Boom & Bust of Indian Real Estate Sector

Engulfing the period of stagnation, the evolution of Indian real estate sector has been phenomenal, impelled by, growing economy, conducive demographics and liberalized foreign direct investment regime. However, now this unceasing phenomenon of real estate sector has started to exhibit the signs of contraction.

What can be the reasons of such a trend in this sector and what future course it will take? This article tries to find answers to these questions…

Overview of Indian real estate sector

Since 2004-05 Indian reality sector has tremendous growth. Registering a growth rate of, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent annually over the next decade, attracting foreign investments worth US$ 30 billion, with a number of IT parks and residential townships being constructed across-India.

The term real estate covers residential housing, commercial offices and trading spaces such as theaters, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves purchase sale and development of land, residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.

The sector accounts for major source of employment generation in the country, being the second largest employer, next to agriculture. The sector has backward and forward linkages with about 250 ancilary industries such as cement, brick,steel, building material etc.

Therefore a unit increase in expenditure of this sector have multiplier effect and capacity to generate income as high as five times.

All-round emergence

In real estate sector major component comprises of housing which accounts for 80% and is growing at the rate of 35%. Remainder consist of commercial segments office, shopping malls, hotels and hospitals.

• Housing units: With the Indian economy surging at the rate of 9 % accompanied by rising incomes levels of middle class, growing nuclear families, low interest rates, modern approach towards homeownership and change in the attitude of young working class in terms of from save and buy to buy and repay having contributed towards soaring housing demand.

Earlier cost of houses used to be in multiple of nearly 20 times the annual income of the buyers, whereas today multiple is less than 4.5 times.

According to 11th five year plan, the housing shortage on 2007 was 24.71 million and total requirement of housing during (2007-2012) will be 26.53 million. The total fund requirement in the urban housing sector for 11th five year plan is estimated to be Rs 361318 crores.
The summary of investment requirements for XI plan is indicated in following table

SCENARIO Investment requirement
Housing shortage at the beginning of the XI plan period 147195.0

New additions to the housing stock during the XI plan period including the additional housing shortage during the plan period 214123.1
Total housing requirement for the plan period 361318.1

• Office premises: rapid growth of Indian economy, simultaneously also have deluging effect on the demand of commercial property to help to meet the needs of business. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organised retail. For example, IT and ITES alone is estimated to require 150 million sqft across urban India by 2010. Similarly, the organised retail industry is likely to require an additional 220 million sqft by 2010.

• Shopping malls: over the past ten years urbanization has upsurge at the CAGR of 2%. With the growth of service sector which has not only pushed up the disposable incomes of urban population but has also become more brand conscious. If we go by numbers Indian retail industry is estimated to be about US $ 350 bn and forecast to be double by 2015.

Thus rosining income levels and changing perception towards branded goods will lead to higher demand for shopping mall space, encompassing strong growth prospects in mall development activities.

• Multiplexes: another growth driver for real-estate sector is growing demand for multiplexes. The higher growth can be witnessed due to following factors:

1. Multiplexes comprises of 250-400 seats per screen as against 800-1000 seats in a single screen theater, which give multiplex owners additional advantage, enabling them to optimize capacity utilization.

2. Apart from these non-ticket revenues like food and beverages and the leasing of excess space to retailer provides excess revenues to theatre developers.

• Hotels/Resorts: as already mentioned above that rising major boom in real estate sector is due to rising incomes of middle class. Therefore with increase in income propensity to spend part of their income on tours and travels is also going up, which in turn leads to higher demand for hotels and resorts across the country. Apart from this India is also emerging as major destination for global tourism in India which is pushing up the demand hotels/resorts.
Path set by the government

The sector gained momentum after going through a decade of stagnation due to initiatives taken by Indian government. The government has introduced many progressive reform measures to unveil the potential of the sector and also to meet increasing demand levels.

• 100% FDI permitted in all reality projects through automatic route.
• In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres.
• Urban land ceiling and regulation act has been abolished by large number of states.
• Legislation of special economic zones act.
• Full repatriation of original investment after 3 years.
• 51% FDI allowed in single brand retail outlets and 100 % in cash and carry through the automatic route.

There fore all the above factors can be attributed towards such a phenomenal growth of this sector. With significant growing and investment opportunities emerging in this industry, Indian reality sector turned out to be a potential goldmine for many international investors. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.

Top most real estate investors in the foray

Investors profile

The two most active segments are high networth individuals and financial institutions. Both these segments are particularly active in commercial real estate. While financial institutions like HDFC and ICICI show high preference for commercial investment,the high net worth individuals show interest in investing in residential as well as commercial properties.

Apart from these, the third most important category is NRI ( non-resident Indians). They mostly invest in residential properties than commercial properties. Emotional attachment to native land could be reasons for their investment. And moreover the necessary documentation and formalities for purchasing immovable properties except agricultural and plantation properties are quite simple. Therefore NRI’s are showing greater interest for investing in Indian reality sector.

MAJOR INVESTORS

• Emmar properties, of Dubai one of the largest listed real estate developer in the world has tied up with Delhi based MGF developments to for largest FDI investment in Indian reality sector for mall and other facilities in Gurgaon.

• Dlf India’s leading real estate developer and UK ’s famous Laing O Rourke (LOR) has joined hands for participation in airport modernization and infrastructure projects.

• A huge investment was made by Vancouver based Royal Indian raj international cooperation in a single real estate project named royal garden city in Bangalore over period of 10 years. The retail value of project was estimated to be around $ 8.9 billion.

• Indiabulls real estate development has entered into agreement with dev property development, a company incorporated in Isle of Man, whereby dev got subscription to new shares and also minority shareholding the company. But in recent developments indiabulls have acquired entire stake in dev property development in a 138 million-pound sterling (10.9 billion ruppees) share-swap deal.

• Apart from this real estate developments opens up opportunity for associated fields like home loans and insurance. A number of global have shown interest in this sector. This include companies like Cesma International from Singapore, American International Group Inc (AIG), High Point Rendel of the UK, Colony Capital and Brack Capital of the US, and Lee Kim Tah Holdings to name a few.
Following are names of some of the companies who have invested in India

International developer Country Investment
(US $ million)
Emmar properties Dubai 500
Ascendas Singapore 350
Salem & ciputra group Indonesia 350
GE commercial finance U.S 63
Tishman Speyer Properties U.S 300

Simultaneously many Indian retailers are entering into international markets through significant investments in foreign markets.

Buyers queue up for luxury houses

These duplexes or triplexes are spread over 8,000-9,000 sq ft and each flat has a 4,000-sq-ft terrace, swimming pool, exclusive parking space for five cars and separate servants’ quarters.

The price of one apartment— Rs 25 crore to Rs 30 crore.

As the real estate market gradually recovers from the economic downturn, builders have once again started constructing luxury houses in the city. And they said buyers are lining up to buy these.

Real estate experts said that most of these projects, which were on the drawing board until now, are now being executed due to the revival of the market.

“There were buyers who were sitting on the fence since last year who have now decided to buy,” said Pranay Vakil, chairman, Knight Frank India Private Limited, a real estate consultancy firm.

Calling each flat in Kumar Couture a bungalow in the air, Lalit Kumar Jain, chairman and managing director of Pune-based Kumar Builders said, “Our research has shown that there is a market for such houses and people are ready to pay for luxury.”

Supreme Universal has also launched a luxury apartment project of 29 flats at Chembur, which has landscaped gardens, a banquet hall and a rooftop sky lounge.

Vishal Jumani, director, Supreme Universal, said, “After a lull, buyers are back in the market.”

Each flat measuring 3,000 sq ft is priced at Rs 12,000 per sq ft.

The apartment complex has a state-of-the-art gymnasium with sauna and massage room and every flat has modular kitchens fitted with chimneys.

Indiabulls Realty Estate has also jumped on to the luxury housing bandwagon with Indiabulls Sky at Lower Parel– high rises with privately managed residencies.

These apartments come with a dedicated butler to cater to residents.

Higher floors are duplexes and penthouses with private terraces as big as the houses themselves. All this at Rs 28,000 per sq ft.

Prakkash Nichanii, owner of Anchor Property attributed the rise in demand for luxury houses to the sentiment prevailing in the realty market.

“Since the stock market has improved and there has been a stability in the job market, the luxury segment has benefitted a lot. The buyers are back,” said Nichanii.

Orbit Corporation India Limited now has six luxury housing projects, three each at Lower Parel and Napean Sea road.

The Napean Sea Road project has flats measuring 3,600 to 10,000 sq ft costing between Rs 14 crore and Rs 50 crore.

7,300 flats in four cities by Shriram Properties

Bangalore, Dec 2 : Shriram Properties, a leading developer in South India, will build about 7,300 apartments in Bangalore, Chennai, Kolkata and Visakhpatnam over the next 24-30 months.
“Over 50 percent of the flats (3,042) will be built in Bangalore to meet the growing demand for affordable housing,” Shriram managing director M. Murali told reporters here Wednesday.

“With the sentiment turning positive and speculation diminishing, we are seeing genuine buyers coming back to us for their dream house,” he said.

Of the remaining apartments, 1,640 units will be built in Chennai, 1,632 in Visakhapatnam and 1,020 in Kolkata in two-three phases.

The company has identified four locations in southern and eastern suburbs of Bangalore to build 3,042 units, measuring 600-1,200 square feet, in three phases.

The project will come up at Guduvanchery in Chennai, Uttarpara town off Kolkata and Madurawada in Visakhapatnam.

The project cost is estimated at about Rs.1,500 crore, with the company already having invested Rs.850 crore on land, raw materials and development of sites.

The Rs.600-crore Shriram has raised Rs.1,100 crore from three overseas private venture partners — Walton Street Capital, Starwood Capital Group and Sun Apollo — for the project by divesting 22 percent of promoters’ holding.

“To meet the budget of middle class families, we are pricing the flats between Rs.10 lakh (Rs.1 million) and Rs.30 lakh (Rs.3 million) with a host of amenities, including landscape, jogging tracks, community halls, swimming pools and gyms,” Murali said.

The company has also tied up with a school chain to set up educational opportunities to the children of the flat owners in the neighbourhood.

“With the recession receding and the economy on the upswing, genuine demand for housing is poised to grow by 25-30 percent over the next two-three years,” he said.

The 14-year-old Shriram Properties is the real estate arm of the Chennai-based Shriram group, which reported a turnover of Rs.20,000 crore (Rs.200 billion) in 2008-09 from diversified businesses ranging from transport to finance.

Asotech plans five-star hotel in Bhubaneswar

After the launch of Cosmopolis, a group housing project consisting of about 800 apartments, Assotech Limited, a Noida-based real estate firm, is now planning to set up a five-star hotel in the city.

Assotech has acquired three acres of land close to the city airport for the proposed five-star hotel which would come up under the banner of Radisson Hotel. “It will be called Radisson Hotel as the hotel chain has given us the franchisee. Radisson would only offer its brand name while Assotech would make the entire investment and also be responsible for management of the hotel”, a senior official of Assotech told Business Standard.

He declined to comment on the investment figure for this project. The five-star hotel would consist of 200 rooms and is expected to be launched soon. The hotel is scheduled to be ready for operation within 25 months.

Meanwhile, the Cosmopolis project being developed by Assotech BEBL Infrastructure Limited, a 50:50 joint venture between Assotech and the city-based B Engineers and Builders Limited is expected to be commissioned by the end of 2012. As per the original plan the Cosmopolis project was to consist of 666 apartments entailing a cost of Rs 230 crore. The project cost is now revised to Rs 400 crore as Assotech BEBL Infrastructure Limited has planned to add four bedroom flats, service apartments and high-end duplex homes.

Green buildings catching up fast in India

Kolkata, Dec 2 (IANS) The green building concept is swiftly catching up in the country partly because of government sops and partly because of the marketing strategy of real estate developers to get customers — and everyone is now busy linking it to climate change.

According to figures available with the Indian Green Building Council (IGBC), part of the Confederation of Indian Industry (CII)-Godrej Green Building Council, in 2008 India had only 18 certified green buildings and 328 projects in the pipeline.

In 2009, the figure of certified green buildings rose to 52. The number of future projects also went up to 436. IGBC has representation from corporate, government, architects, product manufacturers and other institutions.

“In the last five years the trend of green buildings has really caught up in India. It is because of globalisation and westernisation as many new companies have entered the country to start their businesses,” said Shreshth Nagpal, technical head of Spectral Service Consultants Private Ltd.

“The developers are finding these buildings cost beneficial and easy to woo the customers. For them green buildings have become a marketing tool. And at the same time governments are promoting green buildings to cut wastage of energy and carbon emissions,” Nagpal told IANS.

A green building is one which uses less water, optimises energy use, conserves natural resources, generates less waste and provides healthier spaces for occupants. The CII-Sohrabji Godrej Green Business Centre in Hyderabad, ITC Green Centre and Wipro Technologies in Gurgaon, Hiranandani BG Building in Mumbai and ABN Amro Central Enterprise Services Pvt Ltd in Chennai are a few among the green certified buildings in the country.

According to some estimates, buildings account for 39 percent of primary energy consumption and 38 percent of greenhouse gas emissions across the world. It also uses 12 percent of the world’s fresh water.

“A green building looks just the same as a conventional building. The difference is that the initial cost of green buildings are 5-30 percent more but the cost pays off in the long run because of cut in the energy consumption,” said P.K. Banerjee, one of the directors at Forum Projects, which designed Kolkata’s first green certified building, Technopolis.

“Also these buildings are more employee-friendly and help increase their productivity. Other features include use of renewable energy and use of renewable recycled materials,” he added.

Technopolis emits 7,500 tonnes less carbon dioxide every year, compared to a conventional building of the same size.

Green buildings are particularly important for Asia, home to the world’s most rapid economic growth.

“Asia’s share of global energy consumption has doubled in the past 30 years, and its buildings’ share of energy use is growing at similar rates, with China and India alone constructing more than half of all the world’s new floor space,” Mark Clifford, executive director of the Asia Business Council, wrote in a recent article.

Kolkata’s Mayor Bikash Ranjan Bhattacharya said the city produces around 4,000 tonnes of waste every day.

“We have to consider this waste as wealth and devise ways to reduce carbon emissions. We have put a new policy in place to promote green buildings in the state. Some relaxations and tax benefits are being given to the developers to build green homes and buildings in the city,” Bhattacharya told IANS.