulnerable in the Indian property market. On the retail front, the likely effect of an economic slowdown will be to depress discretionary spending and that may subdue retail rental growth, at least over the next year or so. However, once the current global downturn is through, the Indian economy should rebound, supported by a large, young workforce; gradual but consistent liberalisation reforms; and a high rate of consumer and privatesector savings. The growing population and economic expansion will mean that India needs not just homes but offices, schools, hospitals, and entertainment centres. Addressing infrastructure needs is also an important priority to support this property market development. Special Economic Zones can play an important role. On the investment side, the expected development of real estate investment trusts (REITs) in the future could expand the property investment opportunities in India.
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In the longer term, there is a great potential for more sophisticated infrastructure and a greener future.
Understand Social ResponsibilitiesExperts to Developers
Banking
In a brainstorming session on ‘Opportunities and Challenges in Finance and Banking for Real Estate Sector’ on Wednesday, banking experts told real estate developers to realise their social responsibility of providing affordable housing to the masses. Held under the aegis of the Gujarat Chamber of Commerce and Industry (GCCI) and Gujarat Institute of Housing and Estate Developers (GIHED) at Hotel Grand Bhagwati, stress was also laid on providing cost-effective housing for the low income groups, as this had remained largely unexplored. According to GIHED vice-president Suresh Patel, a developer, this was because in the boom period of the last four years, majority of big players had worked towards meeting the needs of only top 12 per cent of the market. He felt affordable housing at lowest rate was possible. He wondered how ‘board room analysis’ by bankers born in the 1980s could decide the fate of a 50-year-old sector. The good repayment figures shown by these bankers to prove their banking prowess could not be taken at face value because of limited exposure, he said.
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Vijay Shah, a prominent real estate developer, lamented that banks were reluctant in extending project loans to developers. He said developers also felt difficulty in sourcing down payment of loans lately. Shah pointed out that banks had reduced valuation of assets for credit from 80 per cent to 60 per cent. S Srinivasan, chief executive officer of Kotak Real Estate Fund, was optimistic about the real estate scene of Ahmedabad. He said it was much better than other cities like Mumbai and Bangalore. He said nowhere else was any developer able to offer a price of Rs 1,500 per square feet, but in Ahmedabad. He said if a buyer called a price of Rs 2,000 as unaffordable, it was a matter of mindset. According to him, developers had capital in the past and yet had the luxury of saying no to new investment in the last one year. That was time of excessive commitments and it would take time to correct that situation in the real estate sector. Srinivasan wondered over the abysmally small number of developers who could declare business size in excess of Rs 150 crore. “Most developers have not built their balance sheets over the years, though they borrowed a huge amount of Rs 72,000 crore from banks… this calls for hard thinking. For, you have no choice but to prepare your balance sheet if you want to build your business in the long run and if you do not want to confine yourself to relationship banking,” he said. Srinivasan said the Reserve Bank of India was often cursed for enforcing restrictions on banks’ lending parameters, but it should be remembered that this cautious approach was in the developers’ interest. He felt that banks must first be able to build confidence in the lending activity to build up stable banking operations. He also advised developers to work closely
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with the planning authorities, especially when planning shopping complex after complex in a close range. “There is a disaster waiting to happen in terms of viability and lessons must be drawn from what happened in places like Gurgaon,” he said. HDFC general manager Irfan Kureishi also spoke on the occasion.
Indian realty goes ‘Green’ The Indian Real estate sector is taking the initiative to contribute to the save the environment by developing green buildings. Jones Lang LaSalle Meghraj, in its research report titled, ‘Greenomics,’ states that the Indian construction industry is growing at 10% as compared to the world average of 5.2%, and that the country is expected to develop 110 million sq ft of green space over the next few years. The report focuses on the cost benefit analysis for green buildings. One of the major findings from the analysis is that a green building aiming for LEED (Leadership in Environment and Energy Design) – GOLD certification can recover its additional costs in a payback period of 2-3 years. Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj, says, “The challenges faced inherent in the development of green buildings in India are the extra investment in an unstable real estate market scenario, and the difficulty in sourcing green building material and sustainability consultants. Extra investments can be recovered in the medium-to-long term from the non-sustainability discount, which gives green buildings a
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higher rental value than conventional buildings in their vicinity, and via the carbon credits that can be earned from the reduced GHG emissions.” Most green buildings in India are coming up in Mumbai and Chennai. Mumbai, being India’s financial hub, is more preferred by large MNCs, especially financial conglomerates. Similarly, Chennai has seen a tremendous influx of IT and multinational manufacturing firms. The concept of green buildings is gradually catching up in other cities like Kolkata, NCR, Bangalore and Hyderabad. Green Buildings are more energy efficient, consume less water and reduce construction waste. The intangible benefits are generated from a healthy living environment and better working conditions within the building. Growing awareness on the benefits of green buildings among international and domestic occupiers is decisively driving the demand for green buildings. The green building movement has also catalyzed the emergence of various green rating systems that provide tools to enable comparison of building on their sustainability credentials. Among all these rating systems, Leadership in Environment and Energy Design (LEED) has emerged as the most popular and is followed in 24 countries across the globe - including India. The Government has launched the Energy Conservation Building Code (ECBC) under the National Building Codes and Standards to promote green buildings in India. The Confederation of Indian Industries (CII), along with the Indian Green Building Council (IGBC) and other professionals, is also working to mitigate the challenges green buildings will face, thereby
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enabling developers to develop and operate green buildings with ease. As the green building industry matures, the green funds industry will also emerge. Therefore, the entire green ecosystem is ramping up in India, opening new investment opportunities for developers and giving them good reason to get involved in developing sustainable buildings.
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Annexture
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References
Duetsche Bank Research Report – Building India. Urban Land Institute --- Emerging Trends In Real Estate,PWC. Real Estate Sector -- EFG Hermes Substantial Real Estate Development - GMR Group Study
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Bibliography
Books & Journals
The Complete Real Estate Encyclopedia, Denise L. Evans & O. William Evans.
Real Estate Report - Realty Times, 2008.
Indian Real Estate Sector, Equity Research, ICICI Securities.
Real Estate Market Predictions, Economy Watch, February 2009.
Indian Real Estate Repot, Northridge Capital, June 2008.
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Websites
www.IndianRealEstateForums.com www.RealtyTimes.com www.chicagotribune.com www.Moneycontrol.com
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“INDIAN REAL ESTATE INDUSTRY”
Research on Real Estate Development
Dissertation Submitted to the Padmashree Dr. D.Y. Patil University in partial fulfillment of the requirements for the award of the Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by: Kumar Agnani (Roll No. 64)
Research Guide:
Prof. Manish Rai
Department of Business Management Padmashree Dr. D.Y. Patil University CBD Belapur, Navi Mumbai April 2009
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CERTIFICATE
This is to certify that the dissertation entitled “ Indian Real Estate Industry and its Development ” is the bona fide project work carried out by Mr. Kumar M. Agnani student of Masters of Business Administration, at Padmashree Dr. D.Y. Patil University’s Department of Business
Management during the year 2007 -2009, in partial fulfillment of the requirements for the award of the Degree of Master in Business Management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title. Signature of Director Signature of Project Guide
Place: Mumbai
Date:
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DECLARATION
I hereby declare that the dissertation “Indian Real Estate Industry” Submitted for the MBA Degree at Padmashree Dr. D.Y. Patil University’s Department of Business Management is my original work and the dissertation has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles.
Place: Navi Mumbai Date:
(Kumar Agnani)
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“Acknowledgement is an art, one can write glib stanzas without meaning a word, on the other hand one can make a simple expression of gratitude.” I take the opportunity to express my gratitude to all of them who in some or other way helped me to accomplish this challenging project in Real Estate Industry. No amount of written expression is sufficient to show my deepest sense of gratitude to them. I am very thankful to Guide Prof. Manish Rai, and very grateful to, Faculty Department of Business Management, Padamshree Dr. D.Y.Patil University, Belapur for their everlasting support and guidance on the ground of which I have acquired a new field of knowledge. The course structure created for this curriculum has benefited with the inclusion of recent development in the organizational and managerial aspects.
KUMAR AGNANI MBA (Core, Marketing) ROLL NO. 64
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TABLE OF CONTENTS
Chapter. No Page. No.
Title
A B 1 2 3 4 5 5.1 5.2 6 6.1 6.2 6.3 6.4 6.5 6.6
List of Tables List of Abbreviations Executive Summery Objectives of the Study Research Methodology Literature Review An Introduction Introduction Real estate regulations Indian Real Estate Industry – An Insight Background MAJOR MARKET PLAYERS Size Structure Growth Rates Statistical Data
A B 14 17 19 23 24 25 26 34 35 37 38 39 39 42
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6.7 6.8 6.9 6.10 7 7.1 7.2 7.3 7.4 7.5 8 8.1 8.2 8.3
Regulations and Foreign Ownership Various Industrial Conditions Foreign Tie-Ups Current Deals Indian Real Estate Industry – Current Scenario Current Scenario Current demand and supply Property Price Charts Of Major Cities EVOLUTION OF THE MARKET ENTRY STRATEGIES AND MODELS FDI In Indian Real Estate Industry The Foreign Investment Boom FACT SHEET ON FOREIGN DIRECT INVESTMENT
43 50 51 53 55 56 58 63 65 67 72 73 78
Conditions for Foreign Investment in Real Estate 82 Sector in India Factors Affecting The Indian Real Estate 84 88 89 91 93
9 10 10.1 10.2 10.3
Industry Major Market Players Sobha Developers Peninsula Land Marg Construction
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TABLE OF CONTENTS (Contd)
Chapter. No 10.4 10.5 10.6 11 12 12.1 12.2 Page.No. 95 97 99 Market 101 106 108 114 118 119 And 123 127 129 130 134 139
Title Prajay Engineers Syndicate D S Kulkarni Developers Arihant Foundations & Housing Research on Emerging Real Estate
Indian Real Estate Industry – SWOT Analysis STRENGHTS WEAKNESSES
12.3 OPPURTUNITY 12.4 KEY THREATS 13 “The Ground Floor” - Real Estate Industry Recession 13.1 RECESSION 13.2 13.3 13.4 13.5 Slowdown across sectors Real estate & Recession Indian real estate sector in recession mode MIGHTY BUILDERS TUMBLE
14
“RENOVATING REAL ESTATE” COUNTER RECESSION
-EFFORTS TO 151
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14.1 15
EFFORTS TO COUNTER RECESSION Conclusion ANEXTURES Reference Bibliography
158 165 168 169 170
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LIST OF TABLES
No. Title Page. No. 5.1 5.2 6.1 6.2 7.1 7.2 7.3 Turnover of Automobile Manufacturers Key regulations in the real estate sector Major Market Players Industry Profile Demand forecast Demand forecast Cumulative Office supply across 7 Key Cities Across India 7.4 8.1 8.2 11.1 12.1 Addition in retail Space Amount of FDI inflows(In Rs. Crore) FDI Equity inflows during calendar year 2007 Research Nominees Long Term Growth Rates 65 83 84 106 116 32 35 40 41 59 60 63
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LIST OF FIGURES
No.
Title
Page. No.
6.1 6.2 6.3 7.1 7.2 11.1 11.2 11.3 12.1 12.2 12.3 12.4 12.5
Real Estate Developers Planning Exponential Growth Indian Real Estate market Growth Drivers Growth Potential and Expected Trends Distribution of India New Office Space by 2008 India’s Mall space to rise fourfold in three years Chart 1 Chart 2 Chart 3 SWOT Analysis Favourable Demographics Growth Chart (FCI) Role Of Aggregators Market Oppurtunities Snapshot
43 44 45 64 65 107 108 109 111 113 115 119 121
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12.6 12.7
Interest Rate Movement For 25 Years Decreasing Spreads
122 125
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LIST OF ABBREVIATIONS
ABBREVIATION FULL FORM
SEZ CRZ CAGR CAN FDI GDP IT MNC R&D SWOT
Socio-economic zone Coastal Regulation Zone Compounded Annual Growth Rate Controller Area Network Foreign Direct Investment Gross Domestic Product Information Technology Multi National Corporation Research & Development Strength, Weakness, Opportunity & Threats
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Chapter 1
Executive Summary
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EXECUTIVE SUMMARY
Indian real estate has huge potential demand in almost every sector especially commercial, residential, retail, industrial, hospitality, healthcare etc. Commercial office space requirement is led by the burgeoning outsourcing and Information Technology Industry. The leaders of the IT/ITES world have set up or are setting up their centers in India. Estimated demand from IT/ITES sector alone is expected to be 150mn sq.ft. of space across the major cities by 2010. In residential sector there is housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organized retail formats has redefined the consumption pattern. As a result the country has experienced mushrooming of retail projects across the cities.The main growth thrust is coming due to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors. India, like many other parts of the world is zooming away in the face of a real estate boom. In India there is a real estate boom in any direction you wish to see. Whether it is Bangalore, Pune, Calcutta or Chennai or Hyderabad or even already sky high Mumbai and Delhi - the story is the same. Now apartments are more than just houses. They are about lifestyle. So while the first housing colonies had nothing but a security guard, these new housing colonies have a gym (spa, jacuzzi, steam), swimming pool (heated, lined with Italian marble). Some have a multiplex, shopping
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complex. There are those which offer a servant entrance. The next step is creating an ambience. Along the length and breath of India, there are many small and big Indian real estate companies. Each has a geographical stronghold, but there are also bigger companies, which have a national presence. There are innumerable agents, brokers, architects, property consultants, builders and home finance companies in the metros and smaller cities. Indian real estate news is hot news in the global real estate market. And Indian real estate companies have geared up to meet the high demand from domestic as well as international buyers. If you are looking for a reputed Indian real estate company to help you with your property dealing, look no further. The development of real estate in India focuses on two primary areas: retail and residential. The global real-estate consulting group Knight Frank has ranked India 5th in the list of 30 emerging retail markets and predicted an impressive 20 per cent growth rate for the organized retail segment by 2010.The organized segment is expected to grow from a mere 2 per cent to 20 per cent by the end of the decade, it said.
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Chapter 2
Objectives of Study
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OBJECTIVES OF THE STUDY
Management Objective
To fuel initiative and foster activity by allowing individuals freedom of action and innovation in attaining defined objectives.
People Objective
To help HCL Insys people share in the company’s success, which they make possible; to provide job security based on their performance; to recognize their individual achievements and to help them gain of satisfaction and accomplishment from their work. Core Values
♦ ♦ ♦ ♦
It is uphold the dignity of individual It is honour all commitments It is committed to quality, Innovation and growth in every endeavor It is responsible Corporate Citizens.
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Chapter 3
Research Methodology
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RESEARCH PROBLEM
• Real Estate Corporate facing financial crunch.
• Decreasing business of Real Estate Companies
RESEARCH DESIGN • Determined the Information Sources: The researcher gathered data through secondary sources. • PRIMARY DATA is collected through questionnaire, search and research from developers and market watchers. • SECONDARY DATA is being search sites like magazines, newspapers, journals, websites and the data has been collected through other approaches.
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DATA COLLECTION The researcher collected information through the official websites, magazines and journals.
DEVELOPED THE RESEARCH FRAME: This included deciding upon various aspects for the project on which the entire research is based. The research frame included:
NATURE OF STUDY The project on which the researcher worked is descriptive and inferential in nature. DATA SOURCE: The researcher took the help of both primary as well as secondary sources. Secondary sources being interaction with various Real Estate people of the selected and has been chosen for the research by the researcher. Secondary sources being the internet as the medium and the official sites of the companies of Real Estate sectors and corporate selling and feedback on real estate Companies.
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INSTRUMENT USED The researcher for the research used a Questionnaire cum Schedule for market research for both the segments horizontal and vertical. The Questionnaire was prepared by the researcher and Schedule was provided by the company in which the researcher did its research report.
SAMPLE SIZE Sample size for the research is fixed. It counts to 30. That is the Real Estate companies and Developers and feed of Real estate in comparison between other sectors.
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Chapter 4
Scope of Study
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SCOPE OF THE STUDY The study is to know the latest crisis faced by the real estate companies and how it can effect the growth of the country. The study is to also determine the demand and future expectation of real estate companies.
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Chapter 5
Real Estate – An Introduction
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5 1INTRODUCTION
“It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate.” – Donald Trump
1.1.1 What is Real Estate ?
The most basic definition real estate is "an interest in land". Broadening that definition somewhat, the word "interest" can mean either an ownership interest (also known as a fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If you rent an apartment, you have a leasehold interest in real estate. If you own a home, you have an ownership interest in that home. Some jurisdictions recognize other interests beyond these two, such as a life estate, but those interests are less common in the investment arena.
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As a real estate investor, you will most likely be purchasing ownership interests and then earning a return on that investment by issuing leasehold interests to tenants, who will in turn pay rent. It is also not uncommon for an investor to acquire a long-term leasehold interest in land, which then has a building constructed upon it. At the end of the land lease, the land and building become the property of the original land-owner.
5.2 Real estate regulations
1.2.1 Central laws
1.2.1.1 Laws relating to land acquisition
The Urban Land (Ceiling and Regulation) Act, 1976 prescribes the limits to urban areas that can be acquired by a single entity. It has, however, been repealed in some states and union territories under the Urban Land (Ceiling and Regulation) Repeal Act, 1999. Further, land holdings are subject to the Land Acquisition Act, 1894, which provides for the compulsory acquisition of land by the central Government or the appropriate state Government for public purposes, including planned development and town and rural planning. However, any person with an interest in such land has the right to object to such compulsory acquisition and the right to compensation.
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1.2 1.2 Laws regulating transfer of property
Transfer of Property Act, 1882
Transfer of property, including immovable property, between living persons, as opposed to the transfer of property by the operation of law, is governed by the Transfer of Property Act, 1882 (TP Act). The TP Act establishes the general principles relating to the transfer of property, including among other things, identifying the categories of property that are capable of being transferred, the persons competent to transfer property, the validity of restrictions and conditions imposed on the transfer, and the creation of contingent and vested interest in the property.
Registration Act, 1908
The Registration Act, 1908 (‘Registration Act’) has been enacted to provide public notice of the execution of documents affecting transfer of interest in immoveable property. The purpose of the Registration Act is to conserve evidence, assurances, title, and publish documents and prevent fraud. It details the formalities for registering an instrument. Section 17 of the Registration Act identifies documents for which registration is compulsory and includes, among other things, any non-testamentary instrument which purports or operates to create, declare, assign, limit or extinguish (whether in present or in future) any right, title or interest (whether vested or contingent) in immovable property of the value of Rs100 or more, and a lease of immovable property for any term exceeding one year or reserving a yearly rent. A document will not affect the property comprised in it, nor be
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treated as evidence of any transaction affecting such property (except as evidence of a contract in a suit for specific performance or as evidence of part performance under the T.P. Act or as collateral), unless it has been registered.
The Indian Stamp Act, 1899
There is a direct link between the Registration Act and the Indian Stamp Act, 1899 (‘Stamp Act’). Stamp duty should be paid on all documents specified under the Indian Stamp Act and at the rates specified in the Schedules there under. The rate of stamp duty varies from state to state. The stamp duty is payable on instruments at the rates specified in Schedule I of the said Act. The applicable rates for stamp duty on these instruments, including those relating to conveyance, are prescribed by the state legislation. Instruments chargeable to duty under the Stamp Act, which are not duly stamped, are incapable of being admitted in court as evidence of the transaction contained there in. The Stamp Act also provides for impounding of instruments which are not sufficiently stamped or not stamped at all.
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Table 5.1 : Stamp Duty And Legal Costs
The Easements Act, 1882
The law relating to easements is governed by the Easements Act, 1882 (‘Easements Act’). The right of easement is derived from the ownership of property and has been defined under the Easements Act as a right which the owner or occupier of land possesses for the beneficial enjoyment of that land and which permits him to do or to prevent something from being done in respect of certain other land not his own. Under this law an easement may be acquired by the owner of immovable property, i.e. the dominant owner, or on his behalf by the person in possession of the property. Such a right may also arise out of necessity or by virtue of a local custom.
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1.2.1.3 Laws relating to employment
The employment of construction workers is regulated by a wide variety of generally applicable labour laws, including the Contract Labour (Regulation and Abolition) Act, 1970, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and the Payment of Wages Act, 1936.
1.2.2 State laws
1.2.2.1 Urban development laws
State legislations provide for the planned development of urban areas and the establishment of regional and local development authorities charged with the responsibility of planning and development of urban areas within their jurisdiction. Real estate projects have to be planned and developed in conformity with the norms established in these laws and regulations made there under and require sanctions from the government departments and developmental authorities at various stages. For instance, in certain states such as Haryana, for developing a residential colony, a licence is required from the relevant local authority. In cases where projects are undertaken on
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lands which form part of the approved layout plans and/or fall within the municipal limits of a town, generally the building plans of the projects have to be approved from the concerned municipal or developmental authority. Building plans are required to be approved for each building within the project area. Clearances with respect to other aspects of development such as fire, civil aviation and pollution control are required from appropriate authorities, depending on the nature, size and height of the projects. The approvals granted by the authorities generally prescribe a time limit for completion of the projects. These time limits are renewable upon payment of a prescribed fee. The regulations provide for obtaining a completion/occupancy certificate upon completion of the project.
1.2.2.2 Agricultural development laws
The acquisition of land is regulated by state land reform laws, which prescribe limits up to which an entity may acquire agricultural land. Any transfer of land which results in the aggregate land holdings of the acquirer in the state to exceed this ceiling is void, and the surplus land is deemed, from the date of the transfer, to have been vested in the state government free of all encumbrances. When local authorities declare certain agricultural areas as earmarked for townships, lands are acquired by different entities. After obtaining a conversion certificate from the appropriate authority with respect to a change in use of the land from agricultural to non-agricultural for development into townships, commercial complexes etc. such ceilings are not applicable. While granting licences for development of townships,
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the authorities generally levy development/ external development charges for provision of peripheral services. Such licences require approvals of layout plans for development and building plans for construction activities. The licences are transferable on permission of the appropriate authority. Similar to urban development laws, approvals of the layout plans and building plans, if applicable, need to be obtained.
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Table 5.2 : Key regulations in the real estate sector
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Chapter 6
Indian Real Estate Industry – An Insight
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6.1 BACKGROUND
India is considered the birthplace of the number zero. In recent years, however, the subcontinent has hit the headlines with rather larger numbers. Home to roughly 1.1 billion people, India is the second most populous country after China and 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% p.a. since 1992.
Indian realty sector will grow from US$ 12 billion in 2007 to US$ 90 billion by 2015.
The size of the real estate industry in India is estimated to be around $12 billion. And iti s continuously growing at the rate of 30% for the last few years. Almost 80% of real estate developed in India is residential space and the rest comprises of office, shopping malls, hotels and Hospitals. The main reason for growth is mainly due to off-shoring business, including high end technology consulting, call centers and software programming houses which covers 15 million square feet of real estate development. With an ever increasing influx of funds, the real estate sector in India is growing bigger. In the first half of 2007, there will be atleast 20 more funds making an entry in India while 35 big ticket foreign funds have already made their presence in India. Northbridge Research expects that the Indian
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realty sector will grow from US$ 12 billion in 2007 to US$ 50 billion in 2010 and to US$ 90 billion by 2015. Global funds like Carlyle, Blackstone, Morgan Stanley, Trikona and Warbus Pincus are sitting on a total corpus of US$ 12-15 billion. Even the most aggressive retailers expands their business creates a huge demand for real estate.
The real estate development in India focuses on two primary areas : Retail and Residential. Northbridge research has predicted growth rate of 20% in the organized retail segment by 2010. Lot of foreign players are attracted to invest in real estate market in India. Examples are : Morgan Stanley Real Estate has invested $68 million in mantri Developers private limited, a private Banglore based Real Estate Developer.Vancouver-based Royal Indian Raj International Corporation (RIRIC) will invest $2.9 billion in a single real estate project named Royal Garden city in Banglore over a period of ten years and the retail value of project is estimated at $8.9 billion.
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Table 6.1 : Market Players
6.2 MAJOR MARKET PLAYERS
Real Estate Developers Construction Companies Corporate Houses Property consultants Real Estate brokers
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Housing finance companies Banks & Financial Institutions Architects Vendors & Suppliers
Table 6.2 : Industry Profile
6.3 SIZE
Real Estate and Construction is a $12 billion (by revenue) industry in India.
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The industry has seen a rapid growth in the past few years.
6.4 STRUCTURE
In India, Real Estate sector is fragmented market - Most real estate developers have only a local or regional presence - There is participation of large corporations in these sector - India has higher margins (20%) as compared to the developed markets (5-6%). Institutional finance in Real estate is just beginning. Various foreign Real Estate and Finance companies like GE Commercial Finance, Tishman Speyer, Ascendas and Farallon Capital have entered the Indian market.
6.5 GROWTH RATES
Real Estate sector is growing at an annual growth rate of 30% Returns in India range between 12-15% compared to 3-4% in the advanced countries. Northbridge research estimates that the 70% of the new construction will be for the IT sector.
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Figure 6.1 : REAL ESTATE DEVELOPERS PLANNING EXPONENTIAL GROWTH
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Figure 6.2 : Indian Real Estate market Growth Drivers
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Figure 6.3 : Growth Potential and Expected Trends
6.6 STATISTICAL DATA
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The growth in commercial office space requirement is mainly due to outsourcing and Information Technology (IT) industry. Northbridge research estimates that there is going to be housing shortage of 19.4 million units out of which 6.7 million are in urban India. Even the purchasing power and exposure to organized retail markets has increased the scope of the market. Projections are made that US$ 10 billion will be injected into Indian real estate sector in the next 12 to 18 months. Almost over 90 foreign investors are already in the country to tap investment avenues. Nearly 12 US funds are raising US$ 3.5 billion for investments in Indian realty.Those raising the funds include Wall Street powerhouses such as the Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup PropertyInvestors (US$ 125 million), Morgan Stanley (US$ 70 million) and GE Commercial Finance Real Estate (US$ 63 million). Organised retail is currently 4.6% of the US$ 270 billion Indian retail sector whichis expected to grow at the rate of 37% in 2007 and 42% in 2008.
6.7 REGULATIONS AND FOREIGN OWNERSHIP
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Till recently, FDI in real estate was restricted to development of industrial parks, hotels, integrated townships and SEZ’s. From March 3, 2005 onwards, Government of India replaced the integrated township policy to permit FDI upto 100% in townships, housing, built-up infrastructure & construction – development projects.
A significant change is the lowering of the minimum development size from 100 acres to25 acres. The lower threshold is more manageable for a firsttime foreign investor. Further, there are limited holdings of 100-acre plots available in major cities. Another significant change is the removal of sectoral restrictions. The scope is expanded to cover residential, commercial or shopping malls. The new guidelines for India can trigger an investment of $1-1.5 billion annually. IT and IT-enabled services would require an estimated 50-70 million sq ft of space in the next two to three years, while the nationwide housing shortage is estimated at 20 million residential units.
The FDI in Indian real estate sector is permitted through the automatic route across all real estate segments except agricultural and plantation properties subject to the conditions mentioned below :-
i. Investment
Minimum Capitalization - for wholly owned subsidiaries - US$ 10 million
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- for Joint Ventures with Indian Partners -US$ 5 million, to be brought in within 6 months of commencement of business. Original Investment cannot be repatriated before a period of three years from completition of capitalization. The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
ii. Minimum Area Requirements:
The minimum area to be developed under each project would be as follows: Minimum land area to be developed is case of serviced housing plots is 10 hectare or approximately 25 acres. In case of construction development projects, a minimum built-up area of 50,000 sqm. In case of a combination of the above two projects, any one of the above two conditions should suffice. This limit has been brought down from 100 acres that was required to invest in integrated townships subject to FIPB approval.
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iii. Time Frame & Rules
Atleast 50% of the project to be developed within 5 years from the date of obtaining all statutory clearances. Investor cannot sell undeveloped plots- where roads, water supply, street lighting, drainage, sewerage and other convenience are not available.
iv. Other Legal Compliances
The Foreign company intending to invest shall be registered as an Indian Company under Companies Act 1956. In case of joint ventures, an SPV other than the parent company of the joint venture partners needs to be formed to invest in real estate. Development of at least 50 per cent of the integrated project within a period of five years from the date of obtaining all statutory clearances has to be completed instead of from the date of procurement of land. The investor would not be permitted to sell underdeveloped plots (where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available). The investor must provide these infrastructures and obtain the completion
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certificate from the concerned local body/service agency before being allowed to dispose of the serviced housing plots. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down in the applicable building control regulations, by-laws, rules and other regulations of the State Government/Municipal/Local Body concerned. The State Government/ Municipal/ Local Body concerned, which approves the building/development plans, will monitor the developer’s compliance to the above conditions.
v. Other Amendments
IT/Business Park: Foreign investment in IT parks subject to such IT parks providing space to atleast 3 tenants. Industrial/Logistics/Warehousing: FDI policy in these properties is liberalized and now foreign investors can invest in them at the construction stage subject to a minimum of 50,000 sqm. In addition to the above, the guidelines have also been relaxed for investment by foreign and domestic venture funds in real estate. Venture funds fall under the Foreign Institutional Investment (FII) category rather
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than FDI and have to be registered with the SEBI. Venture funds can invest in real estate if each investor brings in not less than US$ 11,111 and eighty percent of the funds are invested in companies not listed on the stock exchanges or financially weak companies.
FDI is now permitted in:
Housing Townships Commercial Premises Hotels Resorts Hospitals Industrial parks Educational institutions Recreational facilities SEZ’s etc
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Key Regulatory Developments
Securities & Exchange Board of India (SEBI) has allowed Indian venture capital firms to invest in real estate .
100% Foreign Direct Investment (FDI) is now allowed in the construction sector under Automatic route.
Foreign investors can now invest in commercial real estate development projects having minimum built up area of 50,000 m2.
Minimum area threshold for FDI in Integrated Townships reduced to 25 acres from 100 acres.
Minimum equity investment cap of $10 million for 100% FDI projects and $5 million in Joint ventures.
Foreign investors only barred from trading in undeveloped land.
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6.8 Various Industrial Conditions
6.8.1 CONDITIONS OF DEVELOPMENT
Minimum 10 hectares/ 25 acres area to be developed for serviced housing plots. Minimum built up area of 50,000 sq mts for constructiondevelopment projects. Atleast 50% of project to be developed within 5 years from date of statutory clearances.
6.8.2 CONDITIONS FOR INVESTMENT
Minimum capitalization of $10 million ( wholly owned subsidiary) and $5 million (joint venture with Indian partner).
There
should be
infusion of funds
within 6
months
of
commencement of business.
Original investment cannot be repatriated prior to 3 years from completion of minimum capitalization. Early exit is permitted with prior approval of Government.
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6.8.3 MISCELLANEOUS CONDITIONS
Investor is not permitted to sell undeveloped plots. ( Where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available. It is necessary for investor to provide this infrastructure and obtain a completion certificate prior to sale of land).
Concerned
authority
will
monitor
compliance
of
above
conditions by developer.
6.9 Foreign tie-ups
Residential
JP Morgan invested in Lodha group Keppel Land ( Singaporean Company) – Joint venture with Puravankara Salim Group (Indonesia) had a township in West Bengal
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Office
Farallon (US) had a joint venture with India bulls Vornado – joint Venture with TCG.
Hotels
GMR Infrastructure – Accor Hotels and Resorts EMAAR –Budget Hotels India Limited Hilton Group – DLF JV ACCOR- Emaar- MGF for budget hotels
Domestic Player promoted funds
ICICI Funds HDFC Fund Kotak realty fund Urban Infrastructure Opportunities Fund IL&FS Realty Fund
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CIG Realty Fund Peninsula Realty Fund
Foreign player promoted Funds
Ascendas – GE Blackstone Starwood Capital Sun- Apollo Walton Street Capital AIG Real Estate Fund JP Morgan Real estate
6.10 CURRENT DEALS
Morgan Stanley closed a deal with Oberoi Constructions in Mumbai for $150 million. The Nakheel Group in Dubai signed a deal with DLF for development of residential projects in Tier I & Tier II cities worth $10 billion.
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Yatra capital buys 49 percent in Indian real estate company for 21.6 million Euro.
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Chapter 7
Indian Real Estate Industry – Current Scenario
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7.1 Current Scenario
The estimated current size of Indian real estate market at US$57bn or 6.2% of India’s GDP. In terms of value, the real estate market would likely grow at 12.8% CAGR in the next five years to US$105bn or 7.1% GDP by FY12E. In the next five years, the average annual investments required in the real estate sector are ~US$85bn, of which the residential segment constitutes 88% at US$74bn. The estimated annual investments for office space ais US$5.7bn and retail segment is US$4.8bn. These are based on requirements of investment in land and construction cost to meet the intrinsic real estate demand in India and not on sales as the mark up on costs could vary with market conditions.
Table 7.1 : Demand Forecast
As of end-FY07, the stock estimates (in terms of constructed area) were as follows – residential - ~38bn sqft, office - ~135mn sqft and retail - ~90mn sqft. In FY07, ~1.8bn sqft residential, 35mn sqft office and 24mn sqft retail space was added. We estimate the market to grow at 4.6% CAGR with
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4.2%, 15.2% and 14.3% CAGR in residential, commercial and retail segments respectively. Also, we expect the next five-year average annual demand for residential, office and retail space at 2bn sqft, 65mn sqft and 37mn sqft respectively.
Table 7.2 : Demand Forecast
Going forward, hotels, logistics and warehousing would create significant real estate demand. As per industry estimates, 100,000-125,000 hotel rooms would be added in the next five years, with setting up of around 100 economy hotels in India. There is tremendous opportunity for developers to capture the burgeoning real estate market. However, the developers need to re-invent themselves to meet changing customer needs and offer differentiated, quality products at the right price point.
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7.2 Current demand and supply
The demand and supply are on an even keel across India and estimate that there would not be significant oversupply in either residential, office or retail segments till end-CY09. However, further tightening of interest rate could reduce demand, leading to lesser absorption of supply. There would not be a sharp correction in real estate prices, although a mild correction can not be ruled out. However, such a correction should not last long and would be predominantly confined to a few overheated locations. Given the significant capital appreciation in the past two years and higher operating margins enjoyed by developer (50-80%), a marginal drop in prices should not impact the sector significantly.
Residential segment
Residential markets are stabilizing and prices are not expected to rise beyond the normal inflationary growth. Given the current supply scenario and recent hikes in interest rate, home buyers have adopted a wait and watch stance, implying that differentiated product offerings and brand name would play a critical role in closing a sale. Further, this would increase the possibility of a sporadic drop in prices in certain pockets. However, once the interest rates stabilize, improving demographics and the latent housing
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demand would again push up the residential demand. As this market in various Indian cities matures (i.e. no supply-side constraints for quality homes), developers with business competencies/skills will differentiate themselves and move forward. As per the National Housing Bank (NHB), there was a housing shortage of 19.4mn units (12.7mn units in rural areas and 6.7mn units in urban areas) in FY03. As per the five-year plan, there would be a shortage of 22.7mn housing units by ’07. Industry estimates of cumulative demand supply gap stand at 4.1bn sqft. The demand for residential units in urban India is estimated to be ~2bn sqft/annum. Although, it is difficult to estimate residential demand within the target segment of real estate developers, the estimated demand is ~450550mn sqft. This is based on the new housing demand created by rising middle and upper income households. Demand for the high-end residential segment (properties with a ticket size >Rs2.5mn) is 100- 130mn sqft. As per a recent AC Neilson report, supply from the high-end residential segment is ~120mn sqft. This implies that the demand & supply situation is comfortably matched; and the equilibrium is not expected to shift significantly.
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Office segment
Currently, demand for office space is far exceeding supply in most locations across India. This can be gauged by the large number of preleases and the low vacancy rates. Office properties have hardly seen drop in prices except in Whitefield, Bangalore, where poor infrastructure was a damper. It is estimated that the current supply pipeline would not lead to an oversupply; however, the rentals might not move further, signalling an end to capital appreciation on office properties. The development of IT/ITES SEZs remains a key risk to our estimate, which could create additional 33mn sqft supply annually. The estimated office space demand in India is 65mn sqft/annum, 67% of which is from the IT/ITES sector. We estimate the demand from the sector to be driven by an annual 565,000 employee addition over the next five years. The estimated office space supply in India is ~50-55mn sqft in CY07. The cumulative development pipeline for the key seven cities is ~105mn sqft.
Table 7.3 : Cumulative Office supply across 7 Key Cities Across India
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Figure 7.1 : Distribution of India New Office Space by 2008
Retail segment
The retail sector demand is estimated to be 37mn sqft/annum; currently, there is high demand for quality retail space across India. The supply is expected to exceed demand in the next two years as many large projects would come on stream across most metros. In the next two years, we expect rentals to remain flat or drop marginally. However, the oversupply situation post CY09 is a critical issue. Oversupply is likely to hit retail before office and residential segments and would have a more severe impact given the high land and construction cost (input costs).
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Table 7.4 : Addition in retail Space
Figure 7.2 : India’s Mall space to rise fourfold in three years
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7.3 Property Price Charts Of Major Cities
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7.4 EVOLUTION OF THE MARKET
3 YEAR SCENARIO
Realty sector is growing at the rate of 30% per annum to reach $4550 billion by 2010.
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IT sector alone is expected to require 150 million sq ft of space across major citites by 2010.
Organised retail has the potential to add over US$ 45 billion business by the year 2010.
This will create a demand of 220 million square feet of retail space by 2010.
27 million square feet of organised retail space is currently available. Another 90 million square feet is expected to be added by 2008 from 263 mall projects.
Of these, 18 million square feet is slated to come up in Delhi as well as in Mumbai, 9.5 million square feet in Ludhiana, 6 million square feet in Chandigarh and 3.6 million square feet in Ahmedabad.
India will have 2.9 million hotel rooms by 2010 as compared to today’s 1.2 million. The demand for hotels rooms will grow at a compounded annual growth rate of 10% over the next five years.
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5 YEAR SCENARIO
It is projected that the market size will be $90 billion by 2015.
IT and ITES sector are expected to continue to grow at 30%. It is estimated that additional 367 million square feet of office space will be required by 2012-2013.
A revenue of $333 million was generated from 1,80,000 medical tourists in 2004 and it is expected to rise to $ 2 billion by 2012.
Construction industry is currently worth $70 billion and would rise to $120 billion by 2010.
7.5 ENTRY STRATEGIES AND MODELS
A foreign company planning to set up business operations in India has the following options:-
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7.5.1 AS AN INDIAN COMPANY
A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through:
i) Joint Ventures ii) Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
7.5.2 AS A FOREIGN COMPANY
i) Liaison Office/Representative Office ii) Project Office
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iii) Branch Office
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
Liaison Office/Representative Office
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general
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permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
i) Export/Import of goods ii) Rendering professional or consultancy services iii) Carrying out research work, in which the parent company is engaged. iv) Promoting technical or financial collaborations between Indian
companies and parent or overseas group company. v) Representing the parent company in India and acting as buying/selling agents in India. vi) Rendering services in Information Technology and development of software in India. vii) Rendering technical support to the products supplied by the parent/ group companies.
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viii) Foreign airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). Branch Office on “Stand Alone Basis” Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India. No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
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Chapter 8
FDI In Indian Real Estate Industry
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8.1 The Foreign Investment Boom
India’s real estate sector is undoubtedly on a high growth path and recognized as global investors’ choice. India is holding ninth position among retail markets in the world with organized retailing and growing at the rate of 30 percent per annum. India has played up to its image of being one of the most attractive FDI destinations. The positive outlook of Indian government is the key factor behind the sudden rise of the Indian real estate sector. The Institute of International Finance (IIF)expects FDI in India to rise to $8 billion in 2007 from $6.5 billion in the last year. Following FDI groups have already spread their wings in Indian real estate sector.
1.Emaar MGF has brought in the largest FDI of over US$1 billion in the Indian real estate sector. In addition, the company is focusing on pan-India projects in residential, commercial, infrastructure and hospitality sectors in integrated master plans and SEZ.
2. Keppel land , a singapore based group has aleady signed JV agreement with M/ S Purvankara group, banglore based group for residential and commercial project.
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3.DSP Merrill Lynch, Barclays Bank and Mauritius-based TH Holdings and groups have do far invested Rs.11, 460 crore in the first half of this The collective investment that got parked in real estate and construction sector was to the tune of Rs. 1,252.79 crore.
4. AEA Holdings is searching for the efficient partners to expand its business horizons and wants to grab the deals and opportunities aggressively and quickly, says industry source.
6. RREEF, the real-estate investment arm of Deutsche Asset Management, is planning to invest over $200 million in a joint venture with realty major Emaar- MGF.
8. Capital Land, Hong kong based group is also planning to invest in India.
9. Royal RaJ Indian, A Canadian group has has already signed JV agreement for residential and commercial.
10..Morgan Stanley Real Estate Fund is known to have made the largest private equity transaction in property market till date and invested $125million Mumbai based Oberoi Constructions.
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10. Mauritius-based IREO Investment Holding grabs the honor of making the highest FDI in the sector with the whopping investment of Rs. 321.70 crore.The company also has plans for related projects and heavier inflows.
11. Emaar MGF Land Private Limited is India’s pioneering joint venture in real estate with projects being implemented on a pan-India basis across top 30 cities.
12.DSP Merrill Lynch Limited, India’s leading investment bank and broking firm that pump in more than Rs 2,230 crore between April 2006 and October 2006.
13. Barclays Bank made an investment totaling Rs 1,711.23 crore pitching itself to the second investor slot.
14. Mauritius-based TH Holdings has invested of Rs.1697.35 crore.
15. French firm Carrefour has been showing interest in entering Indian retail industry.
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16. World’s largest financial services group, Citi, which has sewed up property deals of around $400 million in the past few weeks. This prestigious group is also looking forward to enter into a joint venture with HDFC and US based Portman Holdings.
17. Citigroup is all set to enter in the red Citigroup Property Investors (CPI) India.
hot property market through
18. A Mauritius based company financed by a fund in Cayman Islands, was recently in the news to have raised $500 million through an India-dedicated fund. The conglomerate is likely to raise more money to invest in realty.
19. Hong Kong based AEA Holdings announced that it plans to invest more than $2 billion over the coming years in Indian realty projects.
21. Italian firm Rino Greggio’s plan to set up a joint venture for selling silverware and UK-based Alpha Airport Group’s proposal to establish a wholly-owned subsidiary for setting up duty-free shops, flight kitchens and food and beverage outlets at airports in the country at an investment of Rs 22.5 crore was also approved other allied products.
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22. A proposal by the Netherlands-based Diageo Highlands Holdings to set up a joint venture has received clearance as well from Indian Government.
23. Solitaire Capital Investments Pte and Solitaire Ventures Pte, a Singapore based group are investing Rs 511-crore of in India’s booming real estate sector.
24.Mauritius-based power producer Bijlee Bharat Holdings’ plan to set up a subsidiary in India with an initial investment of Rs 308 crore,
25. NSK Limited of Japan which has committed Rs 41.25 crore to set up a new JV in Chennai.
26. Spain-based Lladro Commercials S.A. will pump in Rs 5.85 crore for increasing its equity in Spa Agencies (India) from 26 per cent to 49 per cent.
27. Sri Lanka-based Damro Exports Pvt Ltd’s proposal to sell furniture under the single brand name ‘DAMRO’ and Italian firm Rino Greggio’s plan to set up a joint venture .
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28. UK-based Alpha Airport Group’s proposal to establish a wholly-owned subsidiary for setting up duty-free shops, flight kitchens and food and beverage outlets at airports in the country at an investment of Rs 22.5 crore was also approved.
29. Hong Kong based AEA Holdings announced that it plans to invest more than $2 billion over the coming years in Indian realty projects.
8.2 FACT SHEET INVESTMENT
ON
FOREIGN
DIRECT
A. CUMULATIVE FDI EQUITY INFLOWS
1. Cumulative amount of FDI inflows (from August 1991 to March 2006) Rs. 1,61,411 crore US$ 38,902 million. 2. Amount of FDI inflows during 2006- 2007 (from April 2006 – January 2007) Rs.50,652 crore US$ 11,194 million . 3. Cumulative amount of FDI inflows (updated up to January 2007) Rs. 2,12,063 crore US$ 50,096 million.
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B. FDI EQUITY INFLOWS DURING YEAR 2006-2007
FINANCIAL
Financial Year 2006-2007 (April-March)
Period
(In Rs. Crore)
(In US$ mn)
April 2006
2,972
661
May 2006 June 2006 July 2006 August 2006
2,443 2,405 5,235 2,878
538 523 1,127 619
September 2006
4,222
916
October 2006 7,718
1,698
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November 2006 December 2006 January 2007 2006-2007 January 2007 2005-2006 January 2006) (up up
5,157 9,108 8,514 to 50,652
1,151 2,040 1,921 11,194
to 18,535
4,179
Table 8.1: Amount of FDI inflows(In Rs. Crore)
%age growth over last year (+) 168 %.
Period
(In Rs. Crore)
(In US$ mn)
January 2007 Calendar 2006(upto 2006)
8,514 Year 2,141 January
1,921 482
Table 8.2 : FDI EQUITY INFLOWS DURING CALENDAR YEAR 2007
8 0
%age growth over last year (+) 298 % .
Foreign Direct Investment is encouraged and permitted, in the following real estate sectors in India:
Hotel Development Tourism Hospitality Township development Developing Commercial Real Estate Built-up infrastructure Housing and construction projects Building Resorts Building Hospitals Building Educational institutions Building Recreational facilities Infrastructure projects: regional and local level Special Economic Zones (SEZ)
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8.3 Conditions for Foreign Investment in Real Estate Sector in India
Foreign Direct Investment in some of the aforesaid areas (not all) is subject some conditions, some of which are as follows:
•
Develop a minimum land area of 10 hectares for serviced housing plots, and a minimum built-up area of 50,000 sq m in case of construction projects. The policy does not clearly define ‘built-up’, though FSI (Floor Space Index)/FAR (Floor Area Ratio) could be used as a basis for the same. Fulfill the minimum capitalization norm of $10 million for a whollyowned subsidiary and $5 million for JVs. The funds would have to be brought in within six months of commencement of business (which needs to be defined) of the subsidiary or JV. Complete at least 50% of the integrated project within five years from the date of obtaining all clearances. Do not sell undeveloped plots (with no infrastructural backup). Provide infrastructure and obtain the completion certificate from the concerned local body before disposal. This clause needs amendment because certificates are sometimes not issued for months on end, even years, an uncertainty which tends to raise project cost, often beyond viability.
•
•
•
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•
Do not repatriate original investment before three years from completion of minimum capitalization. Early exits require approval of the Foreign Investment and Promotion Board. prior
• Conform with all applicable local and state laws, and abide by all regulations and norms.
FDI up to 100% is permitted under automatic route in:
Townships,
housing,
built-up
infrastructure
&
construction-
development projects (including housing, commercial premises, educational institutions, recreational facilities, etc).
Establishment and operation of hotels.
Set up of SEZ.
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Chapter 9
Factors Affecting The Indian Real Estate Industry
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The real estate industry is not an isolated industry and the various happenings in the market affect the real estate market at any place ,demand and supply .These factors may or may not have a direct impact on the real estate market, but play a vital role in determining how the real estate market would fare out. Some of the major factors are : -
DEMOGRAPHICS :
The demographics of a particular place play a vital role in determining the market behavior of property there. The demography determines the overall spending power of the people and decides how and foe whom the real estate product and services would shape up. Further more ,the class of people inhabiting a particular area would determine what type of buildings ,structures, complexes etc, would be best suited to the place.
STATUS OF THE ECONOMY :
The economy of a particular place would directly determine the spending power of the people and how prosperous they are. An economy that is booming shows great opportunities for investors to invest as the demand for the provided service is higher.This is one of the reasons why India proves to be a lucrative real estate abode.
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GOVERNING LAWS AND REGULATIONS
The local land laws as well as those imposed by the governing bodies at a particular place is another factor that determines the growth of real estate industry at that place .If the laws at a particular area are to stringent, it increases the vows of the developer as well as investor. Thus a sound government backing is always desired to urge the development and buying of property at a particular place.
MONETARY POLICIES AND LENDING RATES
The monetary policies and laws about lending rate directly hit the demand for real estate at a particular place. The lending rates should be low in order to urge investors to invest both in development as well as buying of property.The monetary policy also determines how well the investors would welcome a new initiative in the real estate segment.
FOREIGN DIRECT INVESTMENT
India’s real estate sector is undoubtedly on a high growth path and recognized as global investors’ choice. India is holding ninth position among retail markets in the world with organized retailing and growing at the rate of 30 percent per annum. India has played up to its image of being one of the most attractive FDI destinations. The positive outlook of Indian government is the key factor behind the sudden rise of the Indian real
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estate sector.The Institute of International Finance (IIF)expects FDI in India to rise to $8 billion in 2007 from $6.5 billion in the last year.
OVERSUPPLY :
Real estate has a long duration cycle; hence, oversupply and undersupply in different phases of the realty cycle is inevitable. India’s real estate cycle has witnessed a bull run since ’03. We estimate the cycle to remain on the upswing till end-CY09.
MANAGEMENT/TRANSPARENCY RISK :
Another crucial risk area is the level of transparency/disclosures by the management, which include the developer’s track record, litigations, professional management, best practices and under capitalized balance sheets (high leverage).
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Chapter 10
Major Market Players
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10.1 Sobha Developers
Sobha Developers is one of the leading real estate developers in India. The Bangalore-based company has excellent reputation for its quality of construction and timely execution. Also, the company has the requisite capability to outperform its peers. Its real estate and contractual businesses are growing at a fast pace supported by sound and visionary management. We estimate Sobha’s NPV at Rs96.5bn or Rs1,324/share. The company is among the finest large-cap stocks in the sector and will continue to trade at a premium against peers.
Strong core competencies. Sobha is well known for its quality of construction and superior execution capabilities. Apart from in-house
construction, the company follows a unique backward integration model, which helps keep a check on quality standards and execution timelines. The company is led by sound and visionary management.
Growing project pipeline. Till date, Sobha has developed 17mn sqft property with another 18.7mn sqft in the pipeline. The company has a large land bank of 3,489 acres having a saleable area of 134mn sqft, to be
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developed over the next nine years. We estimate the total NAV of existing projects (137.4mn sqft) at Rs72.9bn or Rs1,001/share.
Contractual business, impressive margins and steady growth. Sobha has developed 10.15mn sqft via contractualprojects (93% developed for Infosys). The business is expected to grow at a fast pace, generating steady cashflow without undue risk to the capital. The contractual business is valued at Rs10.7bn or Rs143/share.
Attractive valuations. We estimate Sobha’s NPV at Rs96.5bn or Rs1,324/share, factoring in the value of current projects and contractual business, Rs6.6bn terminal value and Rs6.6bn of net current assets. The company reported FY07 EPS of Rs22.2; we estimate the earnings to grow at 46% CAGR in the next three years, implying FY08E, FY09E and FY10E EPS of Rs36, Rs47.8 and Rs68.6 respectively.
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10.2 Peninsula Land
Peninsula Land (PLL), the erstwhile Morarjee Realties, is a South Mumbaibased real estate developer. The company is well known for its innovative and superior construction. PLL is bestowed with an upbeat management and a strong project pipeline. The company is an interesting play on highend real estate development, SEZs and townships. We estimate the NPV of the company at Rs28bn or Rs596/share. PLL is among the best developers in West India. There exists an upside to our NPV estimate.
Current project pipeline generating strong cashflows and capital gains. At present, PLL has four ongoing projects in Parel (South Central Mumbai), with cumulative saleable area of 3.5mn sqft. The company has gained significantly through 3x rise in land value in the area. Additionally, advance payments from residential projects (~100% sold) have boosted the cash situation considerably.
SEZs, real estate mutual fund and townships – Future growth engines. PLL is developing four SEZs with ~300 acres cumulative area and current estimated value of these projects is at Rs9.4bn. The company is also developing two bio-tech SEZs, a gem & jewelry SEZ in Goa and an IT/ITES SEZ in Pune. These projects are expected to come on stream in
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the next 4-5 years. Two SEZs – bio-tech (Verna) and the IT SEZ in Pune – have already been approved by the Ministry of Commerce. PLL is developing two large township projects in Pune and Nashik with an estimated total value of Rs2.9bn. The company is also managing a real estate mutual fund (REMF) and has already raised close to Rs100bn.
Valuations. We estimate the NAV value of PLL at Rs28bn or Rs596/share. For the fifteen months ended June ’06, the company reported revenues and PAT of Rs2.7bn and Rs1.4bn respectively. On a fully-diluted basis, 15MFY06 EPS was Rs30.6. We estimate FY07E, FY08E and FY09E EPS at Rs40, Rs91, and Rs157 respectively and initiate coverage with BUY recommendation. Also, we believe there will be significant earnings growth in the coming years as SEZs and townships materialise.
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10.3 Marg Construction
Marg Construction is a Chennai-based real estate and infrastructure developer. We believe the company has tremendous earnings growth potential from its SEZ and port projects. We estimate Marg’s NPV at Rs9.6bn or Rs385/share. Marg is an interesting triple play on real estate, SEZs and port.
Attractive SEZ projects. Marg is developing two SEZs (one each for multi services and light engineering) near Chennai, spread over 612 acres. The SEZs have been approved by the Government in the Board of Approval meeting. We estimate the NPV of both SEZs at Rs2.8bn.
Profitable Karaikkal Port project. Karaikkal Port is a dry cargo port between Chennai and Tuticorn, the second and the third busiest ports in India respectively. While the first phase of the project (4mnte capacity) would commence by October ’08, the second phase (7.3mnte capacity) would come on stream by November ’09. The NPV is estimated to be Rs4bn.
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Lucrative real estate ventures. Marg is developing a mix of real estate projects, including a mall, a township, serviced apartments and villas in Chennai. Further, the company has a significant amount of additional land banks and owned assets. The estimate of the cumulative NAV of Marg’s real estate projects is Rs3.2bn.
Construction business. Marg is primarily a construction company with its order book encompassing construction cost on infrastructure and real estate projects. We estimate the construction division’s NPV at Rs3.4bn. Also, Marg has formed a joint veture – SIGNA – with the Housing and Urban Development Corporation (HUDCO) for participating in infrastructure and urban development projects.
Discounted valuations. We estimate Marg’s NPV at Rs9.6bn or Rs385/share. For FY06, the company reported revenue and PAT of Rs576mn and Rs82mn, up 3.6x and 3.5x respectively. We estimate Marg to register FY09E earnings growth of 19x to Rs63.4 from fully-diluted Rs3.3 EPS in FY06. Initiate coverage with BUY recommendation.
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10.4 Prajay Engineers Syndicate
Prajay Engineers Syndicate is the largest real estate developer in Hyderabad, offering differentiated real estate and hospitality products. The company has made significant capital gains on account of its well located land bank of 850 acres. We estimate Prajay’s NAV at over Rs480/share and believe that the company will emerge as one of the fastest growing developers in India.
Hyderabad, a sprawling growth opportunity. Hyderabad has emerged as one of the fastest growing real estate market, led by the booming IT/ITES sector and lower real estate prices. The city boasts of skilled and comparatively cheaper human resources, proactive Government and fewer infrastructural bottlenecks. We remain positive on the Hyderabad real estate market and on the tremendous growth opportunities that the city offers. Strong project pipeline. Prajay has around 35 projects under various stages of development, with cumulative saleable area of 26mn sqft. These include high-end residential apartments, villas, townships, and retail and entertainment complexes. The NAV of these projects is estimated at Rs8.9bn or Rs226/share.
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Capital gains on land bank. Prajay has been acquiring land in the peripheral areas of Hyderabad for the past 10-15 years. With increasing scale of development in the region and the ongoing work on arterial outer ring road, which will reduce the distance from the airport, the capital value of Prajay’s land bank has significantly appreciated. The current land bank of the company is 850 acres.
Attractive valuation. We estimate Prajay’s NPV at Rs19bn or Rs480/share. In FY07, the company reported revenues and PAT of Rs2bn and Rs772mn, up 2.9x and 3.4x respectively. FY07 fully-diluted EPS of the company was at Rs19.5 against Rs5.7 in FY06. Over the past two years, the company’s revenues and PAT have grown 10.5x and 12.4x respectively. We estimate FY08E, FY09E and FY10E EPS at Rs30, Rs55 and Rs78 respectively and initiate coverage with BUY recommendation. Prajay would likely post impressive earnings growth at 59% over the next three years.
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10.5 D S Kulkarni Developers
D S Kulkarni Developers (DSK) is the largest Pune-based real estate developer and is emerging as one of the fastest growing companies in West India. The company has a land bank of 650 acres with 23mn sqft developable area. DSK’s vast project pipeline includes high-end to low-end housing and mega SEZ & township projects. The company boasts of a high-quality management, superior execution capability and robust project pipeline. We estimate DSK’s NPV at Rs9.4bn or Rs427/share and believe that the company has immense growth potential on the back of its strong project pipeline.
Pune real estate – Potential for further appreciation. Availability of extensive pieces of land, low real estate prices and presence of a plethora of IT/ITES & manufacturing units and recognised educational institutes in Pune would lead to further price appreciation in the region. Robust project pipeline. At present, DSK has 17 projects with 23mn sqft cumulative saleable area in various development phases. The majority (97%) of the projects are in the peripheral areas of Pune with a few developments forthcoming in Mumbai and Bangalore. We estimate the projects’ NAV at Rs6.3bn or Rs284/share.
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Rapid earnings growth. Over the next three years, we estimate earnings CAGR at 87% to Rs1.16bn in FY09E on the back of strong buildup in the project pipeline. Similarly, we expect revenue CAGR at 79% through the next three years.
Impressive valuations. We estimate DSK’s NPV value at Rs9.4bn or Rs427/share based on the sum of project, terminal and other asset values at Rs6.3bn, Rs3bn and Rs1.7bn respectively. In FY06, DSK registered Rs1.3bn revenue, Rs176mn PAT and Rs8 EPS. Our FY07E, FY08E and FY09E EPS estimates are at Rs16.3, Rs29.1 and Rs52.5 respectively. We initiate coverage with BUY recommendation on the back of attractive discount to NPV and strong earnings growth.
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10.6
Arihant
Foundations
&
Housing
Arihant Foundations and Housing (AFHL) is a Chennai-based real estate company with 25 years of track record. On the back of sound management, the company is focussed towards strong and steady growth in South India, particularly Chennai. We estimate the NPV for AFHL at Rs3.2bn or Rs460/share and believe that it can increase further as only the project pipeline for the next three years has been factored in. AFHL is among the best emerging real estate companies from Chennai.
Robust Chennai market. Over the past one year, Chennai has been one of the fastest growing real estate markets with increasing demand for quality residential, commercial and retail properties due to comparatively lower prices, improving demographics and corporate investments in IT/ITES, manufacturing and auto sectors. Other reasons for growth are the availability of skilled manpower and lowest attrition rates across India. Chennai is likely to emerge as a key manufacturing and outsourcing hub of India.
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Land bank and projects creating significant value. AFHL has a total land bank of 130 acres, of which 45 acres are strategically located on the IT corridor and another 45 acres are close to the Mahindra City. AFHL is currently developing 15 projects with 10mn sqft saleable area, out of which, the company’s share stands at 6.2mn sqft. We estimate the project value of the current land bank at Rs1.6bn. Also, two of AFHL’s larger projects are in a JV with Unitech and JP Morgan, lending further credence to timely execution.
Attractive valuations. We estimate the NPV for AFHL at Rs460/share; however, there exists an upside to our NPV as new projects come on stream. For the financial year ended September ’06, the company reported revenues and PAT of Rs1.6bn and Rs201mn, up 29% YoY and 167% YoY respectively. The fully-diluted FY06 EPS of the company was Rs28.7. We expect the company to deliver 50%+ earnings growth in the next three years.
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Chapter 11
Research Market on Emerging Real Estate
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LOCAL & INDUSTRY VIEWS In order to no more about the real estate sector I decided to conduct a little research on the above parameters discussed so far. I prepared a Questioner having three to four relevant questions which can give me the exact picture of this fast growing sector.
The persons I asked are as follows: SR. No 1 2 3 4 5 6 7 8 9 Name Mr. Latiff Balaji Builders Mr. Patel Sangvi Builders Mrs. Ponnam Sharma Mr. Raja Mr. Bharat Jain Lucky Homes Dream Homes Business Real consultant Builder Real consultant Builder Real consultant Real consultant Builder Real consultant Real Estate Estate
10 2
Estate
Estate
Estate Estate
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consultant 10 11 12 My Homes Ritu Paradise Paradise Properties Real consultant Builder Real consultant Estate Estate
Table 11.1 Research Nominees
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Question discussed and their result: 1) Do you think there is a growth in real estate business over the years? Result: surprisingly all of them said yes.
12 12 10 8 6 4 2 0 Growth in Real Estate YES NO
Fig 11. Chart 11
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2) Did you experience any downfall in sales due to inflation and hike in home loan Rates? Result: 83% said yes and 17% said No
10 9 8 7 6 5 4 3 2 1 0
10
YES NO
Down Fall due to Inflation / Home loan rates
Fig 11.2 Chart 2
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3) How do you see the future of real estate market? Is it going to grow or fall? Result: Surprisingly all of them were positive.
12 12 10 8 6 4 2 0 Will it grow in future or not
Fig 11.3 Chart 3
YES NO
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Chapter 12
Indian Real Estate Industry – SWOT Analysis
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Figure 12.1 : SWOT ANALYSIS
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12.1 STRENGHTS
Powerful demographic impetus
About one in every sixth person on earth lives in India, and the growth rate of the population is still rapid. The present fertility rate is just over three children per woman. Although considerably lower than in the 1960s or 70s when women gave birth to an average of five to six children, it is still far higher than in, say, China (1.7 children per woman) or Europe (1.4 children per woman). Since the lower birth rate is primarily a reflection of better living conditions in India, the rate of population growth has moderated to just 1.5% p.a. Since 1970, the improved conditions have also caused life expectancy to increase by 15 years to around 65 years at present. In addition, during this period, infant mortality has been halved. The high birth rates and fall in infant mortality over the past few decades imply that India’s population is very young. One in every three Indians is under the age of 15, and only one in three is older than 35. This compares it favorably against China, where nearly 50% of the population is older than 35, and roughly 60% in Europe. The three demographic trends, i.e. high but falling birth rate, increasing life expectancy and declining infant mortality, are expected to persist in the coming years. Only during the third decade of this century will the population growth rate drop below 1%. Consequently by 2030, India looks set to be the most populous
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country on earth. By 2050, roughly 1.6 billion people will live on the Indian subcontinent, 200 million more than in China.
The already impressive number of 700 million people of employable age1 in India is expected to grow by another 250 million in the next 20 years. Additionally, the valuable economic reform policies implemented since the early 1990s have created the growth. proper foundation for translating population growth into powerful economic
Figure 12.2 : Favourable Demographics
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The economy is booming
In the past ten years, real GDP accelerated to an average of 6% p.a., growing much faster than in earlier decades. In 2005, real GDP is expected to accelerate at least 8% from the previous period, with investment to remain a strong impetus to growth. There are at least three reasons for its sustained acceleration. First, the economic liberalisation in the early 1990s has integrated the country into world trade. This has benefited the services sector in particular, with many companies from the United States and Europe discovering the subcontinent as an attractive offshoring destination. Second, India possesses a vast pool of highly skilled technicians and engineers. Some 200,000 engineers graduate from Indian universities each year, roughly six times as many as in Germany. But even this large number of graduates may fall short of meeting the strong demand for highly skilled staff. A survey of Indian headhunters revealed that the number of urban jobs soared by 21.5% in 2005, with a further 23% forecast for 2006.4 This implies that salaries for university graduates are on course to increase markedly. This is already an ongoing phenomenon. In a publication on salary trends in Asia, Hewitt Associates, a consultancy, illustrated that salaries in India rose by an average of 13.5% in 2005 from 2004, the steepest climb among the countries reviewed. In the IT industry, pay packets were almost 18% bigger.
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Figure 12.3 : Growth Chart (FCI)
Third, public spending on road and transportation infrastructure is expected to climb. This is key to the government’s long-term growth strategy – and will serve as a positive stimulus to the construction industry.
High growth trend in the long term
The current engines of economic growth – population trend, human capital, openness of the economy and rising investment – will remain the key drivers of India’s economic growth in the long run. Deutsche Bank Research’s long-term growth model, Formel-G, depicted India as the growth star performer over the period 2006 to 2020 among 34 developed and developing economies. This puts it ahead of China
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and Turkey. GDP per capita in terms of purchasing power parity (PPP) is expected to climb by almost 4% a year over the next 15 years, with purchasing power doubling over the period. Real GDP is expected to average 5.5% – with potential to rise even further to 6%, reflecting India’s huge efforts to build up its infrastructure.
Table 12.1 : Long Term Growth Rates
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12.2 WEAKNESSES
Archaic and Retrogressive regulations
India’s real estate market is characterized by heavy and frequent archaic regulations,that have discouraged large scale private ownership of property in urban areas.
Urban Land(Ceiling and Regulation )act ULCRA
The Urban Land Urban Land Ceiling and Regulation act restricts the area of land/property that can be owned by an individual.Land in excess of the ceiling can be acquired by the government under the law of developing mass housing.This has made it extremely difficult for developers to consolidate large land parcels and take up projects of any meaningful scale in urban areas.
Rent Control Act
Rent Control laws have historically placed great emphasis on protecting the rights of tenants rather than the owner of the property.Over a period of time ,the controlled rent does not keep pace with the market rent,and
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therefore tenants never move out of the premesis . Moreover, with the rental income falling too short of the maintenance cost, the landlord loses interest in the repairs and maintenance of the premises and the property dilapidates over a period of time. The landlord is also discouraged to sell the premises as he is forced to share the proceeds with the tenant (under the ‘pagdi’ system).The combined effect of all the above converts the property into a redundant asset for the landlord and the land on which it stands is not reallocated for rebuilding or redevelopment. This creates artificial supply constraints in the urban areas. In addition to ULCRA and the rent control act, there exist many rules and regulations Coastal Regulation Zone (CRZ), Slum Development, property transfer rules and charges etc., which govern land acquisition and use. These laws tend to result in long approval procedures, litigation and disputes as also general delays in land development, thereby stymieing growth of the sector.
Scattered Land Holdings
In India, land is predominantly privately owned and most of it is inherited. A given land parcel keeps splitting between successive inheritors with the result that the size of the holding keeps getting smaller with each passing generation .Futher,in India, the tendency of keeping written laws is not much prevalent , making establishment of
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ownership rights on property extremely difficult.
Moreover, the
landholding pattern arising due to inheritance results in multiple ownership claimants for the same family, for a single plot of land. This makes it extremely difficult to acquire land with a clear title. Consequently, developers find acquisition of large tracts of contiguous land with large ownership extremely difficult.
Use Of Aggregators for land Acquisition
The combined effect of archaic property laws, scattered land holdings and disputed ownership has resulted in the emergence of a unique kind of service providers in the Indian Real Estate context, called aggregators. Aggregators operating mainly in suburbs and rural areas, buy land from individual holders of smaller land parcels. The aggregators establish ownership and settle all legal disputes between multiple claimants to clear the title of the land. They also get land converted for non agricultural use from the local revenue assessing authority. Contiguous parcels of aggregated land, with clear titles and designated for use in real estate development are then transferred to the developer. Moreover, aggregators remain discrete in their activities and donot reveal the final buyer of the land, as the land prices tend to shoot up, in case word spread of a leading developer accumulating land parcels.
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Figure 12.4: Role of Aggregators
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12.3 OPPURTUNITY
Figure 12.4: Market Opportunities Snapshot
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12.4 KEY THREATS
Increase in interest rates is the biggest threat to the sector as it reduces the purchasing potential of home buyers, affecting the demand of new homes significantly. Assuming no change in loan tenor, a 1% increase in interest rate could reduce buying capacity by ~5-7%. Further, taking an equivalent drop in the selling price (to compensate for decrease in buying potential), the discounted profitability of a project can decrease 13-16%. However, due to rise in loan tenor and increasing salaries, the actual impact of interest rate hike is not as high.
Figure 12.5: Interest Rate Movement for 25 Years Recent moves by the RBI to increase cash reserve ratio (CRR) & repo rates and raise risk weightage of home & commercial real estate
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loans have pushed home loan rates up by 300-400bps. ICICI Bank increased its floating reference rate of consumer loans (including home loans) to 12.75% and HDFC hiked its key lending rates to 14.25%. Growth in housing loan disbursal has also slowed down. Total home loan disbursals, that grew from Rs537.37bn in March ’04 to Rs1, 132.3bn in September ’06 (up 111%), have slowed down since March ’07 when they reached ~Rs1,350.52bn. Growth in home loans disbursal by HDFC (second largest home loan originator) has also fallen.
Decreasing spreads between rental yields versus lending rate and g-sec.
Gsec yields have moved up significantly from <6% two years ago to >8% as on date; lending rates have increased even more sharply. On the other hand, rental yields have not moved up more than 100bps. Given the regulated scenario of gsec and lending rates, money flow (particularly from foreign investors) into the real estate market has been easier. That aside, reducing spreads also imply the assumption of capital gains priced into the real estate assets or a possibility of rental yields moving upward. Currently, the trend of reducing spread between rental yields and other risk-free asset classes has been witnessed across the globe. This highlights that in the long term, investor’s world over view real estate as lower risk asset class.
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Figure 12.6: Decreasing Spreads
Government intervention. The central and state governments have been impeding the natural developments in the real estate sector. Changes in policies/regulations, tax incentives and bureaucratic processes are significant risks to the sector.
Oversupply. Real estate has a long duration cycle; hence, oversupply and undersupply in different phases of the realty cycle is inevitable. India’s real estate cycle has witnessed a bull run since ’03. We estimate the cycle to remain on the upswing till end-CY09.
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Land ownership. A check on the title and historical land record is crucial. Occasionally, realty companies sign development agreements with land owners and claim development rights as a part of their land bank. However, this is not the best practice as the risk to execution of projects based on development rights is higher as against owned land. Inaccuracyindisclosures of risk. fully-owned, agreement to purchase, JVs and development rights poses a key
Management/transparency risk. Another crucial risk area is the level of transparency/disclosures by the management, which include the developer’s track record, litigations, professional management, best practices and under capitalized balance sheets (high leverage).
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Chapter 13
“The Ground Floor” - Real Estate Industry and Recession
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The Development of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centers and programming houses. The demand from the information technology sector certainly has changed the urban landscape in India. Several multinational companies (MNCs) continue to move their organizational operations to India to take advantage of lower manpower and other costs. Providing human resources and home at their work place assumes great significance and therefore, the requirement to create space for people to live and work that in turn causes the development of other related infrastructure. It has been a predominant trend to set up the world’s best business centers, often campus-style establishments, bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ´temples of new or modern India´. It is just an indication of the extent to which the development of real estate has been taking place. The real estate market in India remains unorganized, fairly fragmented, mostly characterized by small players with a local presence. Traditionally, real estate developers were viewed with an element ofskepticism. Developers were often identified dealingwithlarge amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals. The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs, etc. This boom however is restricted to areas such as commercial office space, retail and housing
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sectors. The impending concerns of this sector namely- skill shortage, non availability of statistics, lack of low cost-affordable housing, lack of sustainability, high RE prices and last, to meet a future that might have downturn due to oversupply.
The industry is presently facing a major resource crunch – an obvious lack of qualified skilled people from construction firms, PMC firms, etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics which has created an ambiguity as to how much construction activity is actually taking place and one can’t gauge the demand and supply trends accurately. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing, so there is a dearth of low cost affordable units. The negative version of Indian real estate industry is “they have complete disrespect for sustainability” and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed.
Presently, the impact of recession in US economy has impacted Indian Real Estate Market as well as it is also witnessing the recession. Till now the real estate industry was a very booming industry in India which were in pace with IT industry. Accordingly, the demand for IT space and Commercial spaces has been grown. Also the high net worth of individual
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investors has created a very fast pace of demand in Indian real estate sector which have gain a very high impact image of investing in India. As the money was coming in terms on investment in India from NRI as well as Private Equity funds, the well known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. SEZ has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So the booming market has created a niche as modern living in India and created a very mass employment in Indian segment.
The recent changes which happened in American market such as Bankruptcy of Lehman Brother an oldest financial firm of American market and sell process of PE Firm Merryl lynch by the largest US bank Bank of America has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds in to real estate sector without having the proper analyzing or effect. They also have given the funds for mortgage industry of US which is currently facing the hurdle of Sub prime lending and have impacted many players to bankrupt.
All of these changes in US economy have impacted in Indian economy as well as Real estate segment as most of the Indian players have their
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liquidity funded by both of these firms. Also the IT segment which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also impacted the Sensex which has bullish very sharply and brings down the net worth of the leader of Indian real estate player very low. The impact can be shown in share price of DLF, Unitech, GMR group, Reliance group, Wipro, Satyam etc groups.
All of these sudden changes in Indian and US market created a point of thinking to investors & individuals that where it will go and what will be best option in real estate investment. The market rates in India are also dropped by 10 to 30% in most of prominent as well as upcoming cities and the trend appears to be still continuing till it will not recover the effects of this financial crisis.
13.1 RECESSION
We expect a GDP growth rate of 6.0% during FY10E. Our FY09 growth forecast has also been revised down to 7.4% from 7.8% earlier. At 6%, the FY10 GDP growth will be the lowest since FY03.
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Our projection of growth slowdown is against the backdrop of a rapid deterioration of the global economic scenario. Several advanced economies are almost certain to face recession in CY09. Business and consumer confidence indices are at multiyear lows, indicating no possibility of a quick turnaround in either consumer spending or industrial activity. Weakening demand is also depressing prices of several commodities.
In India, investment activities, particularly corporate capex, have taken a backseat in recent quarters and are unlikely to improve, at least for the bulk of FY10. Discretionary consumption demand is likely to stay muted as well. Nondiscretionary consumer demand, however, is likely to be largely unaffected and will provide GDP some resilience.
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13.2 Slowdown across sectors
We expect a modest 5.4% growth in manufacturing in FY09E and a further fall to ~3% in FY10E. Overall index of industrial production (IIP) is estimated to grow at ~5.1% and ~3.3% during FY09 and FY10, respectively.
The projection is factoring in further intensification of slowdown in construction activities with base case expectations of 8.5% and 5.0% for FY09E and FY10E, respectively. This is a sharp slowdown for the construction sector from the average rate of ~10% over the past 10 years. Despite fears of a sharp drop in corporate capex and weak demand for housing, it is believed that the risks of further downside to these projections are limited as a sizeable part of construction activities are driven by the government (e.g., roads, rail roads, bridges, tunnels,
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pipelines, ports, runways, hydro-electric and power projects, etc).
As regards the services sector, it is believed that the growth rate will dip from the current double-digits to ~9.2% in FY09E and further to ~7.9% in FY10E. Amongst larger components of services, ‘banking, real estate, and business services’ is likely to slowdown markedly from the current 12% plus level to ~9% in FY09E and further to ~6.5% in FY10E. Our estimates implicitly assume slowdown in trade, transportation, hotels and restaurants, among others, to the levels of the most recent low growth phase of FY1999-03. Communication (weight ~5% in overall GDP), however, is likely to stay strong. The social and community services segment (~14% of GDP) is likely to hold steady as well, as it is driven largely by government activities.
13.3 Real estate & Recession
Real estate markets in the United States could hit to bottom in 2009 and then flounder for much of 2010. During this period, ongoing drops in property values, foreclosures, delinquencies, and a limping economy will continue to crimp property cash flows.
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Commercial real estate faces its worst year since the wrenching 1991– 1992 industry depression , which projects losses of 15 percent to 20 percent in real estate values from the mid-2007 peak. Only when property financing gets restructured will pricing recorrect and this transition could wipe out companies and people.
The industry is facing multiple disconnects.Many property owners are drowning in debt, lenders are not lending, and for many (industry professionals), property income flows are declining. There is an unprecedented avoidance of risk. Only when financing gets restructured will pricing reconcile, giving the industry a point from which to start digging out of this hole. Distress in the housing market is benefiting the apartment market, which the report lists as the number-one "buy." Moderate-income apartments in core urban markets near mass transit offer the best buy, a trend that carried over from the previous years.
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13.4 Indian real estate sector in recession mode
The US financial crisis has caused disturbing impact on the Indian real estate market, which is facing a plunge in real estate demand. The industry is facing crunch of skilled manpower and it remains unorganised, characterised by small players.
The Development of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centres and programming houses. The demand from the information technology sector has changed the urban landscape. Several multinational companies (MNCs) continue to move their organisational operations to India to take advantage of lower manpower and other costs. Providing human resources and home at their workplace assumes great significance and therefore, the requirement to create space for people to live and work that in turn, causes the development of other related infrastructure. It has been a predominant trend to set up the world’s best business centres, often campus-style establishments bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ’temples of new India’. It is just an indication of the extent to which the development of real estate has been taking place.
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The real estate market in India remains unorganised, fairly fragmented, mostly characterised by small players with a local presence. Traditionally, real estate developers were viewed with an element of skepticism. They were often identified dealing with large amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals.
The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs etc. However, this boom is restricted to areas such as commercial office space, retail and housing sectors. The impending concerns of this sector namely skill shortage, non-availability of statistics, lack of low costaffordable housing, lack of sustainability and to meet a future that might have downturn due to oversupply.
The industry is presently facing a major resource crunch – an obvious lack of qualified and skilled people from construction firms etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics, which has created an ambiguity as to how much construction activity is actually taking place and one can’t gauge the demand and supply trends accurately. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing. So, there is a dearth of low cost affordable units. The negative version of
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Indian real estate industry is ’they have complete disrespect for sustainability’ and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed.
Presently, the impact of recession in US economy has caused mammoth impact on Indian real estate market as well, as it is witnessing the recession. Till now, the real estate industry was a booming industry, which were in pace with information technology (IT) industry. Accordingly, the demand for IT space and commercial spaces has been grown. Also, the high net worth of individual investors has created a very fast pace of demand in Indian real estate sector, which has a very high impact image of investing in India.
As the money was coming in terms on investment in from non-resident Indians as well as private equity funds, the well-known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. Special economic zone (SEZ) has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So, the booming market has created a
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niche as modern living and created a very mass employment in Indian segment.
The recent changes, which happened in American market such as bankruptcy of Lehman Brother (one of the oldest financial firms of American market) and sell process of PE firm Merryl Lynch by the largest US bank, Bank of America, has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds into real estate sector without having the proper analysing or effect. They also have given the funds for mortgage industry of US, which is currently facing the hurdle of sub prime lending and have affected many players to bankruptcy.
All of these changes in the US economy have affected Indian economy as well as real estate segment as most of the Indian players have their liquidity funded by both of these firms. The IT segment, which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also affected the Sensex, which is bullish and brings down the net worth of the leader of Indian real estate player very low.
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The impact can be shown in share price of DLF, Unitech, GMR group, Reliance Group, Wipro, Satyam etc groups. All of these sudden changes in Indian and US market created a point of thinking to investors and individuals that where it will go and what will be the best option in real estate investment. The market rates in India are also dropped by 10 to 30 per cent in most of prominent as well as upcoming cities and the trend appears to be still continuing, till it recovers from the ill effects of financial crisis. With a slump in the Indian real estate sector due to excessive credit crunch and demand slowdown, home buyers can expect a further correction in real estate prices in the range of 15-20% in next six months. There are several factors working against the Indian real estate sector that can bring about such a price correction. With the Reserve Bank of India (RBI) tightening money supply and increasing interest rates to fight inflation, the developers are facing liquidity crunch. Banks are getting jittery over loan disbursals to real estate developers. Even if the developers manage to get loans from banks, they are hardpressed to keep more collateral with the banks. The five-year boom in India’s realty industry came to a crashing halt in 2008, following an acute liquidity crunch, falling sales and rising interest rates. The year, though, started on a positive note. The Dubai-based Emaar MGF raised $1.64 from the primary market in late January, and two motnhs later, Delhi-based realtor BPTP registered the country’s largest land deal, shelling out over Rs.50 bn ($1 bn) for 94 acres of land in Noida, on the outskirts of the national capital. But after that, the fairy tale run for the industry ended. As apartment prices shot through the roof, and interest
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rates soared,
buyers turned away,
which immediately hit
sales.
Subsequently, over the rest of the year, realty stocks began to get hammered on the bourses.
13.5 MIGHTY BUILDERS TUMBLE
9.5.1DLF FINANCIAL REPORT FOR FY06
The meltdown being witnessed around the world is having a significant effect on the state’s real estate business. Property dealers, who were already seeing a decline in their income, have seen a decline of 60 per cent in their earnings. New deals are hard to come by and deals already finalised are also being called off by buyers due to the liquidity crunch, though the prices remain static. “We have been sitting idle for many days,” said Parminder Singh, a property dealer in Jalandhar. NRI buyers are also not as keen on buying property here as they have been in the past. Kewal Singh, a US-based NRI from Jalandhar, said the recession in USA has made it difficult for NRIs to invest here. “We are unable to manage our own installments in the US as most of the things are bought on loan there,” he said.
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The construction sector has also got a hit as NRIs are not investing in big projects and only concentrating on the old projects, according to Anil Chopra of PPR, a leading real estate developer. The number of NRIs visiting India for vacations have also decreased this time as many of them are doing over-time to manage their loans there, said Nihal Singh, another US-based NRI. “The travel expenses are huge and many of our friends who used to come here every year are not coming this time,” said Parkash Raman, a UKbased NRI from Hoshiarpur district. Mohinder Singh, who organises various foreign tours in collaboration with SOTC, a known brand in arranging tour packages, said the travel business too has gone down by more than 50 per cent. Sales manager of Bhabhi Boutique, which has several NRIs as regular clients, said that usually by this time their business would pick up, but their sales have reduced by 50 per cent this year.
Sobha’s net profit fell by 88% to Rs7.5 crore and revenue by 49% to Rs181 crore in the December quarter against the same period a year ago. The developer is also in the last leg of restructuring its debt of Rs1900 crore. “We are restructuring over Rs1,000 crore and are in the final stage of getting approvals from various financial institutions,” said Sharma
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Big developers like DLF, Unitech, Ansals API and HDIL were particularly hit as Lehman Brothers, along with Merrill Lynch, another cash-strapped investment bank that had to be sold, had direct investments in these companies. “What hurt the overall housing sentiment was the increasing borrowing rate. The current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 3. The liquidity risk was accentuated by the slowdown in the overall real estate market and the increasing reluctance of financial institutions and banks to fund real estate developers. The impact of slowdown was also reflected in developers downsizing their manpower or whittling down pay packets. Unitech laid off 10 percent of its employees and DLF retrenched 12 percent. Similarly Parsvnath cut salaries of its employees in the top and middle level management by up to 20 percent, while Omaxe, which fired 70 employees, also cut the remuneration of those who were retained by 10 percent. Looking ahead, the industry does not foresee any upswing in fortunes in the immediate future, though the government and the central bank have been taking steps to infuse additional liquidity into the system, especially for sectors such as housing.
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9.5.2 REACTION TO RECESSION STALLING OF PROJECTS DLF stalls 2 of its biggest projects ,2008
Facing acute liquidity crunch and poorer sentiments, the country's biggest property developer, DLF, has reportedly stopped work at two of its biggest mid-income housing projects. The New Delhi-based builder has halted construction at DLF New Town Heights in Gurgaon Sector 90 and Express Greens in sector M1 in Manesar, both in Haryana. The two projects were launched in January and August 2008, respectively. Even after a year, the company has merely begun some basic work at its New Town Heights project, according to a report by Nomura Financial Advisory and Securities. In the Town Heights project, DLF has merely undertaken excavation work while in the Express Greens project, the company has just marked the boundary with its bill boards, the report said. According to sources, the company has sold most of its apartments in New Town Heights in the first few months, offering 3 and 4 BHK apartments at Rs 2,125 and Rs 2,505 square feet, respectively. However, sales in the Express Greens that offers 3 and 4-bedroom apartments for Rs 1,760 and Rs 2,125 respectively have not been very good. DLF did not respond to a detailed questionnaire sent on Friday.
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DLF's third quarter profit has dropped by 69 per cent to Rs 670.79 crore. The developer has stalled work on nearly 16 million square feet of office and retail mall space out of the 62 million square feet under development. However, ers who have booked houses at the DLF projects may be partly compensated if DLF fails to complete the project in 36 months after the launch, a company official, who declined to be identified, said. The company's debt has spiralled by Rs 1,500 crore to reach Rs 14,800 crore in the third quarter of FY09, compared to the previous quarter, according to sources. DLF had recently announced that new mid-income housing projects in Panchkula, Gurgaon, Hyderabad, Bangalore and Chennai to cater to the increased demand in this segment. However analysts say if the company could not start construction on its already sold mid - income housing projects, it is unlikely that the company can come up with any new projects.
Unitech defaults on Rs 150-cr payments
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Unitech, the country’s second largest real estate company, has defaulted on two payments on a housing project in Greater Noida in Uttar Pradesh. Unitech has not paid two installments worth Rs 150 crore to the Greater Noida Authority for the 100 acres it had purchased for its ambitious Uniworld City project.
The company is trying to reschedule the payment, but risks harming the land deal if it doesn't pay up, the sources say. The company insists the payment was stopped due to farmer agitation. Officials of the Greater Noida Authority understand that real estate companies have been hit by liquidity crunch and will be “understanding” to Unitech’s request. DLF group chairman K P Singh says the financial crisis has hurt the real estate business, particularly “fly-by-night operators”.
DLF defers projects and cuts workers
Bloomberg cited Mr Kushal Pal Singh chairman of DLF Ltd as saying that it has deferred some projects and plans job cuts to cope with the economic slowdown. Mr Singh said that prices have come substantially down, so much that projects will shut down. He said that “There is a lack of money supply to
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developers.
It
is
paying
12%
to
13%
interest
on
loans.”
He said that home mortgage loans should be brought down to 7% to boost demand. State run Bank of India on November 6th reduced loan rate to 10% from 10.75% on 15 year loans for up to INR 5 million. Mr Singh said that “There will be takers only when you bring down home loans.” Mr Singh recently said that the decline in raw materials costs including steel and cement would help bring down property prices.
Sobha Developer Cuts Workforce by 30% Sobha Developers Ltd, a leading realty firm in south India, has witnessed its monthly revenue reduce by more than half, from Rs120 crore to Rs 50 crore. With sales down, Sobha has been forced to cut its 3,000-strong workforce by about 30%, to 2,170. However, with revenue from the real estate sector going down, the company’s other source of income, its contractual business, has been the saving grace. “Unlike the real estate sector, the income from our contractual business has been steady and we don’t really have to look out for customers,” said J.C. Sharma, managing director of the Bangalore-based company, which is expecting a Rs400 crore turnover from the contractual business by 2010 and has completed
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over 120 contractual projects for various corporate customers such as Infosys The company is also looking at various funding options ranging from equity dilution, private equity funding at project level as well as land sales. Mint had earlier reported that the developer would try to sell parts of its 3,000acre land bank—the process seems to have started. It has managed to sell land worth Rs100 crore over the last few months. Sales have not picked up even after developers such as Sobha are trying out various out-of-the-box marketing techniques such as its recent Home Mela. The two-day property exhibition that showcased 18 different properties of the company concluded with only six apartments being sold. Sobha, which till now, focussed on high-end and luxury apartments and villas is finally joining the affordable housing bandwagon. It is launching its first budget housing project in the next three-four months in Bangalore, though officials didn’t divulge pricing details. “Contractual work in real estate has also been hit as most corporates have stalled expansion plans. Which is why, we find lot of contractual business coming in for developers from industrial or education sectors. Like Sobha, we will find more developers going in for debt restructuring to pull down high interest rates on short term loans and converting them to long-term loans,” said Abhinav Bhandari, research analyst (construction and infrastructure) with Pioneer Invest Corp Ltd.
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RATE CUTS
DLF cuts rates by 20-30 percent in Chennai, Bangalore
Country’s largest real estate developer DLF has cut its prices in its ongoing projects in Chennai and Bangalore by 20-30 percent, and has extended this benefit also to those customers who had earlier bought homes in these projects.
Existing customers, who have paid more than the revised apartment price, will be eligible for refund, although there may not be many such cases, as most have made only part payment, the company said. DLF’s decision, which international property consultancy firm DTZ
described as “bold”, is likely to force other realty companies to bring down prices. DLF may also bring down prices of its projects in other cities as well, a company official said.
DLF’s move is similar to what country’s largest bank, State Bank of India, did in the home loan and auto loan market. The SBI has slashed home loan rate to 8 percent for all new borrowers for the first year of the loan term, fuelling a turf war with private sector mortgage lenders. But unlike DLF, the bank didn’t extend this facility to its existing customers. DLF has revised it prices downward by 17 percent to Rs 2,650/sqft in its
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Garden city DLF OMR project in Chennai, comprising 3,500 apartments, of which 2,000 have already been sold.
The company has slashed prices by 32 percent to Rs 1,850/sqft in Bangalore’s Bannerghatta Road. The Bangalore project has a total of around 2,000 apartments. The company also recently launched a housing project in Hyderabad at Rs 1,850/sqft, which is substantially lower than the market price.
A DLF spokesperson said the company’s decision to reduce prices was in response to the changed conditions in the real estate sector due to unprecedented global events and changes in the raw materials costs. DLF’s latest move is in line with the thoughts expressed by its vice chairman Rajiv Singh at the quarterly earnings announcement almost a month ago. He had said that the property prices would fall by 15-20 percent. He had also highlighted the need to take the lead and quickly turn in products that are required in the current market.
“By the time one gets ready with products, the business cycle has already turned and there are not many takers for such products,” he had said. Several analysts have been saying a 30-35 percent decline in prices was essential to spur demand for property. Customers, wary of high property prices and finance cost, and uncertainties regarding their own
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future due to poor job market scenario, slid into the wait and watch mode late in the second half of last year. As sales dried up, credit became expensive and private equity funds vanished, property firms faced major pressure on their cash flow.
Developers though have been slow in reacting to the market changes. DLF’s latest decision to cut price can potentially influence the entire market. “DLF’s bold move will prompt other companies as well to reduce prices,” said DTZ India CEO Anshul Jain.
DLF’s closest rival, Unitech, which hasn’t launched any new project of late, said it is still watching the market. Unitech head of strategy and planning R Nagraju said company’s new launches will surely be at lower price points.
DLF’s move to extend the benefit to existing customers in ongoing projects is being seen as particularly important. Most realty companies had, so far, refused to bring down prices in existing projects saying that they will have to cut prices even for those apartments already sold. DLF, as all other realty players, has been facing pressure on sales and has put construction on more than half of its commercial projects on hold due to lack of demand. The company reported a 69 percent decline in profit in December quarter.
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Developers Likely to Slash Prices
Indian real estate developers are expected to cut prices by 30% and more over the next three to six months. At a recent TiE-Indian Angel Network, summit in the capital, industry players including real estate developers, private equity players and real estate brokers and consultants, all answered in the affirmative when asked whether they see the possibility of a price cut in future. The Indian realty sector has been in a meltdown over the past few months. Prices for both commercial and residential property have come off by 20-25% over the past few months. Industry experts and players say they expect them to go down further.
LAYOFFS
DLF confirms layoffs, freezes projects Tuesday, November 18, 2008
The liquidity squeeze-induced slump in demand has forced real estate leader DLF to fire some employees, put a number of hotel and housing projects on hold and yearn for 7 per cent home loan rates.
"We must have laid off some employees somewhere," DLF Chairman K P Singh told reporters on the sidelines of India Economic Summit, but did not
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give
the
number
of
jobs
that
were
cut.
The company has also deferred some of its projects due to poor demand.In hotels, residential and commercial everywhere... deferred because of lower demand and liquidity crisis, again without sharing the specifics.
Singh also said high interest rates have taken a toll on demand. "There are no takers for housing sector... Ideally, the interest rate should be around 7 per cent."
Asked if the current prices of the realty projects are inflationary, Singh denied and said: "It cannot be inflationary as it has to be competitive. It also depends on supply and demand."
Because of demand going down, many projects have been closed down by many developers across the country, he added.
Brokers Take Advantage of Recession in Real Estate
Property brokers are taking advantage of the slowdown in the residential real estate market by increasing the commission they charge from developers. As house and apartment sales sag, brokers, who typically charged 2-5% of the value of the property as commission, are demanding as much as 8-9%. “The slump in sales is so dramatic that developers are willing to pay a higher commission,” says Sanjay Sharma of Gurgaonscoop.com, a website on the real estate market in Gurgaon, a
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New Delhi suburb. “Earlier, an 8-9% commission was given by weak or smaller developers… Now the trend is even developers of large luxury projects are giving 8-9% commission.”
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Chapter 14
“RENOVATING REAL ESTATE” TO COUNTER RECESSION -EFFORTS
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14.1 EFFORTS TO COUNTER RECESSION
Low interest rates
LEADING real estate developer DLF has called for a 5% cut in home loan interest rates. DLF chairman K P Singh told ET that projects in the realty sector are getting delayed because of the current liquidity crunch. “Home loan interest rates should be slashed from the current 13% to 8% in order to revive the real estate market and prevent the economy from sliding into a recession,” he said. He also added that a 5-10% correction of property prices is expected in the coming months. A temporary slowdown of the economy can lead to a recession and ultimately even a depression. If the government does not take any bold actions, recession is inevitable. Emphasizing the importance of the multiplier effect of the sector, Mr Singh said that the housing industry is the indicator of an economy’s health across the world.Mr Singh also said that the government should aim at making housing a key sector in the economy and make borrowing easy.
increased government spending
Hit hard by the global slowdown, export, housing and financial sectors will get a fiscal as well as monetary package from the Government and RBI. The Government and Reserve Bank may further ease money
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supply, provide interest subsidy for specific sectors and come out with tax cuts for boosting demand. Despite RBI injecting around Rs 2,75,000 crore into the system, various sectors are facing liquidity problem and there is demand for further steps from the central bank to ease money supply.
Private real estate markets need to correct-–lenders must force distressed owners to become motivated sellers.
Debt capital needs to flow-–lenders will need to learn to deal in a more stringent regulatory landscape. The commercial mortgagebacked securities (CMBS) market must "reformulate."
Regulators need to restore confidence in the securities market. The government will insert itself into overseeing mortgage securitization markets. Systemic overhaul promises more measured debt flow.
The economy needs to improve. Falling demand for space won’t affect real estate markets severely until 2009.
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OTHER GOVERNMENT POLICY MEASURES
A high-level task force of the government has recommended setting up of a “real estate regulator” and a dedicated institutional framework to look into the issue of providing affordable houses to the people. The regulator could serve as a single window for overseeing and monitoring the affordable housing agenda and promote policy reforms like stamp duty and registration and protect consumer from real estate fraud, the task force, constituted by the Ministry of Housing and Urban Poverty Alleviation, said. Besides, it can coordinate digitisation of land records, the task force underlined. The recommendation assumes significance as high price has put housing projects in metros and emerging towns beyond the reach of the common man.
NEW SCHEMES TO ATTRACT BUYERS
With real estate prices continuing to fall, builders have been forced to come up with innovative schemes in order to woo buyers. Price guarantee scheme is one such sop being offered by the builders. This scheme — being offered by the members of Confederation of Real Estate Developers’ Association of India (CREDAI), Karnataka — is unique as it benefits the buyers and not sellers. As per the scheme, the buyer would get back the
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difference amount if the builder sells the apartment at a lower price than the amount received from the former. While a few of them honour the price guarantee scheme, others (fly-by- night builders) never bother to refund the difference. Suresh Hari wanted buyers to approach a reputed builder as they can address the problems which are bound to arise in future
MEASURES BY DEVELOPERS
Unitech, India’s second largest listed real estate compan, is looking at restructuring a Rs 800-crore loan from public sector banks, as it attempts to save itself from sinking under the huge debt burden. The company is pinning its hopes on debt restructuring, asset and stake sales to private equity (PE) funds to pay a debt of Rs 2,500 crore, which is due by March ’09. “We are in discussions with public sector banks for rescheduling our loans,” Unitech head of strategy and planning, R Nagraju told ET. Another company executive, requesting anonymity, said Unitech was seeking to restructure a loan of over Rs 800 crore. Unitech is also looking at raising funds through private equity infusion at company and project levels. Unitech is holding an extraordinary general meeting (EGM) on January 19 to seek shareholder approval to raise Rs 5,000 crore by issuing fresh equity or convertible instruments. The RBI had raised the ceiling for FII holdings in Unitech to up to 100% in November 2007. The company has been holding negotiations with multiple PE players to raise between $300-$500 million by issuing convertible debentures at the
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company level and around $200 million by selling stakes in mid-income housing projects.
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Chapter 15
CONCLUSION
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Indian real estate landscape is expected to be dotted withSEZs, international standard warehouses and specialized industrial spaces. Large integrated developments can become a norm among the working population. The Indian Property Market is fast going through a learningcurve. Rising interest rates have impacted the credit availability to the sector, global economic conditions seem to have subdued the demand from investors and occupier’s alike, Indian real estate stocks are down by more than 50 per cent from their year long high and the once soaring real estate values appear to be plunging. This, no doubt is the reality. Nonetheless, it is hoped that this is a transitory phase and the picture that would emerge once the churn is over will be a high growth curve. The economic liberalization in the 1990s and the ensuing information technology revolution have been instrumental in giving the real estate market its present form. MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations. Increased job creation and rising disposable incomes coupled with lower interest on housing loans, had in turn fuelled demand and affordability for residential space. The change in attitude and the spending habits of the consumers led to an increase in consumption and demand for retail malls. Relaxing the FDI regulations for the real estate sector opened the floodgates for foreign capital inflow into realty sector. The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to real estate markets in other developing countries around the world. We are excited about these developments as the growth that we witness today
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is a sign of the emerging far-reaching and long-term trends that will drive robust growth for the sector in the years to come. Foremost would be the institutionalization of the sector and the definite change in the ownership structure. Instead of individuals, private equity funds, hedge funds, insurance companies, pension funds, banks and other financial institutions would own, invest or manage real estate assets in office, residential, hotels, industrial, retail space etc. Public sector organizations like Life Insurance Corporation of India, UTI, Public Provident Fund, other pension funds of central and state would hopefully become active investors in the real estate industry. This will also lead to sophistication in the financial structuring of real estate investments. They will provide access to capital, both debt and equity capital from public and private sources. Apart from offering an exit route for the developers to revolve funds and improve their margins, it will also allow individuals investors to be a part of the real estate market. On the product side, there will be further advancement in construction management and project management techniques in order to optimize costs, meet construction timelines and achieve environmental and health and safety guidelines, intelligent, energy efficient green buildings will become the norm of the day. Property and facilities management services will also undergo a facelift. The provision of a good working and living environment as well as the enhancement of the asset lifespan will be key considerations and these services will be outsourced much more to firms specializing in these functions.
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Real estate activity will become more widespread and will take many smaller towns and cities in its fold. Improved infrastructure, the potential of untapped markets, increased access to capital together with the saturation and spiraling cost of metros will play a vital role in promoting new growth centers. Infrastructural projects including roads, airports, ports and inter-city connectivity will witness increased private sector participating and evolve as real estate play. This will significantly augment the availability as well as the quality of these services in the country. Rental housing as well as rented office space can become common as corporate entities will look at reducing their fixed asset liabilities, change in ownership structure would also bring in standardized, accepted practices for property valuations. Property transactions will become easier due to availability of research data, computerized land records and simpler processes for transfer of land titles and taxation. Hopefully, all these would be the prerequisites for evolving transparency and uniformity in the market. After witnessing periodic highs and lows, the interest rates and real estate process will undergo a rationalization and will finally be market driven. The above listed trends are some key real estate events that are most likely to take shape in next decade.
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Chapter 16
FUTURE SCOPE
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Real Estate Infrastructure
Sector-
potential
for
more
sophisticated
Anecdotal reports are that activity in the property market has been slowing - but that does come after an especially frenetic couple of years. The real estate sector in India has grown by 30% to 35% during the past five years, reflecting the rapidly increasing demand for office, commercial and industrial space, as well as for bigger homes, that coincided with the economic boom. To some extent, property development may have failed to keep pace with demand because of an underdeveloped investment market. Owing to oversupply, downward pressure on rents seems a likely outcome in the coming months, making occupier demand look vulnerable in the Indian property market. On the retail front, the likely effect of an economic slowdown will be to depress discretionary spending and that may subdue retail rental growth, at least over the next year or so. However, once the current global downturn is through, the Indian economy should rebound, supported by a large, young workforce; gradual but consistent liberalisation reforms; and a high rate of consumer and privatesector savings. The growing population and economic expansion will mean that India needs not just homes but offices, schools, hospitals, and entertainment centres. Addressing infrastructure needs is also an important priority to support this property market development. Special Economic Zones can play an important role. On the investment side, the expected development of real estate investment trusts (REITs) in the future could expand the property investment opportunities in India.
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In the longer term, there is a great potential for more sophisticated infrastructure and a greener future.
Understand Social ResponsibilitiesExperts to Developers
Banking
In a brainstorming session on ‘Opportunities and Challenges in Finance and Banking for Real Estate Sector’ on Wednesday, banking experts told real estate developers to realise their social responsibility of providing affordable housing to the masses. Held under the aegis of the Gujarat Chamber of Commerce and Industry (GCCI) and Gujarat Institute of Housing and Estate Developers (GIHED) at Hotel Grand Bhagwati, stress was also laid on providing cost-effective housing for the low income groups, as this had remained largely unexplored. According to GIHED vice-president Suresh Patel, a developer, this was because in the boom period of the last four years, majority of big players had worked towards meeting the needs of only top 12 per cent of the market. He felt affordable housing at lowest rate was possible. He wondered how ‘board room analysis’ by bankers born in the 1980s could decide the fate of a 50-year-old sector. The good repayment figures shown by these bankers to prove their banking prowess could not be taken at face value because of limited exposure, he said.
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Vijay Shah, a prominent real estate developer, lamented that banks were reluctant in extending project loans to developers. He said developers also felt difficulty in sourcing down payment of loans lately. Shah pointed out that banks had reduced valuation of assets for credit from 80 per cent to 60 per cent. S Srinivasan, chief executive officer of Kotak Real Estate Fund, was optimistic about the real estate scene of Ahmedabad. He said it was much better than other cities like Mumbai and Bangalore. He said nowhere else was any developer able to offer a price of Rs 1,500 per square feet, but in Ahmedabad. He said if a buyer called a price of Rs 2,000 as unaffordable, it was a matter of mindset. According to him, developers had capital in the past and yet had the luxury of saying no to new investment in the last one year. That was time of excessive commitments and it would take time to correct that situation in the real estate sector. Srinivasan wondered over the abysmally small number of developers who could declare business size in excess of Rs 150 crore. “Most developers have not built their balance sheets over the years, though they borrowed a huge amount of Rs 72,000 crore from banks… this calls for hard thinking. For, you have no choice but to prepare your balance sheet if you want to build your business in the long run and if you do not want to confine yourself to relationship banking,” he said. Srinivasan said the Reserve Bank of India was often cursed for enforcing restrictions on banks’ lending parameters, but it should be remembered that this cautious approach was in the developers’ interest. He felt that banks must first be able to build confidence in the lending activity to build up stable banking operations. He also advised developers to work closely
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with the planning authorities, especially when planning shopping complex after complex in a close range. “There is a disaster waiting to happen in terms of viability and lessons must be drawn from what happened in places like Gurgaon,” he said. HDFC general manager Irfan Kureishi also spoke on the occasion.
Indian realty goes ‘Green’ The Indian Real estate sector is taking the initiative to contribute to the save the environment by developing green buildings. Jones Lang LaSalle Meghraj, in its research report titled, ‘Greenomics,’ states that the Indian construction industry is growing at 10% as compared to the world average of 5.2%, and that the country is expected to develop 110 million sq ft of green space over the next few years. The report focuses on the cost benefit analysis for green buildings. One of the major findings from the analysis is that a green building aiming for LEED (Leadership in Environment and Energy Design) – GOLD certification can recover its additional costs in a payback period of 2-3 years. Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj, says, “The challenges faced inherent in the development of green buildings in India are the extra investment in an unstable real estate market scenario, and the difficulty in sourcing green building material and sustainability consultants. Extra investments can be recovered in the medium-to-long term from the non-sustainability discount, which gives green buildings a
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higher rental value than conventional buildings in their vicinity, and via the carbon credits that can be earned from the reduced GHG emissions.” Most green buildings in India are coming up in Mumbai and Chennai. Mumbai, being India’s financial hub, is more preferred by large MNCs, especially financial conglomerates. Similarly, Chennai has seen a tremendous influx of IT and multinational manufacturing firms. The concept of green buildings is gradually catching up in other cities like Kolkata, NCR, Bangalore and Hyderabad. Green Buildings are more energy efficient, consume less water and reduce construction waste. The intangible benefits are generated from a healthy living environment and better working conditions within the building. Growing awareness on the benefits of green buildings among international and domestic occupiers is decisively driving the demand for green buildings. The green building movement has also catalyzed the emergence of various green rating systems that provide tools to enable comparison of building on their sustainability credentials. Among all these rating systems, Leadership in Environment and Energy Design (LEED) has emerged as the most popular and is followed in 24 countries across the globe - including India. The Government has launched the Energy Conservation Building Code (ECBC) under the National Building Codes and Standards to promote green buildings in India. The Confederation of Indian Industries (CII), along with the Indian Green Building Council (IGBC) and other professionals, is also working to mitigate the challenges green buildings will face, thereby
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enabling developers to develop and operate green buildings with ease. As the green building industry matures, the green funds industry will also emerge. Therefore, the entire green ecosystem is ramping up in India, opening new investment opportunities for developers and giving them good reason to get involved in developing sustainable buildings.
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Annexture
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References
Duetsche Bank Research Report – Building India. Urban Land Institute --- Emerging Trends In Real Estate,PWC. Real Estate Sector -- EFG Hermes Substantial Real Estate Development - GMR Group Study
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Bibliography
Books & Journals
The Complete Real Estate Encyclopedia, Denise L. Evans & O. William Evans.
Real Estate Report - Realty Times, 2008.
Indian Real Estate Sector, Equity Research, ICICI Securities.
Real Estate Market Predictions, Economy Watch, February 2009.
Indian Real Estate Repot, Northridge Capital, June 2008.
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Websites
www.IndianRealEstateForums.com www.RealtyTimes.com www.chicagotribune.com www.Moneycontrol.com
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