THE REAL ESTATE SECTOR

Size of The Sector:

The real Estate sector is currently worth US$ 12 billion, it is growing at the
rate of around 30% annually and has a potential to grow to a whopping US$
45 – 50 billion in the coming five years. People all across the Asia Pacific
region are viewing the real estate sector in the country as the most lucrative
one and thus offering great prospects in the near future in respect to
contribution to the nation’s growth and the same can be gauged from the fact
that it is the second largest employer next to only agriculture.

Five per cent of the country’s GDP is contributed by the housing sector. In
the next three or four or five years this contribution to the GDP is expected to
rise to 6%.

Growth Trends:

Driven by positive growth in the economy, real estate in India is booming.

The year 2006 started on a promising note when the Government of India
opened the construction and development sector in February 2006, and
allowed 100 per cent foreign direct investment (FDI) under the 'automatic
route' in order to spur investment in the vital infrastructure sector. By 2015,
it is projected that the market size would grow to $ 90 Billion.

Estimates suggest that the urban housing sector would require investments
to the tune of $25 billion (Rs. 1.10 lakh crore) over the next five years. Prices
have remained buoyant as new construction lags. According to surveys, there
was a shortage of 19.4 million units (12.7 million units in rural areas and 6.7
million units in urban areas) in the country about three years ago, which will
require real estate in India

It is invariably seen as the most lucrative sector with the booming land prices
and higher profitability all across the country. More and more international
construction companies are viewing it as a great opportunity with the new
regime in terms of the growth prospective and saturation of their respective
local markets.

The factors favoring the real estate market in India, which currently is on a
high growth curve, are several – a booming economy, favorable
demographics, government’s spending on infrastructure and a liberalized FDI
regime. Though there are still certain issues – land reforms and absence of
substantial tax incentives for real estate development - that need to be
addressed.
Factors affecting the growth:

The development of real estate in India focusses on two primary areas: retail
and residential. Growth opportunities are explored to a great extent in both
the area especially in the housing area where the low interest rates act as a
catalyst in the growth whereas in the retail sector binding FDI norms act as a
barrier. Inspite of those things are very lucrative, infact the gobal 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
organised retail segment by 2010. The organised segment is expected to
grow from a mere 2 per cent to 20 per cent by the end of the decade, it said.

Some years back, real estate would bring in mind shady images of brokers
but now with reputed builders and international property consultants joining
the fray, this image has strengthened and evolved into a professional
corporate image. It has been a great confidence building tool for the Indian
consumers especially the middleclass people.

The Indian middle class, which numbered around 92 million by 2005-06 and
cross the 153 million mark by 2009-10 (Source: NCAER) Thus, the demand
for quality housing is expected to keep rising in the years ahead. Fuelling this
growth is - attitudinal shift towards a higher marginal propensity to consume,
changing consumption patterns and the advent of nuclear families.

Gurgaon is set to get the biggest mall of the world — a large US$ 89.78 sq ft
sprawling property that is being developed by DLF Universal. It will be known
as Mall of India.

Major Government Policies/Changes in the past three years:

The role played by the government in developing the prospects of this sector
cannot be overemphasized. The changes brought about by the current UPA
led alliance has thrown open this sector to develop and evolve as a significant
contributor to the nation’s GDP.

The decision to liberalise the FDI norms in the construction sector is perhaps
the most significant economic policy decisions taken by the Government.
Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin
(PIOs) were permitted to invest in the housing and the real estate sectors.
Foreign investors other than NRIs were allowed to invest only in
development of integrated townships and settlements either through a wholly
owned subsidiary or through a joint venture company in India along with a
local partner. The guidelines prescribed via Press Note 2 (2005) series has
further opened out FDI in townships, housing, built-up infrastructure and
construction development projects.
The relaxation of the FDI ceiling saw big names like Dubai-based Emmar
Properties -- the largest listed real estate developer in the world -- joining
hands with the Delhi-based MGF Developments to announce India's largest
FDI in the realty sector amounting to over US$ 500 million in projects having
capital outlay of US$ 4 billion.

The other major event is the introduction of REIT (Real Estate Investment
Trusts). Currently mutual funds are not allowed to have direct exposure in
Real estate but they can make debt and equity investments in the company.
The Indian version of REIT- REIS (Real Estate Investment Schemes) would
enable investments by the small investor in the real estate sector and thus
earn dividends on the rental income being paid.
Housing loans have been a boon to this sector and the easing of norms in the
housing loans segment has been of great help. Infact, the Government has
made it mandatory that 3% of the incremental deposits of the banks would
be deployed to the housing industry. The budget of 2003-04 allows for a tax
deduction exemption of 1.5 lakhs in the interest payable on housing loans.
With many banks like IDBI Bank, CanFin Homes, HDFC and PNB Housing
having slashed down- it is extremely beneficial for the consumers. This has
provided a boost to residential sales. Again the easing up of bank finance for
developers has acted as important catalysts for the sector. The government
has also helped by permitting banks to advance home loans to NRIs.

Some critical news:

Real estate in india has a bright future. Some reports point out certain issues
which need to be addressed by the government to ensure rapid growth. Some
of the issues are: absence of large listed companies in the sector, which has
affected fund flow; foreigners still cannot buy and sell undeveloped land; and
reassessment of the legal aspects relating to stamp duty and rent control.

There are some suggestions on the FDI guidelines which are enumerated as
follows:

�FDI for existing companies and projects: Presently FDI is allowed only
in the case of greenfield projects. In this relation, the policy assumes setting
up of a SPV by the foreign investor for undertaking real estate development
activities in India. FDI should be permitted in companies which are otherwise
engaged in real estate development companies and own properties, some of
which may be developed, partly developed and/ or undeveloped.
This would assist in providing the necessary finance to the companies which
face shortage of finance for funding their projects.

� FDI for the Hotel and Tourism Industry: A clarification is required

stating that FDI in Hotel and Tourism Industry would continue to be governed
by the earlier FDI policy in relation to Hotels and Tourism and not by the new
Press Note 2 (2005 series) for construction development
activities. This is because the old guidelines are quite wide and serve the
desired purpose of Hotel and Tourism Industry.

� FDI and Industrial Parks: The tem ‘Industrial Parks’ requires to be

clearly defined for purpose of FDI. In this connection the FDI policy should be
amended to permit FDI in industrial parks which have been accorded
industrial parks status under the relevant state legislations. Further, a
clarification is required stating that FDI in Industrial parks continue to
governed by the earlier policy and is not governed by the new Press Note 2
(2005 series) for construction-development activities. Therefore, conditions
under Press Note 2 (2005 series) would not apply in case of FDI in Industrial
Parks.

� Built-up Area: To avoid undue litigation and to bring the much needed
clarity and uniformity, the term ‘Builtup Area’, should be clearly defined. It
should be clearly laid down as whether the term refers to the Super Builtup
area, the Carpet Area or any other accepted definition. The definition of Built-
up Area needs to be clarified. According to FICCI, it should include
basements, stilt floors, balconies, staircases, corridors, lobbies etc. The time
duration by when the built up area condition needs to be fulfilled requires to
be clarified-is it at the initial sanction or at the time of completion. In the case
of large projects that are going to be developed in phases, the provision
should allow the builder the flexibility of developing the different phases only
once he perceives the demand for the project.

� Investment by Joint Venture Company: The present FDI policy on the

construction-development sector requires a minimum capitalization of US$ 5
million where the project is undertaken in joint venture with an Indian
partner. This has resulted in ambiguities on whether FDI of US$ 5 million is in
relation to a single foreign investor or is it the total contribution of multiple
foreign investors investing in the project in India.
It may be considered to align the minimum capitalization norms under Press
note 2 (2005 series) with those prescribed for Non-banking Financial
Companies, ie the minimum investment by foreign investors should be as
follows:
o Upto 51% shareholding – minimum of US$ 5 million;
o 51% to 75% - minimum of US$ 7.5 million; and
o 75% and above till 100% - minimum of US$ 10 million.
The above should apply for all foreign investors put together and not
individually.

Again the industry faces many problems- one of them being the high stamp
duty rates in the Indian states. These range in most Indian cities between 10
and 15 %. States such as West Bengal, Kerala and Bihar levy it as high as
20%. Some states even have a double stamp incidence , first on land and
then on its development. The stamp duty levied in developed countries
like Singapore and Europe is about 1-2%. The existing foreclosure laws are
cumbersome as well as time consuming and make it practically impossible for
Housing Finance Institutions (HFIs) to repossess a dwelling unit financed.
HFIs are reluctant to take risk and continue to land primarily on salaried
urban borrowers. Amendment of (National Housing Board) NHB Act has
already been initiated. The implementation process needs to be expedited to
bring in the required changes

Service tax in relation to construction of residential complexes having more

than 12 houses have been proposed to be introduced as a new service.
However, no rationale has been provided for exclusion of services in relation
to construction of residential bungalows, which may not form part of
‘residential complexes’.

The Reserve Bank of India on Tuesday, 25th of Jul, 2006 raised both the repo
and reverse repo rates by 25 basis points each in a development, which was
broadly in line with expectations.

Jammu and Kashmir Bank's chairman and CEO Haseeb Drabu told PTI that
there was likely to be a shift in lending from sectors with high risk weightage
to ones with lower weightage. "Effectively, this means a shift in focus from
real estate to retail and SME segments," he added. Drabu said that the rate
hike was in line with expectations and another hike of 50-75 basis points was
likely in the next 12-15 months. Meanwhile, a number of banks and housing
financial institutions said after the RBI rate hike announcement that they
were planning to hike their home loan rates.

However, the RBI has decided to keep the bank rate and the Cash Reserve
Ratio, the percentage of bank reserves to deposits and notes, unchanged at 6
per cent and 5 per cent respectively.

Delhi-based MGF Developments to announce India's largest FDI in the realty

sector amounting to over US$ 500 million in projects having capital outlay of
US$ 4 billion.

Outlook Of Investors(list major investors,FII etc.)

According to the Knight Frank India Research data, eight of the 13 residential
projects proposed by foreign players in India are by companies in the
southeast Asian region. Players from the US, UK, Middle East, Canada and
Japan have floated one project each. This itself shows that there is
tremendous interest in the real estate sector of the country.
Southeast Asia nations, especially Singapore, are very bullish on Indian real
estate sector. The main reasons for this is the proximity of these nations to
India and the similarly in their markets. Also, Singapore firms are putting in
huge funds into India because their real estate market has almost saturated
and India is one of the lucrative options for them

The new guidelines for India can trigger an investment of $1-1.5 billion
annually. Demand is on an upswing. 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.
However, there are several ambiguities in the guidelines, which act as major
irritants.

Again HDFC is setting up an international real estate fund under its venture
capital arm focused on construction activities and it will raise USD 720m from
international investors, reports Economic Times. They say that there are
many reasons for such a scheme. Higher risk-adjusted returns as compared
to various asset classes over a period of time, assured regular income, capital
appreciation, inflation hedge, portfolio diversification.

Delhi-based MGF Developments to announce India's largest FDI in the realty

sector amounting to over US$ 500 million in projects having capital outlay of
US$ 4 billion. The investment would be in integrated township which would
include housing , commercial premises, hotels and resorts, while the urban
infrastructure would comprise roads and bridges, mass rapid transit, systems
and manufacture of building materials. The minimum acreage that can be
developed is 100 acres designed keeping into consideration the local bylaws
and regulations. The minimum capitalization would be US $ 10 million for a
wholly owned subsidiary and US$ 5 million for a joint venture with an Indian
partner. FDI is however not being allowed in the retail sector. Generally
speaking , real estate prices have stabilised to a great deal as the role played
by speculation has started declining.

Major Merger and Acquisitions in the past two years:

There have not been many acquisitions and mergers in the sector but there
are many joint ventures initiated between foreign and Indian Companies.

However some of the companies involved in the mergers and acquisition are
ABHA property projects Limited, JMC projects India Limited, IVRCL
Infrastructures Limited. There has been dearth of such instance because of
lack of Indian Multinationals and big players, government norms and very few
listed companies.
Expected Future Trends:

A research study conducted by CRIS-INFAC, a Crisil subsidiary, predicts the

housing sector to grow by 24% in the next five years. The growth in the
current fiscal of 2002-03 is expected to be 33%.

According to a Merrill Lynch report, the number of malls in the country is

expected to rise from 40 to around 250 by 2010. In fact, the same report
envisages approximately 50 million square feet of retail space being
developed over the next five years.
The sector as a whole has a potential to grow to a whopping US$ 45 – 50
billion in the coming five years with the new reforms initiated by the
government lately.

Key Players:

The major domestic players in the real estate sector are DLF group, Tata
Housing Development Corporation Limited, Unitech Limited, Tantia
Constructions, Morarjee Realtors, Nagarjuna Constructions, Era
Constructions, Hiranandani Construction Pvt. Ltd.

Apart from them we have Tishman Speyer, one of the world’s largest
construction companies, is teaming with ICICI Ventures to create a joint
development company. Dubai’s Emaar Properties has signed a joint venture
with Delhi’s MGF Group, and HDFC and ICICI have announced real estate
focussed venture funds to the tune of about $15-20 billion.

Major developers and fund houses such as Lee Kim Tah Holdings (Singapore),
Salim Group (Indonesia), High Point Rendel (UK), Edaw Ltd (US), Kikken
Sekkel (Japan), CESMA International Pvt Limited (Singapore), Emaar Group
(Dubai), IJM (Malaysia), Evan Lim & Co Pte Ltd (Singapore), HO Hup
Construction (Malaysia), Keppel Land (Singapore), Royal Indian Raj
International Corporation (Canada) and Universal Success Enterprise
(Indonesia) are planning integrated township projects in India. Other
segments like IT parks, special economic zones (SEZ), infrastructure, and
hospitality are also as enticing to foreign investors.

Southeast Asian players also dominate investment in IT parks, SEZ and

infrastructure projects. Singapore-based Ascendas India has developed the
International Tech Parks in Bangalore, Gurgoan, Hyderabad and Chennai, and
acquired the Vanenburg IT park in Hyderabad from its original promoters.

New players Planned to venture:

Groups showing interest in India include insurance company American
International Group Inc (AIG), High Point Rendel of the UK, Edaw-US, Japan's
Kikken Sekkel, Lee Kim Tah Holdings and Cesma International from
Singapore.

Vancouver-based Royal Indian Raj International Corporation (RIRIC) will

invest a staggering US$ 2.9 billion in a single real-estate project named Royal
Garden City in Bangalore over a period of 10 years. The retail value of the
project is estimated at US$ 8.9 billion. Morgan Stanley Real Estate announced
that it has invested around US$ 68 million in Mantri Developers Private Ltd, a
private Bangalore-based real estate developer.

These are the major ones finalized so far and there are many in the pipeline
too about to be materialized

Other Special Observations:

For every Rupee spent on construction, an estimated 75-80 per cent is added
to the GDP. In the light of this information, the current thrust in infrastructure
development together with the allowing of 100 per cent FDI is likely to have a
highly favourable multiplier effect on the economy. The Real Estate Industry
has significant linkages with several other sectors of the economy and over
250 associated industries. One Rupee invested in this sector results in 78
paise being added to the GDP of the State.
A unit increase in expenditure in this sector has a multiplier effect and the
capacity to generate income as high as five times. If the economy grows at
the rate of 10% the housing sector has the capacity to grow at
14% and generate 3.2 million new jobs over a decade.

The opening up of FDI for the Retail sector will be a great boon for the
Construction Industry. The symbiotic relationship between Retail and
the Real Estate sector can be explored in a number of formats, some of which
are illustrated below:

o Builders and developers can construct the property and then hand it over to
the retailers.
o There is also the possibility of exploring joint venture collaborations. In this
format the builder shall be responsible for identifying and acquiring
land, constructing the building and further be responsible for the maintenance
and the upkeep of the premises. The retailer in this format shall then be
responsible to bring in the brands in the building. This format provides the
construction industry an extended scope of getting into retail in
a joint venture format. This format shall not be limited to the FDI scenario
but can work well in the Indian Retail Industry scenario as well. This type of
model lets the core business, which is construction, development and
maintenance, get a value addition from another industry segment.

The Government may consider signing up of more FTAs with other countries
in the interest of the Real Estate Segment. However, while doing so the
interest of domestic players in that particular segment should also be kept in
mind.
Excise duty should not be levied in the case of Immovable property like in
the case of Installations such as lifts among others. The present norm that
the goods cleared under CKD would have to pay excise duty should be done
away with.