Overview of Real Estate Sector in India

Contents

Introduction. 2 Evolution of the Indian Real Estate Industry. 2 PESTEL Analysis of Real Estate in India. 3 Market Segments and Size. 4 SWOT Analysis. 7 Investments. 7 Factors that will drive growth in this sector. 8 Government policy and initiatives. 8 The Challenges. 9 The Road Ahead. 9 Highlights of Union Budget 2013-14. 9 Location-wise Overview.. 10 Conclusion. 10

Introduction
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 urbanization. The sector comprises of four sub-sectors- housing, retail, hospitality and commercial. While

housing contributes to a 3-4% of the countrys gross domestic product (GDP), the remaining three sub-sectors are also growing at a rapid pace, meeting the increasing infrastructural needs. Commercial space demand is arising from metro cities like Delhi-NCR, Mumbai and Bengaluru, and will see an upward trend at a CAGR of 7 percent between 2010 and 2014. Few large players dominate the market and hold pan-India presence. However, the overall business in this domain is witnessing a shift from sales to lease and maintenance. Though retail space accounts for a small portion of the overall real estate market and organized retailers are few, increasing collaborations between international retail brands and Indian partners is likely to promote a strong growth in the retail space. Hospitality market comprises hotels, service apartments and convention centers. NCR and Mumbai remain the biggest hospitality markets in India. The real estate sector has transformed from being unorganized to a dynamic and organized sector over the past decade. Government policies have been instrumental in providing support after recognizing 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.

Evolution of the Indian Real Estate Industry

Initially land was used as a tool to hijack a countrys economic independence and subvert its social processes. Post-independence, Indian real estate sector was unorganized and disaggregated. Land prices were low because of low demand. FDI policies were too stringent, defensive and discouraging. Post-liberalization, real estate sector has seen impressive growth owing to the following: Multinational Entrepreneurialism Buoyant local stock markets Robust economy With great-demand for housing and commercial and industrial premises for a booming economy, it transformed into one of the most lucrative sectors in terms of investment and employment opportunities

Evolution of this sector can be divided into three phases: Phase Timeline I Before 1990 Low demand II 1990-2000 Witnessed a boom in residential property III 2000-2010 Transforming from

Characteristics

Sector was disaggregated/ unorganized Availability of finance difficult Dominated by Government of India Government implement schemes to allocate houses Establishment of HUDCO and HDFC

prices Artificially created boom Prices appreciated sharply between 1994 to 1995 Recorded a rise of 420% in property prices But markets crashed after 1996 Followed by a period of no appreciation in property prices Increase in number of local builders and major players

Transforming from unorganized to organized sector Government permitted 100% FDI Increase in demand for commercial and retail property Ease in availability of finance Growth spread out to tier 2, tier 3 cities

PESTEL Analysis of Real Estate in India

Political: The Government has been very proactive in encouraging the companies in the real estate segment. Though there is a considerable amount of streamlining still required there have been many reforms and regulations passed by the Indian Government that support infrastructure companies in general and housing companies in particular. Government issues such as construction tenders, land acquisition laws, FDI caps etc directly influence this industry. Thus, the political influence on the real estate industry is high but usually positive. Some initiatives in this respect are: SEZ Act to Boost Infrastructure Development REITs and REMFs Positively Affected Real Estate Business Allowed external commercial borrowings (ECB) for integrated townships development Economic: FDI Liberalization has augmented growth in the sector but regular interest rate and currency fluctuations have made investments a bit risky for foreign investors. The BFSI and IT/ITeS industry is a lot dependent on the western countries and weak US/Europe economies have affected the Indian economy as well. The effect percolates down to the real estate sector, thus affecting its demand. Social: Real estate, ranked 3rd among the fastest growing sectors, has been one of the largest employers in India. Moreover, the support provided by the government in relation to taxes and bank regulations (such as housing loans etc) have increased the affordability of the common man to own a house. Rising urbanization and a mindset of people towards looking at real estate as a necessary investment has kept the demand high. Technological: The technology influences have been endless. Not only has there been an increase in quality of building due to innovation in structural design and use of materials but also in the delivery of services using IT systems. The use of CAD/CAE software has enabled engineers to model and remodel designs for optimum use of resources and material, thus quickening the construction time and increasing efficiency while stepping up on the quality meter. Forecast systems have helped engineers to predict the impact of environmental conditions and natural disasters on buildings, and thus take into the relevant parameters to avoid losses and damage to the property. Environmental: The construction work is mainly seasonal in nature. The extreme summer heat can create cracks in the concrete, while extreme cold weathers can easily rust and weaken steel bars that support the concrete. Indian subcontinent is known for its erratic weather. Hence, the construction work should keep in mind the seasonal factor while being deployed into a construction project.

Legal: The legal aspect of the infrastructure industry has a huge impact on the sector. As of today, every state has its own laws pertaining to the rights to own or rent an establishment which can be called as property. For example, houses rented to people in West Bengal fall under the Rent Control Act. It prevents sudden inflation of rented property prices and the unlawful eviction of a tenant without his/her notice. Moreover, in India, the property prices are closely monitored by the government. Any transition or exchange of property has to be notified to the notary. The variations of these laws deem it unsuitable that a central strategy could work for the organization in a blind manner. Other legal aspects would include stamp duty, registration charges which differ in each state and affects the final price of the property.

Market Segments and Size

With a total market size of USD 66.8bn, the Real Estate sector contributes around 5-6 percent to the nations GDP. By 2020, the sector is expected to earn revenue of US$ 180 billion. While the market is growing, there remains a housing shortage across both urban and rural areas, estimated to be 20.5 million and 26 million respectively. This demand for residential space is projected to grow sharply at a CAGR of 19 percent in 2010-2014, with tier I metropolitan cities projected to account for about 40 per cent of this.

Growing infrastructure requirements from sectors such as education, healthcare and tourism are providing numerous opportunities in the sector. Further, India is going to produce an estimated two million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. In addition, presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus, creating more demand for corporate space. The real estate is divided into following four segments: a. Commercial Sector: The commercial office space in India has evolved significantly in the past 10 years due to change in business environment. The growth of commercial real estate has been driven largely by service sectors, especially IT-ITeS. Previously commercial properties were concentrated towards CBD (Central Business District) areas in large cities. However, with the emergence of IT-ITeS, which had huge office space requirement, commercial development started moving towards city suburbs. It resulted in multifold development of city outskirts and suburbs like Gurgaon near New Delhi, Bandra and Malad in Mumbai, and the Electronic city in Bangaluru. In addition, over the last 10 years, locations such as Bengaluru, Gurgaon, Hyderabad, Chennai, Kolkata and Pune have established themselves as emerging destinations for commercial development, which are competing with traditional business destinations such as Mumbai and Delhi. The figure alongside gives a view on the rentals in the 7 major cities.

The weakening economic sentiments and a slowdown in the US and European markets had impacted the commercial office sector in India during 2011. The impact was dominant during the second half as most of the expected expansions plans by companies were deferred thereby impacting office space absorption. The absorption, in 2011 was recorded at 36 million sq.ft. in the top 8 cities. Also, a noticeable reduction in supply and rental moderations in several micro markets across the country was seen as a direct impact of slow uptake of office space. Amidst the prevailing market sentiments, several IT sector players including major domestic and foreign companies fervently evaluated options in order to rationalize real estate costs. Both IT/ITeS and Banking, Financial Services and Insurance sectors, which are the key demand drivers and significant contributors to total absorption, saw a slowdown in expansion plans of companies, thereby affecting the demand.

In 2011, Bengaluru witnessed highest absorption in the country at 11.72 million sq. ft. (19% YoY over 2010), which is in fact the highest among Indian markets over the last 5 years. Chennai and NCR also recorded a noticeable growth in absorption in the range of 23% and 14% respectively. Hyderabad and Mumbai witnessed nearly 13% decline in space take up during 2011 over previous year.

According to Cushman & Wakefield Research, the next few years (till 2016) are expected to witness absorption of nearly 180 msf across major eight cities. The top three office markets of Bengaluru, Mumbai and NCR will continue to dominate the absorption scenario with nearly 57% of the total absorption being concentrated in these cities. These three cities have been the entry point for most multinational companies due to availability of Grade A supply and talent pool which is expected to contribute significantly to the absorption. Overall absorption is likely to increase at a Compounded Average Growth Rate (CAGR) of 5%. Supply, on the other hand, is expected to see a moderate annual growth of 2% over years.

b. Residential Sector: Residential demand is the mainstay of the Indian real estate sector. The major demand drivers for the residential market include increasing disposable income levels, increase in the number of nuclear families/households, tax savings on home mortgage products as well as real estate being considered a necessary investment.

During the last 10 years, demand for houses increased considerably whilst supply of houses could not keep pace with demand thereby leading to a steep rise in residential capital values especially in urban areas.

During 2012, cities like National Capital Region (NCR), Chennai and Pune saw healthy infusion of new projects driven by sustained demand. However, though cities like Ahmedabad, Bengaluru and Kolkata have also witnessed healthy supply, they also witnessed cautious demand. Hyderabad saw restraint in the number of project launches due to stringent changes in new Development Control Rules (DCR) that caused developers to reassess their development plans for new projects, but with some relaxations in the middle of the year, development activity is expected to pick up. In Mumbai, delays in construction approvals as well as substantial changes to the DCR resulted in fewer project launches this year, compared to the same period last year. Additionally, the city also has a huge unsold inventory pile-up due to the existing high prices and possible mismatch with buyer needs in some micro markets.

As per Cushman & Wakefield Research, urban India is likely to see an additional demand of approximately 11.8 million housing units in the next few years growing at a CAGR of 2.8% during 2012-2016. The urban housing demand is estimated based on the number of existing and additional urban households, urban population and average urban household size estimates. Around 18.0% of the pan-India demand is likely to be concentrated across the top eight cities estimated at 2.1 million units during the period 2012 - 2016. Of the total expected demand in the top eight cities, the Mid Income Group (MIG) segment is estimated to be approximately 59% at 1.3 million units followed by demand from Higher Income Group (HIG) which is 451,000 units and Lower Income Group (LIG) with 362,000 units.

On the supply front, approximately 1.3 million units in the MIG and HIG categories are slated to be infused into the market during 2012-2016 in the top eight cities. During this time period, NCR is likely to see maximum supply followed by Bengaluru and Chennai subsequently. Despite ranking second in terms of supply, Bengaluru is expected to witness highest demand-supply gap during 2012-2016. Future supply estimates for Economically Weaker Segment (EWS) and LIG housing are difficult to assess, but it would not be incorrect to say that this segment is the most under-served one as private developers shy away from catering to it as most of the targeted customers suffer from affordability issues and the profitability is limited.

c. Retail Sector: In 2010, India witnessed the addition of more than 5 million sq ft of organized retail mall space across various primary and secondary locations. This was the consequence of positive sentiments amongst retailers on spatial expansion and enhancing their footprints across the country. FDI in multi-brand real estate has catalyzed a lot of demand from international retailers.

According to Cushman and Wakefield, the retail market size in India was estimated at close to USD 450 billion as of 2012 and it is expected to reach a mark of USD 600 billion by 2016. According to a sector profile released by Federation of Indian Chambers of Commerce & Industry (FICCI) in 2010, 5% of the total retail market size was captured by organized retail, which was expected to increase to 7% by 2016. This would translate into an organized retail market size of USD 22.5 billion in 2012, growing to USD 42 billion by 2020.

The total mall stock spread across the top eight cities in India was estimated at 64.7 million square feet (msf). Of the total stock more than over 70% i.e. 46.8 msf, of stock entered in the last five years (2007-2012). However, this sudden growth in retail activities in India, led developers to over-estimate the demand, resulting in high vacancies in certain micro markets as can be seen in Ahmedabad, Pune and NCR. Demand for retail space was further affected by factors such as inefficient mall management, lack of understanding of tenant mix and absence of visionary ideas, which have kept retailers at bay from many projects in the initial period of mall development, most of which continues to remain vacant. Developers realized the errors soon and have since been cautious while creating high quality, well serviced retail malls and adopting innovative rental structures to ensure that their malls have high occupancies and footfalls.

d. Hospitality Sector: Indias hospitality industry has enjoyed robust growth over the past few years buoyed by a benign economic and political environment. Rising incomes, higher leisure trips, business travels and increased travel-related information over the internet have propelled growth in hospitality. Owing to this, both domestic hotel chains and international brands are queuing up with several categories of hotels to cater to different travelers in the value chain. The entry of several global brands to fill the demand-supply gap has triggered private equity interest in the industry.

Driven by an 8.9% increase in international tourist arrivals and an increase in activities by domestic tourists who contribute over 82% to the sector's revenues, the Indian hospitality sector is growing strongly. India's geographic and cultural diversity offers a choice of destinations like hill stations, beaches, deserts and pilgrims etc. making it a 365 days destination that attracts travelers for purposes of business, leisure as well as rejuvenation. Tier 1 cities have witnessed

substantial activity in terms of development of infrastructure and hospitality projects to meet the increase in demand being generated mainly from business activity. On the other hand, Tier II and III cities are gaining popularity for leisure and tourism activities, primarily among domestic travelers. As per the Airport Authority of India, the top eight cities received a total of 56.5 million arrivals with domestic arrivals contributing 72% in H1 2012.

In the period April 2011 to January 2012, around 427 hotel and tourism projects have received FDI equity inflows of INR 4,041 crores. This is the highest inflow since 2008-09 and represents an increase of nearly 188% over the FDI investment seen in 2010-11. India's continued performance in the tourism and hospitality sector has improved investor confidence in the market as clearly demonstrated. The Government has also contributed towards this improvement through its emphasis on building and maintaining better rail and road networks. Further, past and current initiatives by the government such as issuing visas on arrivals to foreign nationals from 11 countries, promoting low cost carriers and a prolonged marketing initiative through the 'Incredible India campaign' are showing results. Also, over the past one year, the accessibility to various destinations has been enhanced with the introduction of new sectors by some airlines.

The top eight cities of India make up for the majority hotel rooms stock, totaling to about 71,600 keys in 2012. However, if timely completion of construction of proposed hotels takes place, it is expected that India would surpass 100,000 keys by 2016. This implies an increase in overall inventory of 46% by 2016.

Cushman & Wakefield's trend analysis shows that inventory is likely to increase at a CAGR of 10% in the next four years. Kolkata is likely to witness the highest growth rate of 73% increase in 2013 over 2012, followed by NCR (31%) and Chennai (21%). Kolkata's high growth rate in inventory is mainly because of the current low base in organized supply in the region. However, during 2013-14, Mumbai is expected to experience growth rate of 25%. NCR is likely to lead in inventory in 2016, with a contribution of about 28%. Mumbai share is expected to be about 19% and Bengaluru 15%. The remaining five cities are expected to have single digit shares.

SWOT Analysis
Strengths Attracting High FDI Inflow High Demand due to Urbanization Rising Middle Class Numbers NRI Buying power 10x than local buyers Better Infrastructure Rising Income Levels Opportunities Affordable Homes segment Rural India Housing Weakness High Government Regulation High taxes on Raw Material Availability of Finance High Interest Rate Inability to tap NRI customers Lack for technology adaptation Unorganized and Lack of Transparency Threats Economic Inflation Political instability Economic slowdown Other Investing Options (e.g. Gold, MFs)

Investments
India is ranked 20th in the list of worlds top real estate investment markets with investment volume of US$ 3.4 billion in 2012, according to the latest report titled 'International Investment Atlas' by Cushman & Wakefield. The sector is set for robust inflows of US$ 4-5 billion from overseas investors in the next couple of years, with Bangalore, Delhi and Mumbai emerging as the favorites, according to Jones Lang LaSalle, a global real estate consultancy giant. Construction development sector (including townships, housing, built-up infrastructure & construction-development projects) has attracted a cumulative foreign direct investment (FDI) worth US$ 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April-February 2012-13 stood at US$ 1,260 million, according to the department of industrial policy and promotion (DIPP). Bengaluru witnessed the highest number and value of private equity investments at Rs.32.5 billion (US$ 585.57 million) in 2012, recording more than double of investment over last year, followed by Mumbai with Rs.13 billion (US$ 234.17 million) and National Capital Region (NCR) with Rs.7 billion (US$ 126.09 million) of investments. India needs to invest US$ 1.2 trillion over the next 20 years to modernize urban infrastructure and keep pace with the growing urbanization, as per a report released by McKinsey Global Institute (MGI)-India's urban awakening.

Factors that will drive growth in this sector

a. Demand Pull Factors:

Robust economic growth is driving the demand for commercial property. Urbanization and growing household income is boosting demand for residential real estate. Hospitality space is gaining from increased flow of foreign tourists to the country (CAGR of 6.6 percent during 2005-10). FDI in real estate and construction is on an uptrend, accounting for 22 percent of total FDI. 110 deals were closed in the sector between 2001 mid 2011. Availability of a range of financing options at affordable rates. Impacts: Increasing occupier base. Significant rise in demand for industrial/office space. Demand for newer avenues for entertainment, leisure and shopping. Creation of demand for new housing.

b. Supply Pull Factors:

Policy and regulatory reforms. Policy outlook for global investors (100% FDI relaxation).

Fiscal incentives to developers. Simplification of urban development guidelines. Infrastructure support and development initiatives by government. Impacts: Entry of a number of domestic and foreign players; increasing competition and consumer affordability. Easy access to project financing options. Increases developers risk appetite and allows large scale developments Improved quality of real estate assets. Development of new urban areas and effective utilization of prime land parcels in large cities.

Government policy and initiatives

Introduction of few policies by the Government is allowing the growth of the real estate and construction sector: One percent TDS on transfer of immovable property if the sale value exceeds Rs.50 lakhs in urban centers and Rs.20 lakhs in rest (Union Budget 2013-14) RBI granted permission to foreign citizens of Indian origin to purchase property in India for residential or commercial purposes. The purchase consideration should be met either out of inward remittances in foreign exchange through normal banking channels or out of funds from NRE/FCNR accounts maintained with a bank in India. Housing finances are becoming feasible with the housing loan limit being raised to US $52080 for priority sector lending. FDI up to 100 per cent is allowed with government permission for developing townships, housing, built-up infrastructure and construction-development projects through automatic route (subject to certain guidelines). The Real Estate (Regulation and Development) Bill 2013, which has just received a nod from the cabinet, will prove to be very crucial in determining growth/decline in the sector.

The Challenges
The key challenges that the Indian real estate industry is facing today are: Lack of clear land titles, Absence of title insurance, Absence of industry status, Lack of adequate sources of finance, Shortage of labor, Rising manpower and material costs, Approvals and procedural difficulties.

The Road Ahead

India has huge potential to attract large foreign investments into real estate. With real estate reaching a point of saturation in developed countries and the demand and prices falling, global real estate players are looking at emerging economies such as India for tapping opportunities in real estate. Indian real estate will stay attractive due to its strong economic fundamentals and demographic factors. Moreover, there is a high level of global uncertainty looming over the developed and developing nations of the world. While developed economies are still struggling to regain their growth momentum, developing countries including India and China are expected to grow at a reasonably high rate. Investments in Indian real estate will fetch higher returns for

investors as compared to other global markets. In the coming years, the opportunities in the real estate sector will attract more global players to India and hence will help the industry to mature, become more transparent, improve management and adopt advanced construction techniques. Actions that need to be taken: The Government and industry players should together work towards increased transparency, clear land titles, improved delivery and project execution The Government must provide fiscal incentives to developers to build low cost and affordable housing for the masses The Government should also review the existing FDI guidelines for investment and development in Indian real estate in order to increase the flow of foreign capital into the sector. The Government must provide incentives to the public and private sectors to take up R&D activities for new building materials and technologies so that the industry can deliver low cost, affordable, sustainable and environment-friendly housing and building structures.

Highlights of Union Budget 2013-14

1% TDS on value of the transfer of immovable properties where the consideration exceeds INR 50 lakh; No TDS for agricultural land transfer. Impact: Increase in excise duty rate on marble from INR 30 per sq. meter to INR 60 per sq. meter. Impact: Continuation of service tax exemption for low cost housing and single residential units. Impact: Reduction in rate of abatement from 75% to 70% for houses and flats of more than 2,000 sq. ft. or valuing more than INR 1 Cr. Impact: Allocation of INR 2,000 Cr for creation of Urban Housing Fund to National Housing Bank. Impact: Increase in the exemption limit of home loan interest payable through a separate section under chapter VI A of IT Act from 1.5 Lakh to 2.5 Lakh. Impact:

Location-wise Overview
Delhi: Most of the absorption in Delhi NCR is likely to focus around Gurgaon and Noida, with the exception of Delhi International Airport Limited (DIAL) and few select stand-alone Grade A projects of Delhi. As the demand supply gap of quality office space is expected to increase because of the supply constraints in select precincts of Delhi NCR, rents are expected to increase in certain micro-markets by 2H13. Developers will focus on delivery of the products. Mumbai: Office absorption and residential demand will continue to increase in Mumbai. The trend of completion of high quality new office projects pushing up Grade A office vacancy levels and providing tenants with greater bargaining power will reduce in 2013. With banks drastically reducing lending activities over the last two years, resulting in debt remaining a constraint, not much of new commercial supply (except spillover from 2012) is expected to be completed in 2013 and 2014. Residential launches are expected to increase; however, price drop is unlikely to happen over the year. Amidst constrained supply of quality retail malls, rental gap between Grade A malls and Grade B malls will further widen in the year. Bangalore: In terms of office space, Outer Ring Road will continue to be the sought-after destination in 2013. For residential real estate, North Bangalore is expected to continue to remain as the best performing region in the city with strong infrastructure development, increased demand and price appreciation in 2013. Meanwhile, Whitefield will continue to retain its sheen for both office and residential real estate because of affordability, proximity to key work places

and good social infrastructure. Other Cities: Chennai, which witnessed a historical high number of residential launches in 2012, is likely to slow down in 2013. This trend is also expected in Pune. Meanwhile, Kolkata and Hyderabad are likely to witness increased launches. Prices of residential units are likely to increase in all the cities because of the increased construction costs. Ahmedabad, Bhubaneswar Kochi and Coimbatore are other cities in India that are likely to witness immense development activities in 2013.

Conclusion
The Indian real estate sector promises to be a lucrative destination for foreign investors into the country. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages. However, there are potential constraints for domestic as well as foreign investments in India. Absence of a single regulator to monitor business practices prevailing in Indian real estate market is perceived to be a risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained. Maturity of the real estate markets will lead to infusion of foreign investment and adoption of international best practices by real estate players. Developers will get more organized, and become more transparent to avail opportunities emerging in the market. With the Indian securities market regulator SEBI allowing real estate mutual funds (REMFs) in India, equity investors will have an exit option available to them. All these factors will contribute in making the Indian real estate market more organized and structured, thus providing better investment opportunities