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Executive Summary
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Introduction
INDIAS REAL ESTATE SECTOR
The real estate sector in India has come a long way by becoming one of the fastest
growing markets in the world. It is not only successfully attracting domestic real estate
developers, but foreign investors as well. The growth of the industry is attributed mainly to
a large population base, rising income level, and rapid urbanisation. The sector comprises
of four sub-sectors- housing, retail, hospitality, and commercial. While housing contributes
to five-six percent of the countrys gross domestic product (GDP), the remaining three subsectors are also growing at a rapid pace, meeting the increasing infrastructural needs. The
real estate sector has transformed from being unorganised to a dynamic and organised
sector over the past decade. Government policies have been instrumental in providing
support after recognising the need for infrastructure development in order to ensure better
standard of living for its citizens. In addition to this, adequate infrastructure forms a
prerequisite for sustaining the long-term growth momentum of the economy.
The Indian real estate sector is one of the most globally recognised sectors. In the country,
it is the second largest employer after agriculture and is slated to grow at 30 per cent over
the next decade. It comprises four sub sectors - housing, retail, hospitality, and
commercial. The growth of this sector is well complemented by the growth of the corporate
environment and the demand for office space as well as urban and semi-urban
accommodations. The construction industry ranks third among the 14 major sectors in
terms of direct, indirect and induced effects in all sectors of the economy. It is also
expected that this sector will incur more non-resident Indian investments in the near future,
as a survey by an industry body has revealed a 35 per cent surge in the number of
enquiries with property dealers. Bengaluru is expected to be the most favoured property
investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and
Dehradun. Private equity (PE) funding has picked up in the last one year due to attractive
valuations. Furthermore, with the Government of India introducing newer policies helpful to
real estate, this sector has garnered sufficient growth in recent times.
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Industrial Property
Industrials are often considered the "staple" of the average real estate
investor. Generally, they require smaller average investments, are less
management intensive and have lower operating costs than their office and retail
counterparts. There are varying types of industrials depending on the use of the building.
For example, buildings could be used for warehousing, manufacturing, research and
development, or distribution. Some industrials can even have partial or full office buildouts. Some important factors to consider in an industrial property would be
functionality (for example, ceiling height), location relative to major transport routes
(including rail or sea), building configuration, loading and the degree of specialization in
the space (such as whether it has cranes or freezers). For some uses, the presence of
outdoor or covered yard space is important.
Multi-family Residential Property
Multi-family residential property generally delivers the most stable returns, because no
matter what the economic cycle, people always need a place to live. The result is that in
normal markets, residential occupancy tends to stay reasonably high. Another factor
contributing to the stability of residential property is that the loss of a single tenant has a
minimal impact on the
bottom line whereas if you lose a tenant in any other type of property the negative effects
can be much more significant. For most commercial property types, tenant leases are
either net or partially net, meaning that most operating expenses can be passed along to
tenants.
However, residential properties typically do not have this attribute, meaning that the risk of
increases in building operating costs is borne by the property owner for the duration of the
lease. A positive aspect of residential properties is that in some countries,
government-insured financing is available. At the expense of a small
premium, insured financing lowers the interest rate on mortgages, thereby enhancing
potential returns from the investment.
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Lower Liquidity
With the exception of real estate securities, no public exchange exists
for the trading of real estate. This makes real estate more difficult to
sell because deals must be privately brokered. There can be a
substantial lag between the time you decide to sell a property and
when it actually is sold - usually a couple months at least.
Underlying Tenant Quality
When assessing an income-producing property, an important
consideration is the quality of the underlying tenancy. This is important
because when you purchase the property, you're buying two things:
the physical real estate, and the income stream from the tenants. If
the tenants are likely to default on their monthly obligation, the risk of the investment is
greater.
Variability among Regions
While it sounds clich, location is one of the important aspects of real
estate investments; a piece of real estate can perform very differently
among countries, regions, cities and even within the same city. These
regional differences need to be considered when making an
investment, because your selection of which market to invest in has as
large an impact on your eventual returns as your choice of property
within the market.
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Amortization
With leverage, or the use of other people's money, comes a
repayment schedule. Your outstanding balance is reduced with
every payment you make. Part of each payment goes to
interest (applied first) and the rest goes to pay off the
principal. The principal reduction is called amortization -reducing debt. Hence, amortization can make you wealthy,
slowly and steadily.
Tax advantages
Owning real estate with the goal of making a profit allows you
to deduct interest payments and other expenses come tax
time. But don't be fooled into buying real estate for the tax
advantages; rather, purchase it because it makes economic
sense to do so.
Diversification
Value the positive aspects of diversifying your portfolio in terms of asset allocation are well
documented. Real estate returns have relatively low
correlations with other asset classes (traditional investment vehicles
such as stocks and bonds), which adds to the diversification of your
portfolio.)
Inflation Hedge
Real estate returns are directly linked to the rents that are received
from tenants. Some leases contain provisions for rent increases to be
indexed to inflation. In other cases, rental rates are increased
whenever a lease term expires and the tenant is renewed. Either way,
real estate income tends to increase faster in inflationary
environments, allowing an investor to maintain its real returns.
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Shortcomings
Real estate also has some characteristics that require special consideration when making
an investment decision:
Costly to Buy, Sell and Operate
For transactions in the private real estate market, transaction costs
are significant when compared to other investment classes. It is
usually more efficient to purchase larger real estate assets because
you can spread the transaction costs over a larger asset base. Real
estate is also costly to operate because it is tangible and requires
ongoing maintenance.
Requires Management
With some exceptions, real estate requires ongoing management at
two levels. First, you require property management to deal with the
day-to-day operation of the property. Second, you need strategic
management of the property to consider the longer term market
position of the investment. Sometimes the management functions
are combined and handled by one group. Management comes at a
cost; even if it is handled by the owner, it will require time and
resources.
Difficult to Acquire
It can be a challenge to build a meaningful, diversified real estate
portfolio. Purchases need to be made in a variety of geographical
locations and across asset classes, which can be out of reach for
many investors. You can, however, purchase units in a private pool or a public security,
and these units are typically backed by a
diverse portfolio.
Cyclical (Leasing Market)
Not unlike other asset classes, real estate is cyclical. Real estate
has two cycles: the leasing market cycle and the investment market
cycle. The leasing market consists of the market for space in real
estate properties. As with most markets, conditions of the leasing
market are dictated by the supply side, which is the amount of
space available (or, vacancies), and the demand side, which is the
amount of space required by tenants. If demand for space
increases, then vacancies will decrease, and the resulting scarcity
of space will cause an increase in market rents. Once rents reach
economic levels, it becomes profitable for developers to construct
additional space so that supply can meet demand.
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Unprecedented Expansion
Rising income levels of a growing middle class along with increase in nuclear families, low
interest rates, modern attitudes to home ownership (the average age of a new homeowner
in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude
amongst the young working population from that of 'save and buy' to 'buy and repay' have
all combined to boost housing demand. According to 'Housing Skyline of India 2007-08', a
study by research firm, Indicus Analytics, there will be demand for over 24.3 million new
dwellings for self-living in urban India alone by 2015. Consequently, this segment is likely
to throw huge investment opportunities. In fact, an estimated US$ billion investment will
be required over the next five years in urban housing, says a report by Merrill Lynch.
Simultaneously, the rapid growth of the Indian economy has had a cascading effect on
demand for commercial property to help meet the needs of business, such as modern
offices, warehouses, hotels and retail shopping centres. Growth in commercial office space
requirement is led by the burgeoning outsourcing and information technology (IT) industry
and organized retail. For example, IT and ITES alone are estimated to require 150 million
Sq.ft. across urban India by 2010. Similarly, the organized retail industry is likely to require
an additional 220 million Sq.ft by 2010. With the economy surging ahead, the demand for
all segments of the real estate sector is likely to continue to grow. The Indian real estate
industry is likely to grow from US$ 12 billion in 2005 to US$ 90 billion in by 2015. Given the
boom in residential housing, IT, ITeS, organized retail and hospitality industries, this
industry is likely to see increased investment activity.
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MUMBAI
BENGLURU
1.7%
DELHI
0.9%
-3.0%
Major increase in these 8 cities show positive growth quarter on quarter are as follows:
% INCREASE.
4
3
2
1
0
pune
chennai
kochi
jaipur
bengluru
Major real estate destinations of the country and some other emerging towns can be
classified into three broad categories depending upon the stage of real estate
development that each one of them is undergoing.
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!
City-wise housing price index Tier II cities
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Investors expect to see significant uptick in real estate demand towards January to March
quarter of 2017, as a result of significant steps taken by the government towards
employment generation. NCR currently presents best investment opportunities, with most
of the currently available projects closer to the replacement cost, something which we
haven't seen over last two decades. Bangalore, Chennai and Pune continue to be top end
user driven markets propelled by significant job creation and infrastructure development.
Hyderabad is a market to watch out for over the next three years with possibility of annual
returns of over 30% to 40% across all locations.
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Foreign Players
With the significant investment opportunities emerging in this industry, a
large number of international real estate players have entered the country. Currently,
foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5
billion and US$ 5.50 billion.
Jones Lang LaSalle (JLL), the world's leading integrated global real
estate services and money management firm, plans to invest around
US$ 1 billion in the country's burgeoning property market.
Dubai-based DAMAC Properties would invest up to US$ 4.5 billion to
develop properties in India.
Merrill Lynch & Co bought 49 per cent equity in seven mid-income
housing projects of India's largest real estate developer DLF in
Chennai, Bangalore, Kochi and Indore for US$ 375.98 million.
UAE-based real estate company Rakeen and Chennai-based mineral
firm Trimex Group have formed joint venture company - Rakindo
Developers - which would invest over US$ 5 billion over the next five
years.
Dubai-based Nakheel and Hines of the US have tied up with DLF to
develop properties in India. DLF has also formed a joint venture with
Limitless Holding, a part of Dubai World, to develop a US$ 15.23 billion
township project in Karnataka.
Gulf Finance House (GFH) has decided to invest over US$ 2 billion in a
Greenfield site close to Navi Mumbai. Global real estate majors such as Dubai World,
Trump Organization of US, Smart City of Dubai, Kishimoto Gordon Dalaya, Khuyool
Investments, Bonyan Holding, Plus Properties, ABG Group and Al Fara's Properties
among others have all firmed up their plans for the Indian real estate market with an
investment of around US$ 20-25 billion in the next 12-18 months.
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Going Local
Indian real estate market permeates to smaller towns and cities. According to leading
global property consultancy firm Knight Frank, the real estate action is no longer limited to
the large metropolises of India but has now permeated to the burgeoning smaller towns
and cities. According to Knight Frank Research, the upswing of the Indian real estate
sector has been an outcome of a number of positive micro and macro factors. Consistent
and sustaining GDP growth, expanding service sector,rising purchasing power and
affluence, proactive and changing government policies have all lent momentum to this
rapidly growing sector. Accounting for almost 80% of the total office space absorption, the
Indian IT/ITES sector has been the primary demand driver. India's low cost-high
quality and productivity model has given it a leadership position in the
outsourcing arena. In a bid to scale up their operations and to remain
globally competitive, the Indian IT/ITES companies are exploring the smaller
towns and cities. Rising manpower and real estate costs, plaguing attrition
levels and very often risk mitigation have been the key reasons for this
movement.
Positive economic growth has also translated in rising disposable incomes
and growing aspiration levels across India. Rising consumerism has created a
demand for new retailing and entertainment avenues. Realizing that
consumers across cities have similar needs, albeit the scale may vary, new
age retailers are vying to cash in on the first mover advantage and are
expanding into hitherto unexplored smaller cities. Advent of organized
retailing has also translated into real estate growth in these emerging
locations.
Growth of the Indian 'Rich' (annual income>USD 4,700) and 'Consuming'
(annual income USD 1,000-4,700) class coupled with falling interest rates
and other fiscal incentives on home loans has increased the affordability and
the risk appetite of the average Indian consumer thereby leading to a
substantial rise in demand for housing. This has been further fueled by the
increase in the size of 25-55 age group of earning population and the
emergence of double income, nuclear families. Over the last decade the
average age of Indian home loan borrower has reduced by 10 years.
Another variable facilitating real estate growth in India is the growing
urbanization. According to United Nations Population Division, the urban
population in India will continue to grow at a rate of 2.5% per annum for the
next two and a half decade. As per the Census of India 2001, 41% of the
total population of India will be living in urban areas by 2011. The number of
cities with a population of one million or more is also is expected to double
from 35 recorded in 2001 to 70 by 2005. This increase in population will
generate incremental demand for housing and other real estate components.
All these factors together with increased liquidity in the real estate sector
through the international real estate funds and private equity funds will
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result in radically transforming the real estate landscape over the next 3-5
years.
However, to support this growth and to make it more expansive, a lot needs
to be done. Foremost is the thrust on infrastructure. According to a World
Bank estimate, India needs to invest an additional 3-4% of its GDP on
infrastructure to sustain its current levels of growth and to spread the
benefits of growth more widely. Some positive steps have already been
taken in this direction. Huge investments in infrastructure to the tune of
$350 billion have been envisaged over the next five years. Connectivity may
get a boost with the completion of ~13,000 kms of roads under the Golden
Quadrilateral, North-South-East-West (NSEW) corridor and with 4-laning of all
the major national highways. This will further facilitate the economic
development of smaller towns and cities in the country.
Characteristics: Real estate markets yet to establish. Perceived to have
substantial potential demand. As the Indian real estate sector moves higher on the growth
curve, a number of state capitals and smaller cities which have relatively better
infrastructure and are able to support higher economic growth have come into limelight.
These emerging growth centers are characterized by low real estate costs,
availability of land for development, untapped manpower pool and rising
quality of life. Many of these towns have industrial and tourism driven
economic base that can be leveraged for growth. Anticipating the latent
demand in these markets, a number of real estate developers and retailers
have chalked out expansive plans to harness the opportunity.
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Going Global
Simultaneously, many Indian realtors are making a name for themselves in
the international market through significant investments in foreign markets.
Prudential Real Estate Investors has acquired Round Hill Capital
Partners Kabushiki Kaisha, a Japanese asset management firm.
Embassy Group has inked a deal with the Serbian government to
construct a US$ 600 million IT park in Serbia.
Parsvnath Developers has tied up with the Al-Hasan Group in Oman.
Puravankara Group is doing a project in Sri Lanka - a high-end
residential complex, comprising 100 villas.
The Hiranandanis are constructing 5000 5-star hotel rooms, which will
come up between Abu Dhabi and Dubai.
Ansals API tied up with Malaysia's UEM Group to form a joint venture
company, Ansal API-UEM Contracts Pvt Ltd, which plans to bid for
government projects in Malaysia.
Kolkata's South City Projects is working on two projects in Dubai
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Government Initiatives
POLICY INITIATIVES
Under the Sardar Patel Urban Housing Mission, 30 million houses will be built by 2022,
mostly for the economically weaker sections and low-income groups, through publicprivate- partnership, interest subsidy and increased flow of resources to housing sector.
The Government of India along with the governments of the respective states have taken
several initiatives to encourage the development in the sector. Some of them are as
follows:
The Securities and Exchange Board of India (SEBI) has notified final regulations that will
govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).
This move will enable easier access to funds for cash-strapped developers and create a
new investment avenue for institutions and high net worth individuals, and eventually
ordinary investors.
The State Government of Kerala has decided to make the process of securing permits
from local bodies for construction of houses smoother, as it plans to make the process
online with the launch of a software called 'Sanketham'. This will ensure a more
standardised procedure, more transparency, and less corruption and bribery. The
Government of India has proposed to release the Real Estate (Development and
Regulation) Bill which aims to protect consumer interest and introduce standardisation in
business practices and transactions in the sector. The bill will also enable domestic and
foreign investment flow into the sector.
As the Indian economy grows, the real estate sector keeps benefiting. With the increase in
foreign tourist arrivals (FTA) every year, there is demand for real estate in the tourism and
hospitality sector. Also, with the entry of major private players in the education sector, the
major cities, that is Hyderabad, Bengaluru, Mumbai, Delhi, Pune, Chennai and Kolkata are
likely to account for 70 per cent of total demand for real estate in the education sector.
Demand for improved healthcare facilities is also expected to provide a boost to the
construction sector in the country.
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Investments
The Indian real estate sector has witnessed high growth in recent times with the rise in
demand for office as well as residential spaces. Some of the major investments in this
sector are as follows:
Assotech Realty has tied up with Lemon Tree Hotels to manage and operate its serviced
residences. The first project, 210 apartments under the branding of Sandal Suites, will be
launched in Noida in 2015. The companies will launch 8-10 similar projects in a phased
manner over the next seven years with an investment of Rs 8000-9000 million (US$ 129145 million) approximately.
Blackstone Group LP is all set to become the largest owner of commercial office real
estate in India after a three-year acquisition drive in which it spent US$ 900 million to buy
prime assets. Blackstone has acquired 29 million sq ft of office space in cities such as
Bengaluru, Pune, Mumbai, and Noida on the outskirts of New Delhi.
L&T Infra Finance Private Equity (PE) plans to raise Rs 37,500 million (US$ 607 million) in
an overseas and a domestic fund, and launch a real estate fund.
IDFC Alternatives Ltd has sold two of its real estate investments to PE firm Blackstone
Group LP. The assets - a special economic zone (SEZ) in Pune and an information
technology (IT) park in Noida - were sold for a combined enterprise value of Rs 11,000
million (US$ 178 million).
Goldman Sachs plans to invest Rs 12,000 million (US$ 194 million) to build a new campus
in Bengaluru that can accommodate 9,000 people. The new campus is being developed in
collaboration with Kalyani Developers on the Sarjapur Outer Ring Road, Bengaluru.
Snapdeal has entered into a strategic partnership with Tata Value Homes to sell the latter's
apartments on its e-commerce platform, which marks the first time that an e- commerce
company has tied up with a real estate venture.
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Drivers of profitability
Knowledge of the business
Though the principles of doing business are simple, over the many
years of unregulated development, dealing in real estate in India has
its own peculiarities, often at a local level and particularly in the area
of transparency and legal documentation, and a thorough knowledge
of these remains vital.
A wide network
There are developers and there are developers, and in a boom market
everybody has got into the act. It is important to quickly sift the wheat
from the chaff when forming JVs and SPVs for specific projects.
The longer-term approach
Real value to investors will accrue only on the sale of the end product
in terms of its multiplier effect. Also longer-term investments are more
likely to weather the hiccups of short term breaking news. Regulatory
efforts to keep out hedge funds and such short term profiteers will go
a long way in ensuring that this practice is sustained.
Focus on quality
This, more than anything, will derive the best value for investors, not
just in monetary terms but also lasting goodwill. This entails not just
the final product but also the totality of the environment where the
development is located. Governments efforts to ensure that
resettlement and social development of the displaced form part and
parcel of all large projects is the most encouraging news of all.
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Investment Opportunities
The real estate industry in India is yet in a promising stage. The sector happens to
be the second largest employer after agriculture and is expected to grow at the rate
of 30 per cent over the next decade. A growing migrant population due to
increasing job opportunities, together with healthy infrastructure development, is
underpinning demand in the regions residential real estate market.
It is believed that the Finance Ministry's motivation through softening of interest
rates and lending more to the real estate sector will have a positive impact on both
developers and consumers. The real estate market could start to perform better as
the easing of FDI norms will begin to show results during the second half of the
year. The economy will also recover in 2013 which in turn will perk up the real
estate sector in India. With the government trying to introduce developer and buyer
friendly policies, the outlook for real estate in 2013 does look promising.
Real estate contributed about 6.3 per cent to India's gross domestic product (GDP)
in 2013. The market size of the sector is expected to increase at a compound
annual growth rate (CAGR) of 11.2 per cent during FY 2008-2020 to touch US$ 180
billion by 2020.
The Government of India has allocated US$ 1.3B for Rural Housing Fund in the
Union Budget 2014-15. It also allocated US$ 0.7 billion for National Housing Bank
to increase the flow of cheaper credit for affordable housing for urban poor. The
government has allowed FDI of up to 100 per cent in development projects.
The entry of major private players in the education sector has created vast
opportunities for the real estate sector. Emergence of nuclear families and growing
urbanisation has given rise to several townships that are developed to take care of
the elderly. A number of senior citizen housing projects have been planned, and the
segment is expected to grow significantly in future. Growth in the number of tourists
has resulted in demand for service apartments. This demand is likely to be on the
uptrend and presents opportunities for the unorganised sector.
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Service apartments:
Growth in the number of tourists has resulted in demand for service apartments
This demand is likely to be on uptrend and presents opportunities for the unorganised
sector
Foreign tourist arrivals in India are expected to rise at a CAGR of 10.5 per cent
during 2012-15
The number of foreign tourists arriving in the country is expected to be over 8.9
million by 2015
The number of hotel beds in the country is expected to increase to 443,000 by 2015
from the current capacity of 262,000.
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9
6.75
4.5
2.25
0
2012
2013
2014
2015
2009
2010
2011
2012
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2013
2014
2015
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The fact that there is even any controversy about the bubble's existence testifies to the
power of the forces of misinformation. This also proves that the long habit of wishful
thinking among the millions of victims of the so-called New Economy has yet to start to
dissipate. What the critics fail to see here is that even Fitch notes that price corrections
may not follow a uniform pattern geographically. I would like to add here that with the kind
of retail growth that is forecasted, it won't affect the commercial real estate, too.
There may be a price correction in the residential real estate, but it won't be a bubble burst
by any stretch of imagination. Growth in the country over the last three years has been
supported by sound economic fundamentals, with increased demand on the one hand and
increasing supply supported by equity raising on the other. Real estate
Companies here have produced strong topline growth in 2007, and even Fitch expects
revenue growth to continue in 2008, as Companies would continue to launch several new
projects. Moreover, real estate Companies have expanded to cities in a big way
outside their principal area of operation, and we all expect this geographical diversification
to continue through 2008. We live in a consumption Economy that is financed by debt,
which in turn largely rests upon our home foundations. Thus if there was a real shift
downward in housing demand, it would have a dramatic impact across the entire
Economy. This goes true for any Economy, and India is no exception.
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Regulatory Developments
The year 2014 witnessed a change of guard at the Centre, which not only propelled the
positive sentiments of the market but also, as widely expected, led to the introduction of
several reforms. These, including the announcement of REITs, relaxation in the FDI norms
and affordable housing getting higher priority under the Land Acquisition Act, 2015 are
expected to give an impetus to the sector and offer players an opportunity to rewrite the
growth story.
The REIT Regime in India
On 26 September 2014, the SEBI notified the REITs regulations, thereby paving the way
for introduction of an internationally acclaimed investment structure in India. The Finance
Minister has also made necessary amendments to the Indian taxation regime to provide
the tax pass through status, which is one of the key requirements for feasibility of REITs.
The India REIT regime is aimed at providing:
an organised market for retail investors to invest and be part of the
growth story
a professionally managed ecosystem that is risk averse and is aimed at protecting the
interest of public
an exit platform for the real estate sector to ease out liquidity burden REITs provide tax
transparency. This means that the REIT does not pay any corporate tax in exchange for
paying out strong, consistent dividends. Rather, taxes are paid by the individual
shareholder only.
Further, considering that the listed REITs will be registered and regulated by the SEBI and
adhere to the highest standards of corporate governance, financial reporting and
information disclosure, the REITs will provide operational transparency.
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Case Study
This case study is about India's largest real estate company DLF Limited's (DLF) struggle
in the stressed market conditions due to the global financial crises which started in the
year 2007. The company which created India's biggest IPO in history, raising more than
US$ 2 billion, was counting on the continued growth of realty sector in the country.
However, the depressed economic situation coupled with credit crunch led to a significant
decline in the demand and property prices. While the company had ambitions plans to
launch several properties ranging from Special Economic Zones (SEZs), large townships,
hotels, and convocation centers, the market conditions took its toll on the business. These
factors disturbed the cash flow cycle of DLF, making it difficult for it to repay its debt on
time. The debt to equity ratio of the company increased to all time of high of 0.7 in June,
2010, with inadequate debt paying capacity.
In light of these factors, DLF had to exit from many of its projects either before, or even in
middle of starting the operations. The company devised several strategies overcome the
prevailing situation. By the mid-2010, DLF had a much leaner business structure, but it still
facing various challenges in bringing its business back into shape.
Issues:
Understand the real estate sector in India and issues and challenges faced by the
market leader in this sector. Which gives a clear view on investment in this sector as well.
Understand the impact of global financial crises on business dynamics.
To analyze how macro and micro economic factors influences the success of an
organization.
Determine the internal competencies of business though SWOT analysis.
Examine the role of external factors influencing business thorough PESTEL analysis.
Appreciate the importance of healthy cash flow cycle for a business.
Determine the best product mix, thorough analysis of demand, revenue streams, and
profitability from different verticals of business.
Understand the criticality of decision making process in business, especially during
stressed market conditions.
Scrutinize the impact of increasing debts on planning, execution, and evaluation of
business strategy.
Understand the importance of tailoring business tactics and strategy to fit specific
industry and company situations.
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In Real Trouble?
As on June 12, 2010, DLF Limited (DLF), India's largest real estate company, had
accumulated an outstanding debt of more than US$3100million, marginally below the
record high of US$3635 million in the month of March 2009. The net profit of the company
also plunged by more than 60%, falling from US$993.25 million in financial year
2008-2009 to US$384.44 million in financial year 2009-2010. In addition to decreasing
profits, DLF was struggling with an enormous outstanding debt and a high debt to equity
ratio which stood at around 0.70 in the month of June 2010. To reduce its debt burden,
DLF was considering selling 97% of its stake in Aman Resorts, a hotel chain it had
acquired in November 2007 for about US$400 million, to Khazanah. If completed, this deal
was expected to release between US$300 million and US$350, helping DLF cut its heavy
debt pile. The company was also implementing many other strategies with an eye on
reducing its debt burden and managing its cash flow efficiently.
According to analysts, DLF had been doing well since liberalization and had witnessed
strong growth as a private company in the growing Indian economy. It went public in July
2007 with one of the biggest IPOs (Initial Public Offering) in India. DLF raised capital of
more than US$2 billion to further strengthen its growth. This made it the eighth most
valuable company in India and its promoters, KP Singh and his family, the fourth richest
Indians, just behind the two Ambani brothers and Lakshmi Mittal
It was expected that after this IPO, DLF would be able to grow much faster and change
growing Indian real estate sector, which was growing rapidly along with the Indian
economy. The funds raised from the IPO enabled DLF to reduce its prevailing debt and
acquire additional land to develop properties in the years to come. However, the global
financial crisis in 2008 created a grim situation, and hampered the anticipated growth of
DLF...
Problems Faced by DLF
Though DLF was able to book significant sales in the months before November 2009, the
sales started falling across segments from November 2009. In the housing segment, DLF
had launched some projects in the middle of the year in Kochi, Bangalore, and Gurgaon
which were witnessing marginal sales...
Credit Crunch & Increasing Debts
Analysts felt that under the duress of the prevailing market conditions, DLF was unable to
secure the required loans for implementing many of its projects. The overseas credit
markets had been shut since January 2008 giving DLF no access to FIIs...
The Struggle Continues
By the beginning of 2010, there was a slow revival in demand for both housing and
commercial properties within the country. This enabled DLF to increase the prices of some
of its residential properties by around 15%, which helped it to realize higher margins
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Emerging trends
Smart cities
The challenges and opportunities that come with rising urbanisation across the world have
given birth to the concept of smart cities. Globally, urbanisation is on the rise and India is
not far behind. Growth in urban population is creating excessive pressure on demands for
water, transportation, waste management and power. For a city to cope with these
challenges and deliver a high-quality of urban living, it has to be energy-efficient and have
an efficient and sustainable transport infrastructure. Such cities are known
as smart cities, and are managed and monitored by cutting-edge information and
communications technology.
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Social structure
Urban India is a complex maze of population groups classified on the basis of religion,
caste, community, social status, occupations, origins, beliefs, etc. Each group has its own
way of living and beliefs, which at best, should not be attempted to be altered with. If that
was not all, most large cities have half or more of their population dwelling in slums. Smart
cities need to be able to cater to these diverse client groups whilst ensuring that their
privacy, security and lifestyle are not compromised. Further,all services and infrastructure
have to be affordable for all sections of the society. An all-inclusive growth is most desired
but is also the most challenging part of smart cities.
International and corporate interest
Several countries and corporates around the world have shown keen interest in helping
India achieve her smart cities dream. To name a few: Singapore has signed a
Memorandum of Understanding (MoU) with the state of Andhra Pradesh to provide
knowledge on smart city management. International Enterprise Singapore and the
Infrastructure Corporation of Andhra Pradesh signed a deal to train Andhra Pradesh
officials in urban planning and governance, supported by the Centre for Livable Cities and
the Singapore Cooperation Enterprise.
Spain has come forward to assist in developing New Delhi into a smart city. The MoU is
expected tobe signed shortly between the two countries.
Global networking giant, Cisco, will assist in developing Visakhapatnam as a smart city.
Cisco would focus on setting up a skill development centre and provide training through
Global Talent Tracker. The company is also keen on working with Andhra Pradesh in
digitising education and healthcare.
Germany has agreed to partner with India in developing three smart cities and a sixmember joint committee has been set up in this regard to evolve the way forward including
identification of those cities in three months.
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Japan intends to assist and develop Varanasi into a smart city by using the experience
of Kyoto, the smart city of Japan. A partner city MoU was signed between the two
countries in August last year.
France is keen on developing Smart Cities in Himachal Pradesh having adequate
infrastructure and facilities like proper water treatment, waste management, urban
transport and street lighting in the state.
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Emerging trends
E-commerce and real estate
The e-commerce frenzy that has been taking India by storm over the last two years was at
its peak during 2014 and is expected to grow unabated.
The developers and various players in the market are exploring
unchartered avenues to reach out to potential customers. Taking
advantage of the Google Online Shopping Festival (GOSF), Tata Housing has launched
two projects, one each in Bengaluru and Mumbai. Through the online medium, Tata
Housing has sold over 700 units amounting to about Rs 400 crore, an average of one
house every two days. It has also entered into an exclusive arrangement for selling homes
on Snapdeal.com. The developers participating in the GOSF include Unitech, Raheja,
Puravankara, Mahindra Lifespaces, Godrej Properties and Brigade among others. Even
housing loan providers such as HDFC Home Loans, Tata Capital and others had various
offers going on during the GOSF. We also saw some e-commerce companies dealing in
real estate such as housing.com, commonfloor.com and indiahomes.com getting
significant funding to create infrastructure to support the sale/ renting of real estate units.
Currently, in India, the e-commerce business is not regulated and this poses a serious
threat to physical retailers and mall developers. However, with changing times, some of
the developers have changed their style of business to enable them to
sail through these difficult times. A revamped tenant mix, adoption of
the mixed-use format and delivering theme-based shopping experiences are some of the
methods adopted by the proactive developers. These practices are now common in
overseas markets, and Indian retail malls will be seen adapting to them more rapidly in
2015.
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Budget 2015
On 28 February 2015, the Finance Minister presented the first full year budget of the
current government. The budget was forward looking and pragmatic with a vision that goes
beyond just this fiscal. The policy initiatives and tax proposals mirrored the intention of the
government to set the economy in the growth trajectory. The budget had its share of
goodies for the real estate and infrastructure sector. Some of the key announcements
were:
Policy initiatives
A mission to provide a roof for each family under the housing for all scheme by 2022
has been announced. It is targeted to complete 2 crore houses in urban areas and 4 crore
houses in rural areas
The budget proposals have brought much needed relief to the infrastructure sector, by
substantially increasing the budget allocations
As per the budget proposals, the investment in the infrastructure sector will increase by
Rs 70,000 crore
National Investment and infrastructure Fund (NIIF) to be established with an annual flow
of Rs 20,000 crore
Self-Employment and Talent Utilisation (SETU) to be established as technofinancial,
incubation and facilitation programme to support all aspects of start-up business. Rs 1,000
crore to be set aside as an initial amount
An expert committee to examine possibility and prepare a draft legislation where multiple
prior permissions can be replaced by a pre-existing regulatory mechanism to help India
become a favoured investment destination
Tax-free bonds to be issued to raise funds for rail, road and irrigation sectors
The PPP model for infrastructure development will be revitalised and the government
would bear the major risks therein
Further, there are proposals to allocate Rs 150 crore towards infrastructure research &
development, with a view to encourage the involvement of academicians, entrepreneurs
and researchers to draw national and international experience to foster scientific
innovations, and undertake research and development in the infrastructure sector
The government also proposes to set up five ultra-mega power projects in the country.
Further, the government also plans electrification of the remaining 20,000 villages by 2020
There will be a specific focus on ports in public sector to attract investments and to
promote self-employment and talent utilisation
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Chennai
Chennai Urban Agglomeration Real Estate
Perspective
Chennai Urban Agglomeration (CUA):
Overview
CUA comprises of:
Area under Chennai Municipal Corporation
Part of Thiruvallur district (Ambattur, Thiruvallur, Ponneri and
Poonamallee )
Part of Kancheepuram district (Tambaram, Sriperumbudur and
Chengalpattu
Infrastructure initiatives
Roads
-TN Govt has started a decongestion drive
-Chennai Metro Rail Project
-10 mini flyovers within the city
-In 1999-2000 it proposed the construction of 10 mini flyovers by
Chennai Corporation.
-The project cost is estimated at Rs 3.7 billion.
Outer Ring Road
-Chennai Metropolitan Development Authority is planning the
development of Outer Ring
-Road (ORR) along the periphery of Chennai Metropolitan Area CMA
to decongest the city.
-ORR connects NH45 at Vandalur, NH4 at Nazarathpet, NH 205 at
Nemilichery. NH5 at Nallur and TPP road at Minjur and is of length
62.3 km.
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Railways
-Chennai Metro Rail Project
-The Tamil Nadu Government has implemented the metro rail
project to ease traffic congestion and improve the public transport
system.
-The project consists of 3 corridors, 2 of which will be completed in
the first phase at an estimated cost of Rs 58 billion.
-The first phase will carry 10.5 lakh passengers a day.
Residential apartments: Key characteristics
-Houses with lawns converted to buildings in late 90s.
-G+4 floors storey structures ordinary buildings - prevalent
-Demand slowly shifting outside around the city outskirts. Local
players losing hold as new non local developers cashing in on
opportunities.
Strengths as a Commercial Destination
-Major IT players like Infosys, Tata Consultancy, Wipro, Ascendas, and
Polaris etc have settled base in Chennai.
-With Ford, Hyundai, Hindustan Motors, TVS, Ashok Leyland, MRF, etc.,
-Chennai city is known as Detroit of India
-Has the 5th largest resource pool of graduating students ensuring a
steady supply of qualified personnel for IT/ITES
-Has the highest upcoming supply of relatively cheap real estate (as
compared to Mumbai and Bangalore) in the country mainly along the
borders of Chennai city, i.e., Kancheepuram and Thiruvallur
-Old Mahabalipuram road has been successfully established as an IT
Corridor.
-The government is now promoting the area between Tidel Park and
Kelambakkam as a software corridor.
Commercial Market Features
-IT/ITES Demand
-At present IT/ITES drives around 65-75% of the total office demand.
-Total commercial space supply of around 7 msf is expected in 200709
-In the past, lack of quality commercial space - in terms of structure and
outlay was the major hindrance to commercial development in Chennai
-commercial construction was not of much interest to local players.
-Change in scenario - entry of national builders and increased corporate
interest due to IT boom major commercial construction along the
south west of Chennai.
Office Space: Price Trend
Malls and Multiplexes: Supply Addition
Foreground:
-The concept of organized retailing had its origin in Chennai with the
establishment of Spencer Plaza
-The Mall, which started with a super built up area of 300,000 sq. ft.,
has now become the Mega Mall of city with a total of 1.05 million
sq. ft.
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-In high street retailing, Chennai has major retail chains like
Shopper's Stop, Lifestyles, West side, Pantaloons, Landmark, and
Globus etc.
Mall Space : Major Projects under development
ProjectsDeveloperLocation
-Ansal Plaza
-AnsalMohali
-DLF IT Park
-DLFManimajra
-Mall Matrix
-ParsavnathMohali
-Metropolis Mall
-Polo GroupPanchkula
Delhi
NCR comprises
National Capital Territory of Delhi
8 districts, Haryana
5 districts, Uttar Pradesh
Alwar district, Rajasthan
NCR: Total population: 12,877, 470
Due to the faster growth of Delhi, the National Capital Region Plan
2001 was formulated and it aimed at increasing the growth potential of
the region thereby redirecting the migrants from the metropolis
Infrastructure problems and initiatives
Flyovers
-Two new flyovers opened on Delhi - Gurgaon section of NH-8
-Opening of these two flyovers has eased traffic congestion
between Km 15 to Km 28 of NH-8, in Gurgaon.
-Length of Mahipalpur (Delhi)-1800 m and Udyog Vihar (Gurgaon)length 1500m
-The entire project, from Rao Tula Ram Marg Junction till Km 42 in
Haryana, is likely to be completed by September 2007.
Railways
-Noida-Delhi metro from New Ashok Nagar to Noida City Centre (7.1
km)
-Total project cost Rs 7.36 billion
-The metro is expected to begin operations in 2009.
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Demand pattern for residential units
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Mumbai
UA comprises the area of Mumbai Municipal Corporation,
Thane, Kalyan, Dombivili, Navi Mumbai, and the outskirts
Total area: 1,334.5 square kilometers (km)
Total population in 2001: 16.77 million
Key industries affecting real estate:
Financial services
IT/ITES
Entertainment industry capital
Financial capital of India
Infrastructure initiatives
Mumbai is one of the five cities included in the centre sponsored Mega
City Scheme launched by the Government of India in the Eighth Five
Year Plan. The scheme for Mumbai is being implemented by the BMC,
BEST, CIDCO, TMC, KMC and NMMC.
North-South arterial corridors are being developed through building
flyovers, road widening etc.
Current projects are concentrated more around arterial roads:
Flyover on Western express highway (airport)
Bandra-Worli sea link
New Link road
Mumbai Urban Transport Project (MUTP) and Mumbai Urban
Infrastructure Project ( MUIP) envisages investment in suburban
railway projects, local bus transport, new roads, bridges, pedestrian
subways, and traffic management activities.
Development of East-West corridors (road and rail) to ease traffic flow
between eastern, central, and western suburbs
JogeshwariVikhroli link road
SantacruzChembur link road
GoregaonMulund link road
Mumbai Metro Rail Project also envisages East-West corridor
connectivity
VersovaAndheriGhatkopar link (WestEast)
BandraKurlaMankhurd (WestEast)
ColabaBandraCharkop (SouthNorth)
Development of Mumbai Metropolitan Region (as shown alongside) as
part of long-term development initiatives
Development of international airport and railway terminus near
Panvel
Development of SewriNhava Sheva sea link
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Key characteristics
-Supply across the city in small projects
-Supply mainly in the form of high rises.
Office space: Key growth drivers
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CONCLUSION
With the series of announcements and the change of guard at the helm, the sector has
seen some positivity in the last 8-10 months. The Indian real estate sector seems poised
for growth. Rapid urbanisation, fast-growing middle class, economic growth and lowering
of interest rates is sure to boost demand in 2015-16. The announcement on REITs and
revision of rules for attracting FDI in construction development sector were positive moves
and has pushed the investor community to take a serious look at the sector. This should
support in providing access to capital for the cash-strapped developers. Having said that,
realty on the ground is not moving with the same pace as the talks.. The sector has been
demanding a single window clearance to improve ease of doing business, which is still a
long way ahead. The Union Budget 2015 was also seen as a dampener by many. It was a
wonderful opportunity for the government to provide more clarity on smart cities, announce
tax holidays for affordable housing and increase the limit on interest deduction on housing
loans. However, the governments housing-for-all policy, which aims to provide 6 crore
housing units (2 crore in rural and 4 crore in urban areas) by 2020 was among the bright
spots in Budget 2015-16.
Land acquisition is still a contentious issue with both the government and the opposition
battling it out inside and outside Parliament. The sooner this gets resolved the better, as
the ambiguity is only hurting investor sentiment. The sector has been demanding industry
status to bring in more transparency and make it easier for players to raise funds.
The Governments pro-reform measures in the last few months have bolstered economic
sentiment. Projections for Indias GDP for the current fiscal have improved dramatically.
Rating agency Fitch has forecasted Indias GDP to grow at 8% in 2015-16 and 8.3% the
next year. The time is ripe for the Government, dynamic Indian businesses and the
investor community to collaborate to identify and remove bottlenecks in the real estate
sector and exploit its full potential.
With the right information of the cities, the coming up projects and its pros and cons a goo
investment can be made in this sector. Real estate sector has tremendous growth and a
good return. The information and data provided in this particular book is enough to decide
where, how to invest in real estate. Also, with more and more upcoming new trends its
very important to always be in touch with the markets.
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Bibliography
Books:
1.India real estate sector handbook 2015 by Grant Thornton
2.Real estate finance in India by Prashant Das
Internet Websites:
1. www.nrirealtynews.com
2. www.realestateindiaconsultant.com
3. www.indiaproperties.com
4. www.kothi.com
5. www.indiahousing.com
6. www.thehindubusinessline.com
7. www.therealtor.co.in/
8. www.indianrealtynews.com
9. www.wikipideia.com
10. www.indianground.com/indian-real-estate-watch-aspx
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