August 3, 2011 in Investment Sectors by admin

REAL ESTATE

The real estate sector in India has assumed growing importance with the liberalisation of the economy. The consequent increase in business opportunities and migration of the labour force has, in turn, increased the demand for commercial and housing space, especially rental housing. Developments in the real estate sector are being influenced by the developments in the retail, hospitality and entertainment (e.g., hotels, resorts, cinema theatres) industries, economic services (e.g., hospitals, schools) and information technology (IT)-enabled services (like call centres) etc. and vice versa.

It is estimated that in the residential sector there is a housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organised retail formats has redefined the consumption pattern. As a result, retail projects have been mushrooming across even B-grade cities. The retail market is expected to grow at around 35 per cent. Industry observers feel that this growth is facilitated by favourable demographics, increasing purchasing power, existence of customer-friendly banks and housing finance companies, professionalism in real estate and reforms initiated by the Government to attract global investors.

During 2010-11, the Indian real estate and housing sectors received US$ 1.12 billion in foreign direct investment (FDI), according to the Department of Industrial Policy and Promotion India (DIPP).

Global majors in Indian real estate

Policy changes introduced by the Government in February 2005 allowed 100 per cent foreign investments in construction projects with fast-track approvals. But the real attraction for foreign investors is potential investment returns of 25 per cent and more in Indian projects that might be hard to come by in the US and in Western Europe today.

Industry sources say over 90 foreign investors are already in the country tapping investment avenues. Nearly two dozen US funds are raising US$ 3.5 billion for investments in Indian realty. Those raising the funds include Wall Street powerhouses such as the Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup Property Investors (US$ 125 million), Morgan Stanley (US$ 70 million) and GE Commercial Finance Real Estate (US$ 63 million). Others raising funds are JP Morgan, Warburg Pincus, Merrill Lynch, Lehman Brothers, Warren Buffett’s Berkshire Hathaway, Colony Capital and Starwood Capital.

Further, the industry also witnessed growth in private equity (PE) investments as well. Around 20 deals worth US$ 1.32 billion took place during January-May 2011, as compared to 22 deals worth US$ 483 million during the same period last year, according to Venture Intelligence, a research service focused on PE and mergers and acquisitions (M&A). Some of the major deals that were undertaken during the first five month of the current calendar year include investment of US$ 320 million by Jeff Morgan Capital in Compact Disc India’s film city project, investment of US$ 318 million by Warburg Pincus in Oceanus Real Estate and Ascendas India’s investment of US$ 190 million in Phoenix Infocity. Further, US$ 86 million was invested by Tata Realty in Peepul Tree Properties.

Financial institutions in real estate

Indian financial institutions are competing with each other to invest in this higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, DHFL Venture Capital Fund, Kotak Mahindra Realty Fund, Kshitij Venture Capital Fund (a group venture of Pantaloon Retail India Ltd) and ICICI’s real estate fund, India Advantage Fund. Regulated under SEBI’s (Securities and Exchange Board of India) Venture Capital Funds, these are closed-ended schemes with an initial public offer (IPO) contributing to a discount on NAVs (Net Asset Value).

The Tata group has joined hands with private equity firm, Xander, through its group company Trent in April 2007 to raise US$ 1 billion for an institutional retail real estate fund. India’s top real-estate firm DLF has raised US$ 2.24 billion in the country’s largest initial public offering in June 2007. It has also entered into a joint venture agreement with Indian pharmaceutical major Ranbaxy group company Fortis Healthcare to set up hospitals across the country with investments of about US$ 1.5 billion. Meanwhile, an HDFC-sponsored real estate fund has been permitted to bring up to US$ 790 million of FDI into the country, while Indiabulls Real Estate (IREL) is looking to raise up to US$ 1.2 billion.

Growing Demand of Shopping Malls

With the retail sector experiencing a boom, the country is witnessing a spurt in extremely large retail spaces. Shopping malls with over 1 million sq ft of space have become the order of the day. Several of these are now at various stages of construction across the country.

As the competition in the market intensifies, builders are going out of their way to be different. Specialised malls, designer brands and multi-movie options are marking the shopper’s day out.

Residential development

While the last decade saw the transition of sleepy towns like Gurgaon, Noida and Faridabad into enviable addresses, today these tier I towns, as they are called, are saturated and far beyond the means of the middle class. Naturally, the opportunity in the residential development in Tier-II and Tier-III cities—like Hyderabad, Cochin, Chennai, Coimbatore and Pune—is equally enormous.

For instance, Pune, the engineering and automobile hub of western India—about 160-km south-east of Mumbai—is emerging as a major IT centre. With sprawling software parks coming up all over the city and its suburbs, the demand for high-value apartments is growing. Beyond professionals and people looking to relocate from Mumbai or even overseas, are the older people who have sold a bungalow and want to live in spacious, easy-to-manage surroundings.

Indian Real Estate: Government Initiatives

The Government has undertaken various initiatives to help the sector grow in the recent past. Some of the major government initiatives include:

• Allowing 100 per cent FDI in townships, housing, built-up infrastructure and construction development projects through the automatic route, subject to guidelines as prescribed by DIPP
• Allowing 100 per cent FDI under the automatic route in development of Special Economic Zones (SEZ), subject to the provisions of Special Economic Zones Act 2005 and the SEZ Policy of the Department of Commerce

In the Union Budget 2011-12, Mr. Pranab Mukherjee, Union Finance Minister presented various initiatives for the real estate sector, especially focusing on affordable housing. Some of these initiatives include:

• Raising the limit on housing loans eligible for a 1 per cent subsidy in interest rates
• Widening the scope for housing under “priority-sector lending” for banks, making interest rates cheaper on them
• Earmarking substantial amount to the Urban Development Ministry for spending on extension of Metro networks in Delhi, Bangalore and Chennai
• Allocating US$ 20.03 million for the urban infrastructure development project. The Urban Development Ministry received US$ 1.5 billion, an increase of US$ 68.53 million from the last fiscal 2010-11.

Increasing allocation for Bharat Nirman to US$ 12.89 billion. Bharat Nirman consists of 6 flagship programs, the Pradhan Mantri Gram Sadak Yojana (PMGSY), Accelerated Irrigation Benefit Program, Rajiv Gandhi Grameen Vidyutikaran Yojana, Indira Awas Yojana, National Rural Drinking Water Program and Rural telephony.

Indian Real Estate: Road Ahead

The affordable housing segment is expected to play an important role in the growth of the real estate sector in India in 2011, on the back of increasing demand for such housing, according to the Confederation of Real Estate Developers’ Associations of India (CREDAI).

“Affordable housing will be a key factor in driving the sector and we have already started working on progressive solutions in this area for effective and customised implementation of such projects,” CREDAI Chairman Kumar Gera said.

Further, growth in the infrastructure sector is also expected to accelerate real estate activities, in commercial as well as residential segments, during this year.

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