The Indian real estate market is expected to touch USD 180 bn by the year 2020. In India, Real Estate sector is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The sector has been the major beneficiary of the strong economic growth witnessed in India since the year 2000.There are many allied industries which benefit from growth of the real estate sector. That is why this sector has a huge multiplier effect on the economy.So as this sector grows, the national income grows multifold. The Finance Minister has allocated Rs.4000Cr for low cost housing and Rs. 50000 Cr. for urban housing.
According to ICRA, the construction industry ranks 3rd among the 14 major sectors which has direct, indirect and induced effects in all the sectors of the economy.This means that it not only generates employment in Real Estate sector but also stimulates demand in other related sectors like cement, steel, brick, paint, consumer durables, etc. Private equity (PE) funding has picked up in the last one year due to attractive valuations. The Indian Government introducing newer policies which arehelpful to real estate and due to that this sector has gained sufficient growth in recent times.
India has land area of 3.3 million sq. km, population of more than 1.2 billion and average household size of 4.8 (data according to census 2011). This points to the huge potential for investment in this sector. It is expected that real estate sector will incur more NRI investments in the near future, as there is a 35% surge in the number of enquiries with property dealers. In terms of most favoured property investment destination for NRIs, Bengaluru ranks 1st, followed by other cities- Ahmedabad, Pune, Chennai and Goa.
The Real Estate sector can be subdivided into Residential and Commercial Real Estate.
Housing/Residential sector contributes nearly 80% to the real estate sector. According to KPMG research, it is estimated that around 2 million houses are required annually. The shrinking size of households (i.e. nuclear families) would also contribute to the growing need of houses. Thus, India needs around 50 million housing units by 2028. This sector can be further subdivided into 3 categories- Affordable, Mid-income and Luxury housing. Affordable housing is housing for Low Income Groups (area close to 400 sq. feet, cost less than USD 17000) and this category is expected to account for 85% of housing units by 2028. Mid-income housing is housing for middle class households (area between 800 and 1200 sq. feet, cost between USD 17000 and USD 170000) and this category will account for 7% of total housing demand by 2028. Luxury housing is the fastest growing category wherein the area is atleast 1200 sq. feet & cost more than USD 170000. Over the next 15 years, 1.5 million luxury houses would be required.
Commercial real estate comprises of office, retail and industrial real estate. Around 52% of the office space is occupied by IT/ITeS sector. The number of employees is also slated to increase from 2.4 to 5.1 million by 2022. BFSI is second largest occupying 16% of total office space. Retail is expected to increase at a CAGR of 8% from 2012 to 2020. Manufacturing sector is the focus of the present government. The DMIC corridor is expected to boost Industrial real estate. DMIC would witness development of as many as 11 Industrial regions.
The growth in real estate sector will raise the overall expectation from this sector. However, India is currently lagging in financial and technical support which is a necessity for sustainable development of this sector.
According to research by Department of Industrial Policy and Promotion (DIPP), Real estate development sector in India has had FDI equity inflows to the tune of USD 23,874.1 mn in the period 2000-2014. The housing sector contributes 5-6 per cent to the India’s GDP. Also, in the period FY08-20, the market for this sector is expected to increase at a CAGR of 11.2%. Commercial real estate is growing significantly which is providing the needed infrastructure for India’s growing needs.
According to a study by Knight Frank, Mumbai city is the best in India for commercial real estate with returns ranging from 12%-19% in the next 5 years, followed by Bengaluru and Delhi-National Capital Region (NCR).
Source: Planning commission, Government of India
DLF is the largest player in terms of market capitalization in Indian real estate sector. It has presence across 30 cities in India. It has developed IT parks, hotels, commercial complexes and residential complexes.
Unitech is the 1st real estate company listed in NSE NIFTY. It is also the first to be certified as ISO 90012.
Indiabulls Real Estate is one of the largest real estate company in India. It has got 31 ongoing projects totaling around 73 mnsqft, 2588 acres of SEZ development and additional land bank of around 1001 acres. It has more than 90% of its portfolio in Mumbai, Delhi (NCR) and Chennai markets with Rs. 4,000 Cr of land bought by way of government auctions.
|Company Name||Revenue (in Rs Cr) FY14||Market Capitalization (in Rs Cr)|
|Indiabulls real estate||387.6||2906|
Porters five forces-
- Threat of new entrants- Low
Initial investment in setting up a real estate company is very high since the raw material costs have to be arranged by the developer in the earlier stage i.e. there is no advance payment from the customer. New players in this sector find it difficult to win projects since the real estate sector projects also consider the track record of the developer. Economic downturn across the globe and increase in the number of real estate construction and development companies has reduced the profitability of the business. Cost reduction plans in terms of real estate for office space are being carried out by many companies. So this is kind of a dampener for new companies as well as existing companies. The new players in this sector are expected to be affected the most.
On account of the above points, there is weak/low threat of new entrants.
- Bargaining power of buyers- Moderate
The products (i.e. real estate space) are standardized. Switching costs are very high. People look for developers with good track record i.e. brand identity. The bargaining power of buyers was low. But because of poor economic condition of 2013 and 2014, the property rates were unaffordable to the people of the country. RBI has disallowed the 80:20 ponzi scheme being run by real estate developers. Also the property rates were too high and sellers were not ready to bring down the prices. So the real estate sector became cash crunched.This resulted in builders trying to woo buyers with discounts and offers.
The bargaining power of buyers which was low earlier, later on it increased and now can be termed as moderate.
- Bargaining power of suppliers- Low
There is lower switching cost in changing suppliers for raw material (cement, bricks, paint, etc.). There is negligible threat of forward integration by suppliers. There are a large number of suppliers of raw materials for the real estate sector. The bargaining power of suppliers is low in this case.
- Threat of substitutes- No threat
There is no substitute for real estate sector from the point of view of real estate construction and development. So the threat of substitutes for real estate sector is seemingly nil.
- Intensity of rivalry- High
Rivalry is strong because of the large number of real estate firms operating in India and around 40 companies are listed on BSE in Construction and Contracting- Real estate. The product (i.e real estate space) cannot be differentiated. There is minimal profitability considering the status of current economy and so only companies with high cash reserves would survive. The intensity of rivalry is, therefore, high.
There is enormous pressure on resources like water, energy and materials due to the increase in demand for houses. The Indian Green Building Council (IGBC) was formed in 2001 address many of these aspects. IGBC consists of all stakeholders of construction industry comprising Corporate, Designers, Architects, manufacturers & suppliers, Government, Builders & Developers, Facility managers, Institutions, Service Consultants, Nodal agencies, Product, etc.
IGBC is a part of CII (Godrej green business centre) which is involved in promotion of the green building movement in India. Their vision is to enable sustainable built-environment for everyone and make India one of the global leaders in sustainable built-environment by the year 2025.
In the year 2001, there was a modest beginning of 20,000 sq.ft of green footprint in India and today over 2,760 green buildings having a footprint of over 2.19 Bnsq.ft are constructed all over India.
The impact of the activities of the council has enabled market transformation with regard to green building concepts, materials and technologies. The projected market potential of the green technology and material by the year 2015 is expected to be about USD 120 Bn.
Laws and Regulations concerning Real Estate-
The Right to Fair Compensation and Transparency in Land acquisition, Rehabilitation and Resettlement Act 2013 came into force from 1st Jan 2014. This act replaced the 120 year old Land Acquisition Act 1894. The Act provides for fair compensation to those people who have to give up their land. It also provides to bring transparency to the process of acquisition of land for purposes like setting up factories, buildings or infrastructural projects and assures rehabilitation to those affected.
This Act was viewed to be biased towards the land owners and ignores the need of poor who need affordable housing, hospitals, schools, employment opportunities and Industries. There were also many projects that were lost because of this Act. For example in 2013, ArcelorMittal which is the world’s largest steelmaker dropped the plan to build a steel plant in Orissa because of delays in acquiring land as a main reason. Nobel laureate Amartya Sen claim that prohibiting the use of fertile agricultural land for industries is self defeating since Industrial production generates many more times than the value of production by agriculture.
Many projects in sectors like power, housing and defence were stalled due to the provisions of this Act. Inorder to restart these projects, it is essential to amend the Act. Due to lack of support to the central government in amendment of the law, the central government took recourse to ordinance. An ordinance was passed recently on 29th Dec 2014. The union cabinet brought under its purview 13 central legislations involving defence and national security and providing higher compensation & rehabilitation & resettlement benefits to those farmers whose land is being acquired. Mandatory “consent” clause and SIA (Social Impact Assessment) are not required if land is acquired for the following 5 purposes- Defence, National Security, Industrial corridors, rural infrastructure and social infrastructure including PPP (Public Private Partnership) projects.
The Real Estate (Regulation and Development) bill 2013–
- Prior approval before the launch and advertisement- It contains provisions that restrict launching of projects or advertisements until and unless all approvals are received.
- Mandatory Deposit of fund- Promoters require to deposit 70% or less as notified by government in a separate bank account to cover the construction costs of the project.
- Restriction on taking advance- Developers/Agents are prohibited on taking more than 10% as advance from buyers.
- Mandatory registration of real estate projects and real estate agents with the Authority.
- Real estate developers/agents are required to disclose mandatory information such as details of projects, promoters, land status, carpet area, status of statutory approvals, contractors, architects, etc.
- The Bill gives power to establish 1 or more real estate regulatory authority for each state or Union Territory or one authority for 2 or more states or union territories.
FDI Policy in real estate-
The cash-starved debt-ridden property developers are in need of funds and the government’s recent initiative to ease the FDI rules in construction may well prove to be a boon for them. The minimum capital requirement for FDI is reduced from $10 mn to $5 mn and the built-up area is also reduced from 50000 sq mts to 20000 sq mts. More reforms are required to provide a long term solution to the funding crisis of the real estate.
The ease in FDI will boost the investor sentiment and increase investment flow by providing a window to those foreign developers who were not able to invest earlier owing to higher investment caps. It would also benefit the small and medium sized developers by providing them access to FDI, as earlier they were not eligible for FDI because of small land parcels. Those developers which don’t have bigger land parcels because of high cost of land within city limits would also benefit.
The relaxation in capital and area norms would provide a boost to residential, small office and shopping centre projects which are much in demand in tier 2 & 3 cities. Also the condition of mandatory 50% development from the date of approval in 5 years or after 3 years from the date of final investment (subject to development of trunk infrastructure) has been done away by the government. It has allowed the investors to exit when the project is completed. This is definitely an attractive proposition for current as well as future investors.
The Government is reviewing foreign investment policies for LLPs (Limited Liability Partnerships), and might soon lift the curbs and give an automatic access to the foreign investors via LLPs in real estate sector where 100% FDI is permitted.
The impact of budget 2014 is Marginally Positive
Smart city Development- Rs. 7060 Cr has been allocated for development of 100 smart cities. This move is likely to spur a positive sentiment to the real estate sector. There is a large growth in number of offices and ITeS segment apart from residential real estate growth from tier 2 and 3 cities. So all this cumulatively will bring opportunities for the real estate and allied sectors.
Easing of FDI- There is relaxation in FDI norms in real estate sector as a measure to enhance affordable housing. The minimum investment limit is halved to $5 mn and size of project eligibile for FDI is reduced to 20000sq mtr from 50000sq mtr.
Real estate investment trust (REIT)- The introduction of REITs is a positive sign and is likely to increase liquidity in the real estate sector. The real estate sector will be a direct beneficiary of such trusts.
Housing loans- Income tax deduction on repayment of principal amount on housing loan limits under 80C has also been increased to Rs 1.5 Lacs from Rs 1 Lacs. The finance ministry has increased the home loan rebate on self-occupied property to Rs 200000 from Rs 150000. This will not only have a positive impact on real estate sector but also the banking sector.
NHB is setting up an Urban Housing Fund and it is enhancing the fund allocation for Rural Housing Fund to Rs. 60 bn in FY14 from Rs. 40 bn in FY13. In this way, the Government is trying to focus on reducing housing shortage by providing affordable houses.
The reduction in abatement rate would increase the service tax outflow and make the luxury houses more and more expensive. Also, the hike in excise duty on marbles would increase the development cost which may be passed on to the customer.
The introduction of TDS on transfer of high value immovable property is likely to have a negative impact on the cash flow in a situation of distress property sales or on those property sales which are making minimal gains.
Overall the Budget is marginally positive for the construction and real estate sector.
After a lull of 3 years, sale of large land parcels is picking up. Developers and PEs are aiming to buy land parcels amid the renewed hopes. Prestige Estates Projects bought an 8-acre prime plot of land in Bangalore for Rs 345 Cr in July 2014. The deal was preceded by Lodha Developers buying 87 acre in Thane from Clariant Chemicals (India). The deal was worth Rs1,154 Cr. Oberoi Realty’s purchased 25 acre land in suburban Mumbai’s Borivali from Tata Steel and the deal was worth Rs1,155 crore.
Indian property market has begun to improve. India’s biggest cities rose in Jones Lang LaSalle’s ranking from 48th in 2012 to 40th in 2014 while the medium-sized cities rose from 49th to 42nd place. The improvement is due to PE firms investing a lot of money and demanding transparency.
Investments have been on the rise. In FY14, nearly USD 800 million was invested into India’s real estate sector and this translates to almost Rs 4,800 Cr being injected into the sector through the PE route according to the CBRE report.
The real estate industry has been under scrutiny with the mortgage crisis and other events, but it is still a large field which generates billions of dollars. There were 165000 companies operating in the residential brokerage and management field in 2013 generating USD 170 bn and there were 25000 companies in the commercial brokerage and management field generating revenues of USD 30 bn.
There has been high growth in recent times with the rise in demand for office and residential spaces.
Assotech Realty has tied up with Lemon Tree Hotels. It will manage and operate its serviced residences. Under the branding of Sandal Suites which would involve building 210 apartmentswill be their first project and it would be launched in Noida in 2015. It will launch more similar projects in a phased manner over the next 7 years with an investment of Rs 800-900 crore (US$ 129.37-145.57 mn) in cities like Goa, Ahmedabad, Bengaluru and Hyderabad.
Blackstone Group LP is poised to become the largest owner of commercial office real estate in India. They achieved it after a 3-year acquisition drive in which it spent USD 900 mn (or Rs 5400 Cr) to buy prime assets. Blackstone has acquired space of 29 mnsqft for developing offices in cities such as Bengaluru, Mumbai, Pune, and Noida.
L&T Infra Finance Private Equity has planned to raise Rs 3750 Cr in an overseas and a domestic fund, and planned to launch a real estate fund.
IDFC Alternatives Ltd sold 2 of its real estate investments to Blackstone Group LP. The assets consists of a SEZ in Pune and an IT park in Noida – were sold for a combined enterprise value (EV) of Rs 1100 Cr.
Goldman Sachs plans to invest Rs 1200 Cr to build a new campus in Bengaluru that can accommodate close to 9000 people.
Tata value homes who are focused on affordable housing have partnered with e-commerce company Snapdealto sell houses through the online marketplace model. The project plans 1000 homes spanning across major cities like Mumbai, Pune, Ahmedabad& Bengaluru.
Sardar Patel Urban Housing Mission- Close to 30 million houses are expected to be built by the year 2022, mostly for low-income groups.
The Government of India along with the governments of the states has taken several initiatives to encourage development in real estate sector. Some of them are: The Securities and Exchange Board of India has notified regulations that would govern the real estate investment trusts and infrastructure investment trusts. This would help in easier access to funds for cash-strapped developers. It will also create a new investment avenue for institutions and HNIs, and eventually retail investors.
Telangana Real Estate Developers’ Association (Treda) hosted the Fifth Treda Property Show 2014 at Hitex. The show will have around 180 stalls and participation of about 100 developers. It will be open to the general public along with prospective property purchasers, architects and investors.
The Kerala Government has decided to make securing permits from local bodies for construction of houses smoother. It plans to make the process online by launchingsoftware called ‘Sanketham’. This will ensure standardised procedure, transparency, and less corruption.
The Indian Government has proposed to release the Real Estate (Development and Regulation) Bill. The bill aims at protectingconsumer interest and introducingstandardization in business practices in the sector. The bill also helps in enabling foreign and domestic investment flow into the sector.