A Study on the Indian Real Estate Market for Investment: A Qualitative Approach

By Rashi Mehta 2006-2007

A Dissertation presented in part consideration for the degree of MA Finance and Investment.

Abstract

This dissertation aims to evaluate the investment opportunities present in the Indian real estate market. The surveys and responses of the representatives of the real estate market have been analysed and the results of the study clearly establishes growth of the sector in the forthcoming years. Different aspects of the market have been examined such as the importance of India as an investment destination, hindrances in the market, sources of capital available, scope of the industry etc to get a deeper insight of the market. These factors have also helped to determine the factors to be considered before investment. New techniques of investment such as REITs (Real Estate Investment Trusts) have come to light inducing investors to plough their funds into the market to produce lucrative yet stable returns.

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TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ...........................................................................1

1.1 Background of the Research ........................................................................................................ 1 1.2 Research Motivation and Research Question............................................................................ 2 1.3 Research Methodology ................................................................................................................ 2 1.4 Outline of the Dissertation .......................................................................................................... 3

CHAPTER 2 : THE INDIAN ECONOMY............................................................4 CHAPTER 3: LITERATURE REVIEW.................................................................8

3.1 The Real Estate Market of India ................................................................................................. 8 Residential Real Estate Development...................................................................................................................10 Commercial Real Estate Development ................................................................................................................11 Retail Real Estate Development ............................................................................................................................12 Special Economic Zones (SEZS) ..........................................................................................................................12 3.2 Factors leading to Real Estate Boom in India .......................................................................... 14 Indias key demand drivers - Size, Youth, Aspiration and Prosperity.............................................................14 3.3 Avenues for Raising Capital in the Real Estate Sector .............................................................. 17 3.4 Key Investment Risks present in the Indian Real Estate Market.............................................. 22 3.5 Corrective Action ....................................................................................................................... 25 3.6 Outlook The way Ahead ..................................................................................................... 26

CHAPTER 4: RESEARCH METHODOLOGY & DATA COLLECTION.......30

4.1 Introduction ............................................................................................................................... 30 4.2 Research Methods ..................................................................................................................... 30 4.2.1 Justification for the use of qualitative research ....................................................................... 30 4.3 Qualitative Tools for Data Collection........................................................................................ 32 4.4 The Research Process................................................................................................................ 32 4.4.1 Interview Phase ...............................................................................................................................................33 4.4.2 Questionnaire Design ....................................................................................................................................33

CHAPTER 5: EMPIRICAL ANALYSIS ...............................................................35

5.1 Introduction ............................................................................................................................... 35 5.2 Findings of the Questionnaire................................................................................................... 35 5.3 Findings of the Interview .......................................................................................................... 44 5.3.1 Growth and Importance of the Real Estate Sector in India...................................................................45 5.3.2 Avenues for Investment ................................................................................................................................47

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5.3.3 Concerns regarding the Sector .....................................................................................................................48 5.3.4 Role of the Government ...............................................................................................................................50 5.3.5 Sources of Capital available...........................................................................................................................51 5.3.6 Future of the Industry....................................................................................................................................52

CHAPTER 6: CONCLUSION, LIMITATIONS & RECOMMENDATIONS-55

6.1 Conclusion ................................................................................................................................. 55 6.2 Limitations of the Study ............................................................................................................ 59 6.3 Recommendations..................................................................................................................... 60

REFERENCES ......................................................................................................62 APPENDICES........................................................................................................69

APPENDIX A - QUESTIONNAIRE ............................................................................................ 70 APPENDIX B - INTERVIEW QUESTIONS ............................................................................... 73

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Acknowledgements

Working on this dissertation has been an incredible experience for me. For this, I would like to thank a lot of people without whose co-operation and support; this research would not have been possible.

Firstly, I would like to thank my supervisor and mentor, Ms. Alyson McLintock for her endless support and guidance. She has played a key role in helping me structure my dissertation. Her prompt replies to my e-mails and her valuable feedback and comments have greatly helped me to complete my dissertation on time.

I would also like to sincerely thank all the interviewees and respondents for their valuable time and useful insights on the research topic.

I am grateful to my parents for their never-ending support and faith in me. Without their presence, carrying out this research would have been rather difficult. In the end, I am thankful to my friends for their constant source of encouragement and being there for me always when I was de-motivated during the course of my dissertation.

Chapter 1: Introduction
1.1 Background of the Research
International Real Estate is set to be the biggest and best investment market of the next several years. Pennington (2001) states that while the world economy has been rapidly changing in response to technological innovation, real estate has evolved from a depository of wealth for households and assets for corporations into a major force in the debt and equity markets. As land is the one scarce economic resource that is not replenishable or substitutable, real estate will continue to dominate the world as a prominent attraction for investments and allocation to savings. Mahurkar & Senthil (2004) add that real estate is a good opportunity to employ funds for both long and short-term investments. It is safe and provides high yield investment as compared to volatile returns from the stock market and limited returns from bank deposits.

Michael Smith- head of Asian real estate investment banking at Goldman Sachs states that India is the most exciting real estate market in Asia. (Fortune Magazine, 2006) This sector growth has not only improved the infrastructural face of India, but also provided employment to millions and made India a financial and retail hub. This has contributed to the organised investment in the real estate sector by domestic and international financial institutions and has also resulted in the greater availability of financing for real estate developers.

Numerous researchers have predicted the stability and importance of real estate investment in the long run. Kaiser (1997) predicts the Indian real estate market to be unaffected by a bust period for the next four decades. Other academics like Chan, Hendershott & Sanders (1990), Ross & Zisler (1991) and Ibbotson & Siegel (1984) suggest investment in real estate to be less

risky than stocks. Ibbotson & Siegel (1984) further recommend real estate to be a good diversification tool for investment purposes.

The reasons for choosing my research topic along with the aims and objectives of my study have been presented below.

1.2 Research Motivation and Research Question

Apart from the emergence of real estate as a new academic discipline, one of the main reasons for choosing this topic is to study the change that has taken place in the real estate markets. As the markets have become more accessible to international investors, there has been an increasing demand for information and knowledge about these markets, especially regarding their structure and dynamics. Keeping this in mind, I have been motivated to undertake an in-depth study on the investment opportunities present in the fast-growing Indian real estate market. The purpose of this dissertation is to find out whether the Indian real estate sector is a good investment spot for domestic and global investors. I intend to bring out the importance of both India as favoured destination for investment as well as the reasons for real estate boom in India.

1.3 Research Methodology

My research shall focus on analyzing factors that have led to the growth of Indias emerging real estate market and the relative importance of investing in this market. I shall follow a qualitative approach for my research. This would comprise of a questionnaire survey and face to face interactions with several well-versed people in this field including real estate analysts, consultants, property brokers and listed real estate companies. I shall also examine relevant quantitative data consisting of facts and figures from reputed sources for the Indian Real estate market in order to reach a suitable conclusion for investing in the same.

1.4 Outline of the Dissertation

This dissertation is divided into seven chapters. They follow throughout in chronologically order. Chapter 1 provides an introduction to the research topic and briefly discusses the objectives and the methodology used for the study. Chapter 2 presents an overview of the Indian economy to establish Indias potential in becoming the next global investment destination. Chapter 3 contains the literature review and the existing secondary information on the opportunities in the Indian real estate market comprising of sector reports, journals, newspaper and magazine articles. Chapter 4 discusses in detail the methodology and the data collection process for the purpose of conducting the research. Chapter 5 analyzes the outcomes of both the questionnaire survey and the interview process. Chapter 6 provides a summary of the research findings along with the limitations of the study. Ultimately, Chapter 7 offers recommendations for further research and helps investors take a correct investment decision.

Chapter 2: The Indian Economy

INDIA: AN UPCOMING INVESTMENT DESTINATION GLOBALLY -Thuermer (2004) India; the country of culture and diversity has come a long way to make its global presence felt. From being a global underperformer before 1980 to a strong overperformer since then, India has undergone tremendous transformation in the past three decades. The World Bank reports that the Indian economy is the fourth largest in the world after USA, Japan and China (measured in terms of purchasing power parity adjusted Gross Domestic Product (GDP)) with a GDP of US $3.63 trillion. India is the second fastest growing major economy in the world (after China) with a GDP growth rate of 9.4% for the fiscal year 2006 2007. (Hauke & Neely, 2007) After Indias independence in 1947, the output of the Indian economy (i.e. GDP) stagnated around an average growth of 3.5 per cent per annum during three decades, (i.e. 1950 to 1970) due to strict government control over private sector participation and foreign direct investment. However, an unprecedented balance of payments crisis in 1991 paved the way for liberalization in India leading to opening up of markets. Through economic reforms such as reduction of government controls on foreign trade and investment that were initiated by the Late Prime Minister Narsimha Rao and Finance Minister Manmohan Singh (who is currently Indias Prime Minister); foreign direct investment (FDI) encouraged into various sectors of the economy. Hence, Das (2006) points out that the trend changed after the eighties, when output growth per annum was 6 percent a year from 1980 to 2002 and at 7.5 percent a year from 2002 to 2006 -making India one of the world's best-performing economies for a quarter century.

Another outstanding feature of the Indian economic reform in the recent period has been the fast expansion of stock markets backed by Indias well-developed financial sector and its growing role in the economy. Sectors like real estate, infrastructure, power, telecom, information technology and retail and are showing strong potential with high growth rates. As per Federation of Indian Chambers of Commerce and Industrys (2007) estimates, the Industrial growth of India in April-May 2007 picked up by 11.7% compared to 10.8% increase in the corresponding period a year ago. In May 2007, the six core infrastructure industries growth rate touched 8.7%; crossing the 7.2% growth in the corresponding month of last fiscal. The four performing sectors namely finished steel, cement, petroleum refinery and power grew at 11.8%, 9.4%, 14.9% and 9.3% in May 2007 as against 10.7%, 6.8%, 12.1% and 8.3% respectively in the same month of last fiscal. Inflation in June 2007 (averaged) stood at 4.3% from a high of 6.2% (averaged) in January 2007. The drop in the inflation was attributed to the monetary tightening policies. Indian exports in the current fiscal have been estimated to reach US 160 billion in 200708 from US $ 125 billion in 2006-07.

However, India still faces certain constraints, impeding its path to rapid growth. Inadequate infrastructural facilities in India form the key problem area. This can be supported by the World Economic Forums 1998 Global Competitiveness Report that ranked India last among 53 countries on the quality of overall infrastructure services. It should be noted that this was a report published in the late 1990s. It does remain a cause of concern for India however it is a changing scenario for the Indian economy in the coming few years. Further, high levels of fiscal deficit and public debt have reduced resources available for investment. The overall fiscal deficit remains high at 7.5 percent of GDP in 2004-05, reveals Jha (2004) as does the government debt-to-GDP ratio at 80 percent compared to about 60 percent in 1994-95. Surveys by the World Bank indicate that India has some of the most restrictive labour laws in the world, which, in effect have transformed labour into a fixed factor of production. This in turn has created

difficulties for enforcing lay-offs, thereby discouraging fresh employment in the organized real estate sector. (Acharya & Thomsen, 2007)

Nonetheless, India is the worlds largest democracy and free market offering a large, skilled, English-speaking talent. This along with Government focus on economic development, diversity and partnership, has presented investors with a strong growth proposition. (The Economic Times, 2007) Above all, Indias success can be attributed to its entrepreneurs. India recently overtook the speed of entrepreneurship development in China due to a number of overseas residents returning to the homeland and local residents eager to undertake opportunity-based ventures. This has led India to experience rapid growth with expectations of becoming the 3rd largest economy in the world (GDP terms) by 2025. (Indian Economy Blog, 2007)

Unlike most Asian economies, which have prospered on the manufacturing front, India has grown due to its robust services sector contributing 54% of the total GDP. India is the second largest populated country having a 1.1billion population, estimates Narkar & Neema (2006) which has been growing at a rapid pace of 1.7%, above the world average growth rate of 1.4% since 2001. This in itself offers huge opportunities for FMCG (Fast Moving Consumer Goods) and other companies to tap the vast market demand. While it can be argued that population growth explosion in a weak economy could be detrimental, I believe that having high growth in population would allow Indias economy to proliferate significantly. A young country with emphasis on education and technical acumen would allow Indian to produce a high level of working young population which would lead to quality growth and rise of a middle-class consuming family boosting the economy into consumption of goods and services.

India is in the process of becoming Asias next trading hub. Rapid integration of India into the global trading system will have ripple effects beyond Asia. India could overtake Britain and be the world's fifth largest economy within a decade as the country's growth accelerates. Also if the trend continues, India's economy could surpass the US and be second largest economy only to China's by 2050. (Investment bank Goldman Sachs Report 2003). Assuming India continues to grow at current growth rates (9% p.a.) till 2050 and the Unites States grows at its modest rates (2.5% p.a), mathematically India will be a $37 trillion economy against the $36 trillion of the United States of America.

Summary This chapter highlights the growth potentials of India in the forthcoming years. Indias high GDP growth along with booming capital markets has attracted huge investments into different sectors of the economy. The following chapter shall discuss the opportunities present in one such sector of the economy: the Indian real estate sector.

Chapter 3: Literature Review

Significant research has been conducted in the real estate field of both developed and developing nations by many academics in order to study various factors such as determination of the highest growth segment, degree to which problems in the sector hinders growth levels, comparisons with stock markets returns, risk profile of the sector, industry dynamics and new opportunities offered by the market etc. However, most Asian real estate markets are much less well developed compared to western countries and efforts to gather real estate and economic statistics has only recently started. Real estate price indices have also been constructed in a very crude manner, which has undermined the reliability of the indices for serious empirical research. I attempt to cover the relevant studies conducted in the past along with secondary research in order to obtain a complete picture of the Indian real estate market and understand researchers views on investing in this market.

3.1 The Real Estate Market of India

The Indian real estate industry is on a high growth path having a current market size of $15 billion approximately as estimated by Desai & Rane (2006). Real estate prices have risen steeply across India over the last two years growing at 40% CAGR (compounded annual growth rate). The chart below depicts the market size which is estimated to reach $50 billion by 2010.

Source: Industry, India Infoline Estimates

The market is growing at a rapid pace due to improved real estate prices and sustained demand from end users as well as investors. With a population growth of 1.7% per annum and a deficit currently of about 22 million houses as pointed out by Saunders (2007); the demand from end users will materialize consistently making the long term fundamentals of this sector strong. Traditionally, residential housing was the dominant segment of real estate development in India. This can be justified by the chart below depicting 83.3% of the overall market being held by the residential segment in 2005. However, with the emergence of commercial office space, retail and hospitality; substantial opportunities have been created in the non-residential segments. The non- residential segment is predicted to occupy 26% of the overall market share in 2010 as compared to 16.7% held in 2005. (Refer to Chart 2)

Chart 2: India Market Segmentation

Source: FICCI (Federation of Indian Chamber of Commerce and Industry), TSMG (Tata Strategic Management Group), Industry

A number of studies on the newer and emerging markets have been conducted, that is on India and China. However, these studies (Acharya, 1988; Acharya, 1989; Leaf, 1993; Li and Walker, 1996 and Walker and McKinnell, 1995) are descriptive with very minimal formal analysis of empirical data. They typically pertain to institutional relationships, especially the legal and administrative system under which the real estate market operates. I have nonetheless covered most research papers relating to different aspects of the Indian real estate in the subsequent sections of the literature review. Before I delve into explaining the academic point of view in this segment, it is mandated for any reader to be introduced to the major sub-sects and dynamics of this sector. To understand the real estate market, the key segments are discussed below along with relevant statistics to demonstrate the growth levels faced by the sector.

Residential Real Estate Development

The residential market in India comprises of around 80% of the total real estate potential. The growth in this market has largely been driven by rising disposable incomes, a rapidly growing middle class, low interest rates as well as increased urbanization. Households are expected to rise to 235 million by 2010 from 210 million in 2005 as per Narkar & Neemas (2006) estimates. A

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housing stock shortfall of 19.8 million was experienced in 2005 which increased to 22 million in 2006, despite the strong inflow of supply over the past one decade. The dynamics that rule this segment are complex relationships existing between selling price, listing price, housing features, housing market conditions and Marketing time in the residential real estate market.

This relationship was analyzed in a paper published by Kang & Gardner (1989) taking a large sample of single-family homes.

Commercial Real Estate Development

The market for offices in India has doubled over the past three years to 100 million square feet. Demand is estimated to grow at an annual rate of 20-25% over the next 10 years, which equates to 500-650 million square feet, states Crowe, Feldman & Harinarayanan (2006). This recent growth in India has been fuelled by increased revenues of companies in the services business, particularly in the Information Technology sector. The Indian off-shoring operations of multinational companies are expected to increase demand for commercial space. India leads the AT Kearney (Global Management Consulting Firm) 2004 Offshore Location Attractiveness Index by a significant margin which analyzes the top 40 service locations on three main categories: cost, people skills and availability and business environment. This emphasizes the continued need for office space in the years to come.

(http://www.atkearney.com/shared_res/pdf/Making_Offshore_S.pdf) However, Rosen (1984) observes that high rise office buildings represent large capital outlays in very competitive markets. He suggests that investment decisions must require careful market analysis to assure sufficient demand to lease the office space at rental rates which will make the 11

venture financially attractive. He is of the view that present methodology for analyzing future commercial real estate market conditions is inadequate and hence develops an alternative methodology- a statistical model of supply and demand to provide forecasts of space demand. Factoring his argument into the real estate segment, I believe that the sheer demand growth in the coming few years will encourage investors to own the property and lease it to companies for commercial purposes. This would also require adequate property being constructed and sold for consumption.

Retail Real Estate Development

Retail spending in India in 2005 was Rs. 9.9 trillion, of which organized retail accounted for only 3.5%. The organized retail segment in India is expected to grow at a rate of 25% to 30% over the next five years, reveals Yadav & Mahajan (2006). The growth of organized retail is driven by demographic factors, increasing disposable incomes, changes in shopping habits, the entry of international retailers into the market and the growing number of retail malls. However, Sreejith & Raj (2007) discuss the ill-effects of the retail revolution in India, that of increasing social tension among families below poverty line and greater loss of self employment opportunities while explicitly explaining the contribution of retail to Indias economic growth. Nonetheless, global real-estate consulting group Knight Frank has ranked India 5th in the list of 30 emerging retail markets and predicted an impressive 20 per cent growth rate for the organised retail segment by 2010. (Deccan Herald, 2007)

Special Economic Zones (SEZS)

The government created SEZs to promote global trade and greenfield development. These zones provide businesses located within their area with exemption from customs duty on imported and exported goods and services. The SEZ area is divided into processing and nonprocessing zones. The developer utilizes the processing area for manufacturing products or 12

services. The non processing area can be used by him for developing commercial, residential and social purposes like educational institutions, hospitals and other required infrastructure. Narkar & Neema (2006) emphasize that developers earn revenues by leasing out land, but cannot outright sell the land. Critics of Indias Commerce and Industry Minister Kamal Nath feel that the proposed SEZs will create economic hardship rather than promoting prosperity since they would be built on prime agricultural land, without adequate compensation for farmers. It would be important to note in my opinion that close to 70% of Indias vast populous is dependant on agriculture. Also, the Central Government could stand to lose billions of dollars of tax revenue because of the special concessions given to firms that will operate in the SEZs. (BBC News, 2006) However, SEZs, by virtue of their size, are expected to be a significant new source of real estate demand. According to Yadav & Mahajan (2006), SEZ-based industries are expected to create 500,000 jobs by December 2007 and attract investment of Rs 1,000 billion, including Rs 250 billion of FDI. The above mentioned spaces are the areas of potential development in the Indian real estate segment. It is where the highest levels of investments would be required. Significant investments have taken place in these sectors and have experienced handsome returns in the past few years. However, the extent of price increases in the real estate segment has greatly varied across Indian cities over two years and in certain areas in Delhi/Mumbai; prices have more than doubled as can be seen from Table 1 below.
TABLE 1: TREND IN REAL ESTATE (Rs/ sf) 2001 Mumbai- South 12,000 Mumbai- North 4,110 Delhi CP 9,000 Delhi / Gurgaon 2,000 Bangalore - Indira Nagar 2,500 Chennai Pune Hyderabad PRICE ACROSS KEY INDIAN CITIES 2002 2003 2004 2005 2006 10,000 9,500 10,000 12,000 20,000 4,320 4,430 4,320 5,180 7,000 8,800 9,270 9,570 10,930 18,000 2,400 2,650 3,370 3,500 5,000 2,560 2,630 2,990 3,350 5,000 3,750 4,500 5,500 6,000 3,000 3,500 4,200 5,200 2,300 2,500 3,400 4,000

Source: Knight Frank, CB Richard Ellis, CLSA Asia- Pacific Markets

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The trend of rapid price increases and investments returns have contributed and attracted organized investment in the real estate sector by domestic and international financial institutions. It has also resulted in the greater availability of financing for real estate developers. In the later parts of my paper, I will discuss the help of price appreciation lending towards the capital sources for the developers. These trends have benefited from the substantial recent growth in the Indian economy, which has stimulated demand for land and developed real estate across business lines.

3.2 Factors leading to Real Estate Boom in India

Indias key demand drivers - Size, Youth, Aspiration and Prosperity India is the second most populous country in the world after China. The population growth of 1.1 billion Indians is the key factor affecting demand and putting pressure on the need for more real estate space in the country.

India is also currently one of the youngest countries with a median population age of merely 24.5 years. Narkar & Neema (2006) suggest that India has one of the highest proportions of working population of around 41% and is expected to improve to 44% by 2015. Within the working population around 48 million are graduate workers, which are growing at the rate of 5%. India currently produces more than 0.2 million engineer graduates each year, which is only second best to China. This along with a high English speaking proportion has made India a formidable workforce. Hence, size with quality is a superior combination for making India a favored destination for the real estate market. Usalcass (2005) study emphasizes this fact. The research concludes that youth employment during the 1997-to-2004 period grew at a faster pace

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in India than employment for men and women 25 and over as a result of the strengthened economy.

Booming economy along with higher services sector contribution has led to a faster growth in income levels over the years as can be seen from Table 2 below. With the average qualification level of the working population moving up, income levels have moved up in tandem as well.

TABLE 2: INCOME LEVEL CLASSIFICATION Category Income Bracket 1995-96 (%) 2001-02 (%) Super Rich > 10 mn 5 20 Sheer Rich 5-10 mn 11 0.0 40 0.1 Clear Rich 2-5 mn 63 201 Near Rich 1-2 mn 189 546 Strivers 0.5-1 mn 651 20.4 1712 27.9 Seekers 200-500 (000) 3881 9034 Aspirers 90-200 (000) 28901 41262 Deprived < 90 (000) 131176 79.6 135378 71.9 Total 164,877 188,193 Source: NCAER (National Council of Applied Economic Research)

2005-06 53 103 454 1122 1322 13813 53276 132249 204,282

(%) 0.3 35 64.7

A study by Hewitt Associates (leading HR consulting firm) in its annual salary survey; found increase in salary by 13.5% in 2005 from the previous year. Thus greater disposable income has led Indians from renting to owning a house and created demand for higher-end houses, larger office spaces and high- tech malls in the country.

Apart from the favorable demographic changes and population growth, affordability has been a major influential factor. Also greater availability of mortgages has made housing much more affordable compared to the previous decade. Tax breaks on housing loans and interest payments have kept the interest rates on housing loans extremely low. This attractive cost of borrowing along with affordability remaining stable despite the sharp rise in real estate prices is likely to drive demand for premium housing.

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The rise in household income is slowly percolating into growing urbanization causing a change in lifestyle trend. Urbanization has resulted in the nuclear family structure from the traditional joint-family system which is likely to create huge demand for urban housing leading to further expansion of the citys suburban regions.

The above fundamentals in turn have created a huge demand supply gap in all sectors of the real estate market - commercial, residential, retail and hospitality. According to a research conducted by ENAM Securities (a leading financial services firm) in late 2006; requirements of 20 million new housing units; a five-fold increase in office space and 200 million square feet of organized retail would be needed by 2010. The fact that nearly half of the 200 million households in India still live in temporary or semi-permanent structures suggest that housing has a huge potential demand in both the middle-income and high-income segments.

(www.indianrealestateforum.com)

The Indian real estate sector has been subject to a number of regulatory restrictions hindering development which will be discussed in the following sections. Recent improvements have greatly pushed the sector to reach new heights. The Urban Land (Ceiling & Regulation) Act that prescribed the limits on urban areas that could be acquired by an entity, has been repealed by most states of India. Thus, according to Saunders (2007), real estate developers can now acquire consolidated pieces of land for development. Prior to March 2005, foreign direct investment (FDI) in the real estate sector was prohibited. However, the real estate sector is now open to FDI to a limited extent. FDI in townships, housing, built-up infrastructure and construction development etc is permitted under the automatic route, for which prior approval from the Foreign Investment promotion Board (FIPB) is not required. Following these

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regulatory changes, the Indian real estate sector has attracted a significant inflow of funds from overseas. The above mentioned reforms have propelled Indian Real Estate industry to become one of the highest investment generating avenues. In a recent survey conducted by AT Kearney, India takes the second place in the list of attractive investment destinations after China. This is because Indian real estate has transformed into an organized industry with global standards, contrary to the erstwhile industry that had been marked by fragmentation and poor governance. The credit for this change goes to the significant rise in investment, not only from within India but from offshore as well. Increasing interest of international property consultants, developers and commercial banks in investing in Indian real estate emphasizes the fact that India is being recognized globally as a lucrative investment opportunity by foreign investors. (Property Bytes, 2006)

3.3 Avenues for Raising Capital in the Real Estate Sector

The real estate sector in India has seen tremendous growth in the recent years with property prices soaring and the number and scale of projects increasing. Developers have been looking at new sources of raising funds such as from investors, both domestic and foreign, through avenues such as listings on London's Alternative Investment Market (AIM), domestic initial public offerings (IPOs), private equity participation and the setting up of joint ventures. Recognising the need for foreign funding, the government has allowed foreign direct investment without prior approval from the exchange control regulator. As a result, foreign investors are permitted to invest in wholly owned subsidiaries or in joint ventures with Indian real estate companies as long as minimum capitalisation requirements are met within six months of the commencement of operations and the capital remains locked in the project for three years thereafter. (Financial Times, 2007) FDI relaxation in retail has given further boost to the sector which can be supported by the expected 150 million space requirement from 17

hypermarkets by 2010. Entry of foreign retailers is accelerating demand for mall space. Walmart for example has increased its sourcing operations from India by US$ 0.9billion to US$ 1.2billion in 2005. Starbucks has also expressed interest to enter the Indian market through the franchisee route like Pizza Hut and McDonalds. (Guruswamy, Sharma & Jos 2007) The Indian institutional real estate capital market however is still underdeveloped. The four sources of this market as per Chart 3 below need to be tapped effectively to acquire maximum funds.

Chart 3: Break Up of Real Estate Capital Market

Source: RBI, Bloomberg and Insurance Corporation of India

The findings of Yadav & Mahajan (2006) suggest that Private Debt is utilized for over 60% of the total invested capital in real estate. Past four years have seen bank loans for the commercial estate having increased by over six times due to increasing competition and decreasing interest rates. The next major segment is Private Equity that accounts for nearly 39% of the Indian Real Estate Capital Market as can be seen from the above chart. Although this segment has been growing at a decent pace, still a large area is to be tapped especially by institutions like pension

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funds and insurance agencies. Public Debt market in India, which comprises of Commercial Mortgage Backed Securities (CMBS) and Corporate Bonds are still at its nascent stages as can be seen by Indian structured securitization products like Residential Mortgage Backed Securities (RMBS) which have just started operations. Public Equity is very minimal in India so far. Nonetheless; many property builders and development companies are raising public equity for major expansion plans. The DLF IPO in June 2007 has revolutionized the public equity market in real estate and made India a property-driven stock market.

(http://www.moneycontrol.com/india/news/ipo-upcoming-issues/dlf-ipo-likely-toopen-june-11sources-/282667)

Apart from the above mentioned sources of funding, an interesting research in capital sourcing by Allen, Madura & Wiant (1995) assesses the relationship of balance sheet exposure of commercial banks to the real estate market. By applying a seemingly unrelated regression (SUR) model to bank portfolios, a positive relationship between monthly bank returns and the real estate index is found. This research concludes that sensitivity of bank values to the market has increased over time. What this essentially explains is that theoretically, banks have become less averse to funding the real estate developers and consider them as a less riskier asset. Similarly, Qin & Lisbeth (2001) focus on the relationship between developments in these markets and the financial sector to determine under what circumstances real estate booms and busts affect the stability of the financial system. It concludes that unbalanced real estate price developments often contribute to financial sector distress and that trends in real estate markets should be monitored closely during financial sector assessments.

The conventional sources of funding such as debt and equity have moved aside to open other various avenues for investment. Several large financial firms and private equity players have launched exclusive funds targeted at the real estate sector. Table 3 enumerates some of those

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financial institutions that are taking part in the real estate segment. This has paved way for the establishment of Real Estate Funds (REFs). These unlisted funds are closed ended, therefore limiting the exit strategies for the investor. The target IRRs of these funds range from 15% to as high as 30%, reports Gupta & Nacard (2006).
Table 3: INDIA SPECIFIC REAL ESTATE FUNDS RAISED Fund Sponsor (US $mn) IL&FS Investment Managers 502 The Chatterjee Group 450 CalPERS 400 CIG Realty (Unitech Group) 400 IDFC 345 Carlyle- Santa Fey 300 ICICI- Tishman Speyer (India Advantage Fund) 300 American International Group (AIG) 275 Trikona 250 Ascendas India IT Fund 230 HDFC India real estate fund 223 Stargate Capital 186 AnandRathi real estate venture fund 112 Reliance Group 112 Siachen Capital 100 Kotak Mahindra Realty Fund 100 Ajay Piramal 78 Dawnay Day 75 Morgan Stanley 68 Kshitij Venture Capital Fund(Pantaloon Retail) 57 Dewan Housing 56 Fire Capital 50 Edelweiss Capital 35 Total 4,704 Source : Newspaper Reports, India Infoline Research

India is a fairly virgin market for financial tools such as the REMFs (Real Estate Mutual Funds) and REITs (Real Estate Investment Trusts). In the future, I believe that these two avenues of capital will be amongst the most beneficial to the developers in the industry. REMFs are mutual funds that participate only in listed real estate funds that invest in a mix of direct property, unlisted real estate funds and listed real estate companies. The objective is to provide retail and institutional investors a way to invest in real estate in the listed (open ended fund) environment. 20

Globally a huge portion of real estate investment is routed through REITs. These essentially act as mutual funds to gather public money for investing in real estate assets. The real estate investment for such funds at end December 2004 as per Narkar & Neemas (2006) estimates was US$ 5.9trillion. (Refer Table 4)

TABLE 4: GLOBAL REAL ESTATE INVESTMENT UNIVERSE (2004) (US $bn) Share of Global Market USA 2,525 42% Europe ( ex- U.K.) 1,500 25% Japan 705 12% Hong Kong/ China 540 9% U.K. 490 8% Australia 100 2% Other Asia 88 1% Total 5,948 100% Source: " Investment Management Journal"- Morgan Stanley

India is slowly developing its REIT market. Since the government regulations in the REIT are investor unfriendly, several REFs have sprung up acting as a REIT. Once REITs are introduced, there would be more exit options for investors as compared to REFs. Moreover; the market is set to be more liquid with its proposed introduction in 2007. The Planning Commission, a top government agency, recommended in 2002 that India should make use of REITs to "open the investment floodgate for the real estate sector." (International Herald Tribune, 2006) While it is debatable how investors can gain from the REITs structure in India, there is no actual case-study or data available to analyze REITs as a viable option for investing. However, I would like to quote a study by Chan, Hendershott & Sanders (1990) that analyzed monthly returns on an equally weighted index of twenty-three equity REITs traded on major stock exchanges over the 197387 period in order to test whether equity REIT returns were related to changes in the stock funds. It was found that real estate (measured by the return performance of equity

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REITs), is less risky than stocks generally. This is similar to another research conducted by Ross & Zisler (1991) who ascertained the returns and risks for unleveraged equity real estate and compared it to stocks and bonds from a period of 1978 to 1985. Estimates from this study indicate that real estate risk lies probably midway between that of stocks and bonds, in the 9 %13% range. Moreover, low correlations with stocks and bonds make real estate a diversification opportunity for traditional portfolio managers as per the results of Ibbotson & Siegels (1984) study.

3.4 Key Investment Risks present in the Indian Real Estate Market
While the Indian real estate sector offers huge opportunities for developers, some risks remain that may impact demand for real estate going forward. The sharp rise in property prices over the last two-three years has greatly affected demand for real estate since demand is significantly price sensitive. This in turn has had a profound impact on the purchasing affordability of the buyer hindering real estate growth. On the other hand, sharp drop in property prices is also a key concern due to the cyclical nature of business. The reversal in cycle could be a result of either economic slowdown curtailing demand or increased supply coming to the market. Grenadier (1995) presents a model that explains the underlying causes of the prolonged cycles observed in real estate markets. The combination of demand uncertainty, adjustment costs, and construction lags leads to two phenomena that helps explain these cycles. The first phenomenon is the reluctance of owners to adjust occupancy levels while the second is the addition of new supply in the face of already high vacancy rates. Since the property story is heavily based on overall market growth, a slowdown in economic growth in India could dampen the euphoria surrounding the sector. This can negatively affect the demand for the sector resulting in declining capital values and rentals. A fall in property prices can also be caused by potential oversupply. A survey conducted by Narkar & Neema (2006) of fifteen large property developers in India reveals that they are scaling up from a 22

cumulative 30 million square feet per year now to about more than 200million square feet per year by 2010.

The large step-up projected in property development activity over the next few years will expose the sector to execution risks. Execution risk can hit either in the form of delays to projects, as contractor resources are limited, or in the form of cost inflation. Hence large players will likely to be better off versus smaller players as contractors would prefer larger developers because of timely payments and longer-term contracts, states Saunders (2007).

Rising mortgage rates is another obstacle to Real Estate development in India. Lower interest rates on housing finance from Indias retail banks and housing finance companies and favorable tax treatment of loans, have helped fuel the recent growth of the Indian real estate market. However, interest rates in India are heading north, which could discourage consumers from borrowing to finance real estate purchases and depress the market as is depicted in Chart 4. From a low of 7.25% per annum in 2004, Desai & Rane (2006) state that home loans are currently being offered at about 9.5% per annum. Chart 4: Potential Interest Rate Impact

Source: Macquarie Research, November 2006

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Buckley (1994) suggests that in most developing countries, relatively little mortgage credit is voluntarily supplied. The main reason is the lack of credible contracts. He examines benefits involved in improving governance of mortgage contracts for the rapid growth of housing finance systems. However, the following paper discusses problems associated with mortgage markets. Linneman & Wachter (1989) utilize microdata to quantify the impact of mortgage on individual homeownership propensities. The research indicates that even in well-developed capital markets, the presence of borrowing constraints adversely affects homeownership propensities.

Infrastructure is improving but is still a significant issue. All modes of transportation are in dire need of modernization in India. Though the real estate sector is growing at a high of 30 per cent annually; cities in India have barely any concrete infrastructure. Traffic congestions, increasing pollution etc are all a result of inconsistent urban planning, states Gupta & Nacard (2006) Governments contribution to the real estate sector is a concern and a number of studies have been conducted to investigate this. The findings of most researches have produced different outcomes. This can be attributed to different aspects of the Government workings studied by different academicians. While several research work has been conducted on Asian real estate markets pertaining to policy issues, (Chen, 1996; Dowall, 1994; Firman, 1997; Winchester and Chalkley, 1990 and Zhu, 1994), housing issues (Dowall, 1992; Lodhi and Pasha, 1991; Peng and Wheaton, 1994; Seko, 1993 and Shefer, 1990) and urban planning and development policy issues (Alperovich and Deutsch, 1996 and Henderson, 1991); the two main studies conducted on Indian real estate markets are analyzed below. The study by Sivam and Karuppannan (2002) discuss the Indian Governments inability to provide lodging to the lower-income Indian population due to which numerous unauthorized housing settlements are scattered in and around the large cities of India. The paper reviews the

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role of the state, the market and non-governmental organizations (NGOs). It is found that formal housing agencies are neither building fast enough to meet demand nor cheaply enough to reach the poor due to which an informal sector has emerged in almost all cities in India. While this is a cause of concern, another prominent academician in contrast to their findings in his paper supports the Government functioning. Mukhija (2001) examines the complexities involved in housing provided by the private sector, specifically the markets in developing countries. The paper presents evidence from slum redevelopment programmes in Mumbai, India, to demonstrate the same. He concludes that a more sophisticated role of the state is necessary to provide the institutional support for well functioning property markets and to capture the opportunities high value property markets provide.

3.5 Corrective Action

The changing real estate landscape along with government support is set to boost the sector, overcome sector risks involved and encourage foreign investment into the market. With urban areas contributing 60% to Indias GDP, a comprehensive urban development policy has been framed by the Government for upgradation of Indian infrastructure. The government has constituted the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) - a national level framework covering 63 cities which focuses on integrated development of infrastructural services in cities. Change from the rigid laws of the government to progressive legislation is paving way for larger scale land acquisition and projects. The Urban Land and Ceiling Act being repealed and a Model Rent Control Legislation framed are a few examples illustrated by Desai & Rane (2006).

Also, the real estate developers over the past few years have started improving their compliance standards to avail of income tax benefits under section 80 IB of the Income Tax Act 1956. Cash

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transactions have also reduced with the rising share of mortgage financed houses in the residential segment. Furthermore, major developers have adopted better corporate governance standards and improved their disclosure norms with an intention of raising capital through the financial markets. Some of the larger developers have started expanding across cities to leverage on the growth opportunities offered by non- metro cities. Growth in real estate development is spreading to suburban areas with high levels of economic activity and job creation. Hence, the problem of a regional, fragmented real estate market is getting resolved with more players acquiring a national footprint.

Desai & Rane (2006) are supportive of the fact that an extremely fragmented market and lack of transparency is replacing large scale projects and improving governance standards due to progressive regulations and organized approach to urban planning and development. Coupled with robust economic growth, the sector is expected to undergo positive, rapid changes on its path to high levels of growth over the next five years.

India is soon developing an increasingly sophisticated housing market. Unclear titles, poor building standards and ridiculous tenancy laws that have historically plagued Indian real estate and alienated foreign investors have been replaced by computerisation of land records. So confident is the Indian financial sector in the changes that institutions have filed for permission to introduce $1billion worth of real-estate mutual funds in India. (Money Week Magazine 2005)

3.6 Outlook The way Ahead

The Real Estate potential in India is vast. The market is expected to grow at 33% through 20052010 to US 50 billion as per Negandhis (2007) estimates. Tremendous potential demand along with an improving regulatory landscape, robust economic growth and gradually improving 26

corporate governance standards of developers makes the real estate market in India over the next five years highly sustainable. (Refer Chart 5)

Chart 5: Indian Realty: Long Term Opportunity Intact

Source: ENAM Research

This strong potential demand is expected to result in an exponential growth in development plans of real estate companies. According to Negandhi (2007), development is expected to reach 16 billion square feet across all segments of the real estate market by 2010

The plan ahead seems sustainable; however it would be unwise to forget the experience of the 1985-93 boom/bust in real estate that has left industry players nervous about when it might happen again. A paper by Kaiser (1997) examines the possible causes and the periodicity of such major real estate cycles. The evidence suggests that both periods of negative returns, (early 1930s and early 1990s) were caused by excessive levels of new construction which caused an inflation spike in the general level of prices, suggesting a 50- 60 year real estate bust cycle. The paper safely concludes that India is not likely to witness another bust period for real estate in the next four decades. 27

The conclusions of Kaiser can be witnessed with the bullishness underlying in the development proposed by the cumulative strength of the Indian developers. Historically, Indian real estate companies have undertaken development of 1million- 3million square feet of real estate annually. With strong growth in demand expected across segments of real estate over the next few years, Desai & Rane (2006) estimate development plans of real estate companies to rise to 20million- 30million square feet annually. To sustain these growth levels, the flow of capital into the sector will be carried out through REITs. REITs is the future of the Indian real estate market. It is expected to lend the much-needed liquidity to developers and allow them to take out their capital value off completed projects for deployment in newer projects. REITs also serve as an effective vehicle for broader participation by investors in the market.

However, without demand and latent capital adequacy, none of these plans will materialize effectively for the players in this segment and a good chunk of their demand and capital is expected in the form of Foreign Direct Investments. The paper by Henley (2004) compares the performance of India and China in attracting foreign direct investment (FDI). FDI statistics suggest that India's performance has been significantly understated but India still falls behind for several reasons such as high tariff structure, poor physical infrastructure, a regulatory system that is too often not business friendly etc. Nonetheless, India has displaced USA as the second-most favored destination for FDI in the world. ASSOCHAMs (The Associated Chambers of Commerce and Industry of India) study on Future of Real Estate Investment in India forecasts that of estimated US$ 60 billion future market size of real estate business in India, the share of foreign investments will be within the range of US$ 25-28 billion by 2010. The overseas investments will also be finding larger space in Indian SEZs and increasing number of shopping malls that will naturally fatten their share in real estate market. Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards. (www.IndianGround.Com) 28

Summary In this chapter various academic papers as well as secondary research material has been used to bring out the growing importance of investing in the Indian Real Estate Market. It is apparent from the previous researches carried out in this segment that the sector is growing on the back of various demand drivers and although many problems have persisted in this sector, the longterm opportunity is bright. Overall, it can be inferred that not only are there sufficient capital sources to be tapped by developers but also increasing number of investment avenues are coming to the forefront, widening the horizons of this sector

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Chapter 4: Research Methodology & Data Collection

4.1 Introduction
In this chapter I shall cover the methodology used in carrying out my research on the investment opportunities in the Indian real estate market. After justifying my research technique, I shall go on to identifying the various tools available for the purpose of data collection. Following this I shall explain the use of specific tools in my research. Lastly I shall discuss the research process in detail touching upon the questionnaire design and interview phase.

4.2 Research Methods

Research methodology is one of most essential elements in data collection and analysis of the study. It can be defined as the various ways in which data can be gathered, organised and analyzed, whether it be quantitative or qualitative data.

(www.sociologycommission.org/docs/glossary.htm). There are numerous ways in which research methods can be classified; but the most common distinction is between qualitative and quantitative research methods. Both positive and negative qualities can be found in each of these methods and no method is universally superior. However, what is crucial is that the method selected by the researcher should be suitable to the research undertaken.

4.2.1 Justification for the use of qualitative research

I used a qualitative approach as it is best suited to address questions about what, why and how markets function. Hesketh & Laidlaw (2002, pp. 366) state that qualitative research focuses

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on events, experiences and feelings from the perspective of those being studied and therefore can be extremely useful in understanding complex processes, exploring problem areas and suggesting ways of tackling them. This is one of the key deciding factors for qualitative being selected over quantitative research. Not only can the research question (Are there sufficient investment opportunities in the Real estate market) be dealt with thoroughly but also maximum information can be elicited from the representatives of the market. Essentially, I am suggestive that the paper can add value to the actual buyers of the real estate since this encompasses a holistic view from reputed developers and consultants of the market. The purpose of this research paper is to provide an insight into the real estate market in order to understand why the sector has taken a sudden jump over the past five years and to assess the future potential of the market in terms of opportunities for investment. In addition to that, qualitative analysis is helpful to gather consumers views regarding the various investment avenues available to them and scope of the industry. Although this research takes into account a small sample from the overall Indian population; the remarks and reactions of brokers, analysts, end users and realty developers give a useful overview of the industry and indicates the awareness level and strength this sector holds in the country. This is the view of Kaplan & Maxwell (1994) who believe that the goal of understanding a phenomenon from the viewpoint of the participants and their specific social surrounding is lost when textual data is measured and quantified. Mehra (2002) however makes a contrary point by stating that a field like qualitative research walks the thin line between upholding value-neutrality and taking into consideration the subjective view of the world and its human life. I have therefore made a genuine effort to collect real facts, data and feedbacks from respondents. I have exhibited my findings in a way that is not biased and does not include my personal views on the research findings. They have been restricted to the analysis of the topic and not the actual findings of the research.

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4.3 Qualitative Tools for Data Collection

There are several data collection methods in the social science field. Surveys, questionnaires, interviews, focus groups, observations, secondary sources and data reviews are a few as pointed out by Bouffard & Little (2004). I have preferred to make use of qualitative methods using not only the interview but also the questionnaire for my research work. At the outset, it is imperative to realise the requirements of my study in order to understand why I have chosen both the above methods. Since this research is centred on the Indian real estate market, it is a requisite to get hold of a large sample size which will aid to a better understanding of my research study. Using a questionnaire according to Lanthier (2002) is therefore an effective means to find out attitudes, thoughts and behaviours of a large group of people. On the other hand, Hesketh & Laidlaw (2002, pp.365) strongly believe that since an interview provides data in the interviewees own words, it assists in seeing the world from their perspective. They throw light upon the fact that an in-depth interview with one person can be far better and reveal far more than 500 shallow questionnaires. Keeping this in mind, in-depth interviews with a few key potential respondents were carried out to furnish a valuable insight into the Indian real estate market scenario. Thus this approach of examining the outcome of an objective questionnaire (Appendix A) and a subjective interview method (Appendix B) without the use of technical analysis is most appropriate for this dissertation topic.

4.4 The Research Process

A list of real estate developers, consultants, analysts and property agents was drawn up using the World Wide Web. The list comprised both small regional and local players as well as companies listed on the Bombay Stock Exchange (BSE) to get a complete picture of the market. The initial contacts were made through telephone and sending out emails to the key potential companies requesting them for an interview slot. Of the thirty-five companies and professionals contacted,

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only eight agreed for an interview. However, in order to get a pan-India perspective about the real estate market, I designed a questionnaire to be filled by brokers, realty developers and end users of property. Hence, acquiring information from these numerous sources has benefited me tremendously in drawing a complete picture of the opportunities present in the Indian real estate market for investment.

4.4.1 Interview Phase

The research was based on primary data obtained mainly from eight interviews that were conducted of which two were real estate agents, three were Mumbai-based developers, one was a realty consultant firm and two were real estate analysts at a top broking house. The eight interviewees were required to look at the questionnaire before the interview was conducted to which I obliged immediately. Taping the interview is a useful means employed in qualitative research. By doing this, the researcher can analyse data to his/her advantage since the matter is not lost; which otherwise would have been if manual notes were taken. I have applied ten openended, structured questions in my interviews and then audio-recorded those to obtain a diverse and valuable set of information from different respondents. Close-ended questions would limit my understanding of the interviewees response and hence, those questions have been used which would give me an in-depth view of the real estate market.

4.4.2 Questionnaire Design

A questionnaire consisting of nine multiple-choice, close ended questions was designed to support the research. It was based on the questionnaire used by industry chamber FICCI with a few changes made keeping in mind the current Indian scenario. It was aimed to be filled by directors of real estate agencies, developers having a nation-wide presence and end users of property. An internet-based questionnaire through email attachment was followed for the developers and agents who were either located outside Mumbai or who refused to be interviewed while a paper-based questionnaire was followed for the consumers taken at strategic 33

locations near retail malls, commercial hubs and upcoming residential complexes. Both these types of questionnaires were sent by mid August to which fifty of them responded out of eightyeight questionnaires generating a response rate of a good 56.82%. Of the fifty, thirty-two were consumer questionnaires; seven were from real estate developers while eleven questionnaires were from real estate agents. In order to increase the response rate; direct contact was made using telephone which was accompanied by a personalised email. A final e-mail reminder was sent in case they had failed to respond.

Most previous researches have been conducted using Internet based surveys. Although the mail questionnaire has difficulties as a research technique having a chiefly low and biased response, it also appears to have unique advantages as observed by Linsky (1975). Besides being economical, the mail questionnaire permits contact with persons living in remote areas, provides data at a quick pace and often elicits responses from people too busy for personal interviews. To enumerate; obtaining detailed responses from the respondents in the mail questionnaires was extremely difficult as the modicum was a written form. However without the help of the mail questionnaire, I would not have been able to approach agents and developers who have a pan India presence. My research would have been restrictive to my geographical presence. Summary This chapter provides an insight to the methodology followed for the research topic. The research method adopted, the tools used for data collection and the research process have been established for the purpose of drawing up an empirical analysis on this subject matter.

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Chapter 5: Empirical Analysis

5.1 Introduction
There were two distinct parts of the research carried out. The first part consisted of a subjective interview of respondents wherein several investment opportunities in the Indian real estate market were examined in detail. The second part consisted of an objective questionnaire where respondents had to choose an option from a given set of multiple choice answers. This chapter provides a detailed discussion of my findings from both the questionnaire and interview.

5.2 Findings of the Questionnaire

The questionnaire that was filled by seven real estate developers, eleven agents and thirty-two consumers as part of the survey was also collected by end August. The profile of the respondents interviewed was characterized in the fifty sample surveys ranged between the ages of 25 to 47 years. While all the consumers surveyed were professionals or businessmen; responses from regional-national real estate development and agency firms came from vicepresidents and directors respectively. This compliments the literature review research that states that India is currently one of the youngest countries (median age of 24.5 years) to have the highest proportions of working population. It supports the career minded outlook of Indias present generation striving to attain greater money power at an earlier age. This has led to the widening of various investment streams for the purpose of generating returns on the idle funds of fast growing Indians.

The information collected from the above primary sources has been critically evaluated to reach a definite conclusion for the purpose of my research study. Every question of the survey has

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been reviewed individually under this section and suitable conclusions are drawn with the help of questionnaire feedback.

The first question was on the significance of Indias position as an investment destination for real estate from the viewpoint of both foreign and domestic investors. Table 1: Indias position as an investment destination for real estate
Very Significant Increasingly gaining Significance Minimal Significance Respondents 11 31 8 % 22 62 16

As can be seen from the above table, 11 respondents (22%) felt that India was a significant investment hub and offered great potential to both investor types in the real estate market. 31 respondents (62%) perceived India to be increasingly gaining importance as an upcoming destination for real estate investment purposes whereas only 8 respondents (16%) felt that India had hardly any scope for attracting investments to the real estate sector. Surprisingly, 4 of these 8 respondents were realty agents. I feel that due to principal-agent problems present in India, that is conflicts of interest between the two parties under conditions of incomplete information; property agents are loosing faith in the workings and scope of the real estate market. However, the remaining 7 agents surveyed and majority of the consumers voted for Indias increasing significance as an investment hub. One of the reasons for this could be the rapid awareness of the sector growth along with the recent 100% Foreign Direct Investment (FDI) allowance into the real estate sector. Above all, 6 of the 7 developers surveyed supported Indias great investment drive possibly due to their strong presence and being a witness to the recent Indian real estate boom.

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The second question tried to ascertain the level of importance the respondents gave to real estate as a contributing factor to boosting their individual wealth portfolios.

Table 2: Importance of real estate as an investment tool

Very Important Increasingly becoming important Not so important Respondents 9 33 8 % 18 66 16

Surprisingly only 9 respondents (18%) considered real estate an extremely important investment tool according to Table 2. Majority of the respondents, that is 33 (66%) were increasingly realising the importance of real estate and its share in maximizing their net worth. 8 respondents (16%) on the contrary did not regard real estate to be an important contributing factor to their personal portfolios. I think what is happening here is that people are now widening their horizons and shifting their investment focus from the traditional means of investing in gold and stocks to diversifying their portfolios to include property and other such lucrative yet stable income streams. An interesting point to note here is the possibility of the 8 respondents (who considered real estate not so important for their investment purpose) living on a lease based system, hence having no form of property contributing to their net worth. I feel that the lease housing system has been steadily picking up over the years, bringing the low income population one step ahead to settle for housing on lease thereby avoiding liquidity crunch as well as having the benefits of possessing a home.

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The following question tried to identify the most preferred avenue for investment in the real estate market from a given set of four options. Table 3: Most preferred avenue for investment in the real estate sector
Direct Investment in land/property Investment in Listed Real Estate Company shares Joint Venture with Realty Developer Others (Please Specify) Respondents 21 22 4 3 % 42 44 8 6

As Table 3 shows, no clear solution could be obtained as 21 respondents (42%) found direct investment in property to be the ultimate investment avenue whilst 22 respondents (44%) perceived investment in the real estate stocks to be a better solution. I feel that people are drifting from making huge investments in a single property to investing in stocks of realty companies thereby benefiting from dividends, capital appreciation of stocks as well as maintaining their liquidity position. Intuitively I come to the conclusion that since real estate was not encouraged on the principles of leveraging, and buying a property required blocking large sums of money in liquid assets, listed real estate companies offered investors to invest in smaller denominations with the accessibility to get out and go liquid easily. Enumerating this statement, assume $1 Million is paid for a house in the suburbs of Mumbai. If a household wanted to invest, they would need $ 1 Million to put into real estate, however with listed stocks, they could participate in the real estate boom by blocking whatever they could afford ($1 $1million). Nonetheless there were 4 respondents (8%)- mostly developers - who felt that joint venture with property developers was the most lucrative form of investment in this market. This is in tandem with section 3.4 of the literature review which highlights the contribution of state governments and realty funds investment into property joint venture projects; thereby acquiring an equity stake and also providing the necessary capital to the developer for successful completion of his project. Then again, 3 respondents (6%), all of whom were consumers; suggested REITs (in other options) to be the most preferred avenue for investment in real estate once it would get a head start in India. This indicates their awareness levels to the potential 38

investment avenues available in the market in the near future. REITs will be discussed in greater detail in the interview analysis section.

The fourth question was whether the sudden surge in property prices across India over the last two years was justified or not. More than half the respondents, which are 26 (52%), believed that the sharp rise in property prices across India was backed by fundamentals. However, 21 respondents (42%) considered the property market prices to be a bubble. There were 3 respondents (6%) nonetheless who were not fully aware of the price movements and hence reserved their comments on the price mechanisms of the market as can be seen from Table 4 below. Table 4: Is the sudden surge in property price across India justified?
Yes No Cant Say Respondents 26 21 3 % 52 42 6

The majority of the respondents who did not support the sudden price rise comprised consumers. A reason for this can be that a surge in property price affects the consumers at large who are the end users of property whereas the realty developers selling the property are infact benefiting from a price rise. From the above responses it can be deduced that although majority of the respondents are in favour of India being a successful investment destination due to strong growth drivers and consider real estate to be an important investment tool; they are not comfortable with the intensity at which the property prices are soaring across India. Therefore I conclude that Indians have a low risk appetite which can be cause of concern for them investing in the real estate market.

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Next the respondents were asked to identify the key problem faced by the Indian real estate sector from four given options. (Table 5 summarises the responses) Majority of the respondents, that is 29 (58%) of them, were convinced that poor infrastructural facilities in India was a major drawback to the sector whereas only 7 respondents (14%) considered ownership issues and unclear land titles to be a cause of worry. Another recent hindrance to the sector; that of rising interest rates putting pressure on affordability of homes was felt by 13 (26%) other respondents. One of the respondents; being a real estate developer, mentioned (in other options) that the licence clearance procedure was extremely slow and problematic causing unnecessary delays in the project development.

Table 5: Key problems faced by the realty sector

Lack of Infrastructural facilities Ownership issues, unclear titles & abnormally high stamp duties Rising Interest Rates dampening affordability Others (Please specify) Respondents 29 7 13 1 % 58 14 26 2

I feel that these responses are not surprising and are in fact in accordance with the literature review presented in Chapter 3. It is evident from above that the Government has not realised the importance of providing a strong infrastructure and needs to take immediate action if it wishes the Indian real estate to be at par with the other sectors of the countrys economy. Also with the sector gradually becoming organised and companies focussing on corporate governance; I feel that ownership issues and land titles are not of as much concern as they were a few years back as can be justified from the above responses.

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On being asked about the segment that has the greatest scope for improving profits, there was a mixed response. 18 respondents (36%) felt that it was the residential segment, 17 respondents (34%) believed that the commercial segment had greatest scope while 15 respondents (30%) perceived the retail segment to earn the maximum returns. Surprisingly no respondent selected SEZ as the highest income generating segment. One of the possibilities for this could be the lack of awareness of the public relating to the special economic zones. While it is interesting to note that the public refers to some leading real estate developers and should have knowledge of the SEZs, however the complex laws and capital requirements being very stringent have dissuaded most people from participating. Thus I can intuitive conclude that even the consultants and developers, not having witnessed a successful case-study or model of SEZ, did not have a fair idea of understanding. Also the long gestation period of capital lock-in of the developers in SEZs prohibit high IRRs (Internal Rate of Return) to be generated.

Table 6: Returns (IRR) generated by the segment having greatest scope for improving profits IRR 5 10 % 10 20 % > 20 % Total Segment Residential 2 7 9 18 Commercial 11 6 17 Retail 1 10 4 15 SEZ -

The majority of the respondents to select retail and commercial segments suggested an IRR between 10-20%. These percentages hint at the high returns that can be generated on investment in the above segments. An interesting point to note here is that half the respondents to select residential segments felt that IRRs of more than 20% could be generated. I feel that with the population, disposable income of Indians and demand for high end houses shooting up; the residential segment has taken the lead in driving the sector forward.

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On the issue of the future of the Indian real estate sector as perceived by the respondents, there was an overall positive response. (Refer Table 7) 18 respondents (36%) had faith in real estate becoming a high growth sector, 23 respondents (46%) believed that the sector would stabilise over the next ten years whilst only 7 respondents (14%) perceived real estate to be a risky sector. However there were 2 respondents who reserved their comments since ten years was too long a period to forecast the future of the industry

Table 7: The real estate sector 10 years from now

A stabilised sector A risk- perceived sector A high growth sector Cant say Respondents 23 7 18 2 % 46 14 36 4

An important point emerging from the above responses is that with peoples awareness levels of the markets and the economy in general increasing; they are becoming more optimistic and futuristic in their approach. It can therefore be concluded that ten years hence majority of the Indians will have their investments in real estate along with many more investment avenues brought to light in the future.

Moving on to the next sub-section pertaining to the seven real estate developers; they were asked to rank the sources of capital most tapped by them in order of preference from the given three options. Table 8: Sources of capital most tapped by real estate developers
Name Shobha Developers Unitech Lodha Developers Anant Raj Industries DLF DS Kulkarni Ansal API Bank loans 3 3 3 3 3 3 3 FDI 1 2 1 2 2 1 2 Capital Markets (IPOs) 2 1 2 1 1 2 1

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As can be seen from the above table, more than 50% of the respondents, that is 4 out of 7 developers, gave the ranking 1 to capital markets as the most frequently used capital source. This can be justified by the fact that all the developers surveyed were listed real estate companies having a pan- India focus. Hence raising capital through public issue of shares must be the most convenient capital source for them. While the same 4 developers ranked foreign direct investments as the second approachable source of capital; all of the 7 developers surveyed gave a ranking of 3 to raising capital through bank loans. This is quite a predictable response since FDI is now allowed 100% into the real estate sector. This has led to joint ventures being formed between the Indian developer and the foreign entity providing the necessary capital resources and acquiring an equity stake in the developers project. According to one of the respondents, banks are disallowing loans for land acquisition purposes. Loans available only for construction and development have forced the developers to hunt for alternative sources of raising capital. I feel that in order for local real estate developers to continue their operations and withstand acquisition by larger firms; it is necessary for the Government to introduce new capital avenues that will benefit the industry at large.

The last question tried to find out whether they felt that the Indian Government had taken adequate measures towards the development of the real estate sector in recent years from the view point of developers. A mixed response was received again. 4 developers responses were yes, showing faith in the Government contribution towards the upliftment of the sector whereas the remaining 3 developers felt the Government had a long way to go in making real estate one of the fine and strong sectors of the Indian economy. None of the developers response to the question was dont know which proves that the developers are well-informed about Government indifference or support to the sector.

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Table 9: Has the Indian Government taken adequate measures for the real estate development in recent years?
Yes No Dont Know Real Estate Developers 4 3 % 57.14 42.86 -

From the above responses I feel that although real estate problems exist in India, the Government has initiated measures to improve the infrastructure, allow 100% FDI into the sector and make the Indian real estate sector a distinguished entity round the world.

5.3 Findings of the Interview

As part of the survey, I tried to collect vital information from a few key respondents on different aspects of the Indian real estate market. The questions used in the interview process were structured. However, the interviewees were given the freedom to discuss issues beyond the specific set of questions pertaining to their area of expertise. Thirty-five professionals were contacted for the purpose of an in-depth interview from which only eight agreed to be interviewed. All interviews were conducted at the interviewees workplace lasting about twenty to thirty minutes in duration. Before conducting the interview, every interviewee was asked whether they preferred anonymity. Fortunately, none had a problem with their names being disclosed for the sole purpose of this dissertation. The profile of the interviewees contained in the table below indicates the dynamics of the real estate sector and the possibility of the sector being examined from different aspects.

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Name Mr. Kailash Rajani Ms. Parul Tijoriwalla

Company Name Rajani Estate Agents

Designation Director

KPMG India Pvt. Ltd (Advisory Real Estate Executive Consultant Services)

Mr. Sudhir Kedia Mr. Danesh Mistry Mr. Prakash Shah

ASK Securities Pvt. Ltd Enam Securities Pvt. Ltd

Real Estate Analyst Real Estate Analyst

Vice President Hiranandani Constructions Sr. Pvt. Ltd

Mr. Manish Jain Mr. Sanjay Runwal Mr. Manubhai Bhagalia

Kumar Properties Runwal Housing Group Bhagalia Estate Agents

Director Managing Director Property Consultant

The following analysis will be exhibited through interviewees remarks on various issues pertaining to the sector.

5.3.1 Growth and Importance of the Real Estate Sector in India

The real estate industry has received significant attention in India in recent years as can be seen from section 3.1 of the literature review. Suggests Mr. Kedia; The real estate market world over is growing especially in USA, Europe, China and India. With the Indian economy growing at a fast pace of 8.5% and the GDP being correlated to this sector; the real estate is expected to emerge a powerful sector of the Indian economy. The population liability in India has constantly created a shortage for land space. Due to demand being much more than supply of available land, property prices across India have shot up tremendously. The population will have a tremendous impact on the sector in the forthcoming years. Mr. Rajani points out, the Indian

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youth has become extremely career oriented and with late marriages taking place; the Indian joint family system has become unorthodox. This has led to a sudden surge of demand for land, property, flats and houses. He adds, the growing economy parity with developed countries, and slowing down of economy progression in the developed countries with Indian populous; a lot of Indian families are choosing to return to their homeland and become a part of the fast unravelling growth opportunities available to Indians. Real estate companies in India are developing at a fast pace. 22 Billion square feet of constructions will be targeted for development in next ten years by the real estate developers suggests Mr. Kedia. If I were to simply assume normal progression of development, India will be adding 2.2 billion square feet of real estate development every year. That is a humongous opportunity for investment participation. There have also been certain macro level changes in India, which reflect, in key parameters of the sector becoming far more favourable. Demographic scenario of India, 50% of the population is young. In the words of Mr. Shah, due to the economic growth and the large, intelligent Indian population recognised all over the world; the overall income levels have risen affecting the real estate market. I feel that with salary levels having risen over the past three years by three-four times, capacity to buy a house has increased tremendously. Vis--vis the old economy, the new economy has seen money in the hands of younger people whose leverage capacity is higher. The capacity to take a high mortgage along with the mortgage market driven by banks has boosted the real estate sector. This has allowed the real estate segment to witness large potentials for development. Another important factor adds Ms. Tijoriwalla pertains to liberalization of foreign direct investments into India. 100% FDI allowance into the real estate sector in March 2005 along with the IT boom especially in Southern India in places like Hyderabad and Bangalore has resulted in the sector witnessing an overall long term growth. I believe that it is the IT boom that has given birth to real estate in India which can be justified by the fact that for every 1 square foot of IT, 4 square feet of real estate is needed.

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Opening up of the economy and liberalization of stringent laws has seen real estate transform into an organized sector. Building of quality housing at a premium cost has seen surging of prices. Office and retail explosion has also complimented this thrust. Mr. Kedia indicates, Besides this, the demand for property is increasing with the coming of Multi-National Companies to India In my opinion, the earlier surges in property prices were not backed by fundamentals. However, the recent surge is not a bubble because fundamentals are in place; that of purchasing power parity moving up along with GDP growth.

5.3.2 Avenues for Investment

All the interviewees suggested direct investment in property and investment in real estate company shares as the two most common forms of investment. Of the four main segments of the real estate sector as mentioned in section 3.1; there is difference of opinion amongst the interviewees regarding the segment that offers greatest scope for improving profits. While Ms. Tijoriwalla says that a self-sufficient township is beneficial since it has various streams of income such as rent, lease, sale of land etc; Mr. Kedia believes that residential segment has the greatest scope since investments are very low. Looking at the various arguments offered, I am personally inclined to agree with the viewpoint put forward by Mr. Kedia. Low capital intensity and high demand in the residential space is a very attractive option for seeking the highest returns for investments. SEZs on the other hand need huge investments and capital lock in for a longer period. However, Mr. Mistry considers SEZ to be the most lucrative in the long run due to tax benefits and land acquisition at a low cost. The most successful example of SEZ according to him is that of Mahindra World City close to Chennai in southern India. That model holds high in my opinion; however the gestation period and intensity of capital required to make the basic infrastructure for the SEZ will require superior planning and high demand on resources in terms of time and capital. Mr. Shah of Hiranandani Developers stated that they were into residential,

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commercial and SEZ and felt the commercial segment to have the greatest scope for improving profits. While I could not come to a consensus with the respondents in this section, one thing important to note however would be that all the four segments in section 3.1 have merit for explosive growth in the coming future.

5.3.3 Concerns regarding the Sector

All interviewees suggested that the Indian real estate sector though upcoming was plagued with numerous problems. Common to them all was the lack of infrastructure facilities acting as the greatest hindrance to the Indian real estate sector. Pricing mechanism in the markets is a great risk to consumers and developers alike. If rapid explosion in supply takes place, prices will fall and the builders will face a cash crunch as their cash generation cycles get elongated. Flip side, if prices rise unchecked, demand may see tapering off till the sector cools down. Monetary checks in the form of interest rates rising in the past four months from 8% to 11% have reduced liquidity in the markets significantly. Buyers have begun shying away from investing as well as pointed out by Mr. Kedia. He adds, Shortage of contractors and manpower for civil engineering work is a major drawback to this sector. Last few years have witnessed employees entering computer and electrical engineering after graduating but with companies expanding and roads and buildings coming up; sector is facing a shortage of civil engineers (who are responsible in actually putting up the building) due to the pay package being lower as compared to other engineering fields. Legislations, approvals and sanctions processes continue to slow down the rapid pace of development in the segment. This was mentioned earlier in section 3.4. Many approvals are required from the Government authorities as observed by Mr. Shah. Firstly the ULC (urban land ceiling) permission is required after which the Building permission, known as the IOD (Intimation of disapproval) is needed. The commencement certificate, the completion certificate 48

and various other regulations are very cumbersome as there is no single window for approval. He enumerates this with an example, Our company bought land in Powai (outskirts of Mumbai) in 1983 while permission to build was granted only in 1987. However he feels that with faster sanctions, land availability, better infrastructure and more money, the sector is set to reach new heights. There are no standard measuring systems for housing in India. Several charges are levied on actual area of the developed property. It is a norm to charge on the built up area of the property. Built up area essentially includes the loading of several costs borne by the developer in the form of lobby areas, external infrastructure and amenities which dont come directly in the purview of your property. Normally it is around 20% above the rate charged on carpet area. However, it is not a standardized rate, confirms Mr. Shah. Lot of developers charge varying rates starting from 20% and moving to even 50% in some cases. No standardised unit of measurement poses a major hurdle as measurements are accepted in square feet, square yards as well as square meters, quotes Mr. Mistry. The recent spurt of activity in the real estate sector has also put execution to great risk. Several equipments, machinery, land clearances etc are a worrisome hurdle for exponential growth. Supports Mr. Mistry, The cost of construction is rising along with execution costs of a project. An example to prove my point is that there is a three year waiting period to purchase a crane for construction. A major concern in my opinion also is the macro nature of Indian investing. Most Indians do not believe in leverage. India has the highest savings rate (Kanwar, 2005) with most of the money employed in low liquid assets such as fixed deposits or term plans. The wealth of any Indian is 90% in assets and 10% liquid compared to an American who has 90% liquidity and 10% asset wealth. Due to this, it is difficult to buy property outright without breaking Fixed Deposits or taking loans, supports Mr. Rajani. Renting property is one solution. All round the world, the lease (rental) system is a huge success. However, Indians being extremely attached to

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their property are unwilling to move out of rented property posing a threat to the owner/ landlord. Therefore, the lease system contributes only 4- 6 % of overall property. Until the Rent Act is changed and the landlord equally protected; leasing in India will not take a major lift, according to Mr. Rajani.

5.3.4 Role of the Government

The interviewees have given diverse opinions on the Governments contribution to the real estate sector. There was a faction of the developers who were in complete disagreement with the government policies. It was interesting to observe that while consumers and property consultants were of the view that government policies to curb inflationary prices movements in real estate was a welcome one; developers like Mr. Ranwal were sour at them. Stability of prices in the market is possible only when the supply of money as well as land is increased. However, the government is restricting the money supply to the real estate sector in the attempt to prevent a bubble but in effect is causing existing projects to remain uncompleted, he said. Consultants and analysts of the sector however viewed the policies of monetary impacts as welcome measures. The Government in an attempt to curb artificial inflation in property prices, is bringing over 30,000 acres of additional land in the National Capital Region (NCR) to the market. By resolving disputes over titles, it is making the land available for sale. The governments initiative to take help from local bodies to verify land ownership in the NCR disputed region is an indication of real estate boom backed by strong Government support, stated Mr. Bhagalia. He adds; the government has already approved Real Estate Funds which will invest in equity and equity linked products of companies who are primarily into real estate in major cities. The Government is also thinking of setting up Investment Trusts to provide the much needed support to the housing sector, similar to the structures adopted in developed real estate markets of USA and Singapore. I feel Investment Trusts would be an efficient mode for providing equity finance as against debt; which is currently how real estate developments in 50

India are financed. Mr. Shah also states in affirmation, the coming of REITs will facilitate a domestic investor to invest in mutual funds. REITs is a kind of mutual fund that invests in real estate, buys property from developers and generates a steady rental income. Also IRRs will increase with property prices and rentals rising by two-three times over a five year horizon. Having supported government actions in this briefing, I would now like to present Mr. Shahs critical views on the same. Due to infrastructure problems, connectivity becomes a major concern. Projects would be delayed due to the inability of the government to provide roads, water, electricity and basis infrastructure support to the projects. This is causing the developers to take matters in their own hands and develop the same. To ensure the government takes actions, bribing has become a common phenomenon. The government expects to be paid by the developers for providing high infrastructure facilities in that particular region.

5.3.5 Sources of Capital available

There are various sources of funds available. FDI for more than twenty-five acres of land, own resources generated from business, banks for construction purposes, private equity funds and raising funds through an IPO (initial public offering) are few of them. A range of funds, Private Equity, Hedge Funds and Insurance companies are waiting to enter the Indian real estate market. Mr. Shah observes, Even foreign markets are available for tapping resources. They are governed strictly by some norms such as, foreign loans cannot be procured by a real estate developer and FDI can enter India either directly; through bankers or through IPC (Industry Property Consultants) who keep a database of real estate developers. Bank loans in India are given only for property development. Financial institutions in India are not allowed to disburse loans to real estate companies for acquisition of land. To raise funds however, some manufacturers are using innovative ways of raising capital. Mr. Kedia explains An innovative way by which capital can be procured is from customers in residential housing. This is known as pre-financing: selling flats while the building is still under 51

construction. Thus developers have to incur only land cost and 10-12% of initial construction cost. Balance payments are taken in advance by pre-selling the property to the end-user; collected at various pre-defined stages whenever the capital is required. A new trend in creating land bank (lists of owned property) is through the FDI route. According to Kumar Properties director Mr. Jain, FDI is the sole way to raise money as banks have cut loans to the realty sector. Additionally, FDI has provided us an opportunity for creating good, larger developments and landbanks. Several firms are using this opportunity and listing themselves on the AIM (Alternative Investments Market) in London such as Hiranandani Constructions (HIRCO) and Raheja Group. Mr. Runwal also supports the FDI route. FDI is our strategy for growth. We are in the process of acquiring a deal with an overseas partner for 200 crore FDI in our first large project- an integrated township at Hadapsar. Recently, there have been several ventures into the FDI route emphasizing its evolving importance in the real estate segment and helping prove my hypothesis of an effective real estate investment opportunity. Large financial conglomerates have struck deals in this front. The Citigroup Property Investment has an equal stake in a SPV created by Gera Developments for a high-end housing complex. Even Credit Suisses real estate investment arm is another example that has invested in a project by Vascon Engineers for a hotel-office-residential block, quotes Mr. Mistry.

5.3.6 Future of the Industry

Real estate will become a stabilized sector of India like the manufacturing sector. Currently at a size of about $15 Billion, the segment is expected to grow to $50-$100 billion in five years as ranged by several experts whom I interviewed. Though it is not a clean sector with unclear laws, titles and political interference; the long term perspective for the sector is bright, says Mr. Kedia. While the future for the entire industry is bright, what has effectively been witnessed from the interviews is that there is a wide 52

diversity in the growth. Indian real estate segment plays on regional dynamics. Every region in India seems to be growing at a different pace. Another important point highlights Mr. Kedia, prices in all the markets are driven by liquidity. When there is shortage of liquidity, property prices will tend to fall. 700 million $ liquid equity waiting to be invested in the Indian real estate market along with the confident developing execution of the developers is a very healthy sign of the growth to come. Mr. Jain argues while comparing the Indian markets to that of USA, Indians are conservative and they would rather put their money in buying a house than the USA system where people pay monthly instalments and then mortgage their house to raise further money. However, this trend will soon catch up in India over the next few years. While the interest rates in the USA are very low boosting the housing sector; India still has to witness this development. This can be supported by a snippet on the savings rate of Indians. A study by CLSA suggested that High Net worth Individuals invested 25% of their wealth in real estate of which 36% was in Asia Pacific region; another positive sign for the good times to come. With the markets becoming organized, there is creation of a certain depth in them. To simplify Mr. Mistrys statement, real estate has become an investment tool. Capital gains with stocks are now flowing into the real estate segment. Earlier focus was primarily on residential development with no lease model and dealings in unofficial money. Now various funds and structures according to Mr. Mistry are entering the arena such as REITs structure, lease framework, slum rehabilitation, society redevelopment and hotel growth. Eighteen Indian developers are now looking at investing in Singapore listed REITs which shows the global presence of Indian real estate markets. The future of the real estate industry will be extremely specialized with companies splitting into different structures. Investors will have a choice to narrow their investments in real estate into a land bucket, developer bucket, rental asset (yield) bucket or a combination of these according to their risk appetite. An example of this structure can be enumerated by the great success by Capitaland - the Singapore based real estate company

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that owns a separate land company, developer company and its own REIT listed on the Singapore markets (CLSA, 2006).

Summary

This chapter contains a detailed analysis of the questionnaire and the interview method used for my research. The subjective analysis throws light upon numerous aspects of the Indian realty sector that respondents remarked upon during the interview while the answers from the questionnaire have been summarised and a brief account of my findings have been provided above. Both the methods indicate that Indian real estate as a sector and an investment tool has great potential if tapped correctly. Lucrative avenues for investment, greater capital accessibility along with increasing Government support has widened the scope of this sector in recent years.

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Chapter 6: Conclusion, Limitations & Recommendations

This chapter sums up the research carried out for the thesis. It briefly covers the literature review, methodology and analysis to present the main findings of the study. This is followed by the limitations of the research; offering researchers a possibility of falling upon an interesting area for further study. Lastly, the chapter provides recommendations for sector improvement.

6.1 Conclusion
This dissertation aims at exploring the upcoming real estate market in India and determines whether there are lucrative opportunities for investment in the market. The research study was split into six broad sections and an interview and questionnaire method was adopted for conducting the primary research. The six research areas were; importance and growth of the real estate industry in India, different avenues for investment in the sector, concerns regarding the sector, the role of the Government, various capital sources available to realty developers and the future potential of the industry. The interviewees were all representatives of the real estate market, comprising of real estate development companies, middlemen, i.e. property agents and consultants and finally realty analysts specializing in forecasting the future market trends of the industry. The respondents of the questionnaire comprised of the above along with consumersthe end-users of property. The main research findings are summed up below:

With a rising population growth (1.7% per annum) and consistent demand for housing (real estate) and consumptions (commercial); India is set to have a long-term active demand from the consumers segment. A deficit in housing of 22 million houses complimented by a fast rising prosperous population will ensure long term fundamentals of this segment remaining intact. It is for this reason that India is increasingly gaining significance as an investment destination for real

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estate round the globe. After analyzing all reasons given by the respondents for the growth of the sector, it can be concluded that a large proportion of the Indian population is attracted towards real estate. Also real estate as an investment tool has been growing in importance over the years in boosting an investors wealth portfolio. This is due to higher returns being generated on investing large amounts of funds and the possibility of earning from various sources such a capital appreciation of land prices, dividends from holding real estate company shares, rental income etc.

The following figure depicts the factors that can have a major influence on the Indian Real Estate Market. This will help domestic as well as foreign investors have a clear understanding of the realty scenario before they go ahead and invest in this market.

CHART 6: PEST FACTORS POLITICAL FACTORS

TECHNOLOGICAL FACTORS

THE INDIAN REAL ESTATE SECTOR

ECONOMIC FACTORS

SOCIO-CULTURAL FACTORS Political Factors The Government has greatly influenced real estate development through various laws, taxes, infrastructure and environmental regulations. The Construction Industry is considered to be one of the heavily taxed sectors of the economy. Any further tax imposed on this sector would affect the orderly growth and development of the Real Estate Sector.

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Economic Factors Macroeconomic factors according to me, which are instrumental in increasing real estate demand, are inflation levels and interest rates. Low and controlled inflation in the recent years have increased the purchasing power of consumers thereby increasing the demand for real estate. On the other hand, the banking sector has provided further liquidity into the domestic real estate market by charging lower interest rates. This has changed the lifestyle of consumers who now have easy access to credit facilities.

Socio-cultural Factors There has been a rising trend in the per capita income and the Gross Domestic Product (GDP) of the Nation. The average salary of Indians is increasing every year with more Multi- National Companies coming into India. Urbanization is moving at a fast pace putting constant pressure on need for more urban land space. The inflation levels and interest rates being under control have led to higher disposable income and hence demand for more homes.

Technological Factors The Internet revolution seems to be the most important technological innovation to impact real estate since the invention of the automobile and the elevator.

Investors must keep the above factors influencing the Indian real estate scenario in mind before committing their wealth to this sector.

The second finding disclosed that there are numerous avenues for investment in the Indian real estate market. With the real estate development of the REIT (Real Estate Investment Trusts) and REMF (Real Estate Mutual Fund) markets round the world over the past decade; India has plentiful opportunities coming its way once the REIT structure is established in India.

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The third finding revealed that infrastructure in India was a key problem faced by the sector. However recent years have witnessed active participation by the Government in the development of the sector, which has prevented dampening of investor spirit.

The fourth finding that came forth from the survey was foreign investments being a major source of capital for real estate development companies. This is probably the only striking difference from that of the literature review that strongly supports the role of the bank in providing the necessary finance to developers and its high correlation with the Indian real estate sector. This can be attributed to the recent change in RBIs (Reserve Bank of India) policy disallowing loans for land acquisition purpose to keep a tight control on inflationary measures. Nonetheless; though banks have disallowed loans for land acquisition purposes, developers have not felt the restriction of funds due to the widening of Indias capital markets and access to foreign fund inflow.

Overall, it is quite apparent from the research that if the real estate market is tapped and penetrated correctly; it has an outstanding future due to the sudden and consistent demand for property in the market for usage and investment purposes.

Having a broad focus; this research study holds many areas that can further be explored by future researchers. The study does not end here but rather unfolds areas to be examined and bridges the gap with areas that may not have been explored within the specified limits of my research question. The following section will reveal such limitations of my research study.

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6.2 Limitations of the Study

Every research has certain drawbacks. It is therefore necessary to incorporate them in the thesis to obtain a true perspective of the research topic. The following are a few drawbacks I faced during my research study.

The study makes use of qualitative analysis, which is interview and questionnaire based in order to find out the investment opportunities present in the Indian real estate market. However quantitative approach has not been used as it would have prolonged the study. Hence financial statements such as Balance Sheet and Profit and Loss of Real estate listed companies have not been analysed to arrive at the growth prospects of the sector in quantitative terms.

Due to time constraints, industries associated with the real estate sector such as construction and infrastructure have not been studied to establish the persistent demand for the realty segment in the forthcoming years. Also due to difference in valuation methods adopted by different countries and limited relevant data; comparison of Indian to any other countrys real estate market has not been possible.

Another drawback was getting through to companies for the purpose of an interview. Limited number of interviewees induced me to collect further information through a questionnaire survey. Further, there could be a possibility of a biased research being carried out due to all interviewees being Mumbai-based. Therefore I feel that for any further research on the Indian real estate market to be effective, the sample size must be increased to adequately include companies from all parts of India to get a clear national perspective of the real estate market.

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However, the research aims at providing a broad overview and gives valuable prospects to the participants of this industry as well as to investors seeking to invest in the Indian realty markets. A few valuable suggestions for sector improvement are provided in the following section.

6.3 Recommendations
The largest hitches to the development of the real estate segment of India are infrastructure, pricing and government laws as suggested by most of the respondents in the interviews. Changes brought in these segments can ensure a better rate of growth for the market and a relatively more attractive opportunity for the consumers and investors. As we have discussed in the paper above, Real Estate in India has a potent demand backed growth. Demand due to population increase, higher allocation to savings in real estate, actualization of mortgaging by consumers and bridging the gap of the current 22 million housing deficit will be a trigger for sustained growth.

The efforts by the government to ensure faster clearances for active real estate development would enable developers in a great way. I recommend that the government should set up a separate real estate division with the objective of single window clearance of all required paper work and clearances. Single window essentially means that the developers will need to approach only one department for the clearances required in checking the title of the land, the water treatment plant, electricity and water utility connections, permission for construction and labor related issues such as facilities and wages. The builders should be given support in ensuring that the land they own and hold is free of encroachment from slums. Also, free hold land should be released to developers with proper title clearances to the land quickly. Some litigation processes take years for clearances, which should be put onto a fast track.

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Government has stringent norms in allocation of Floor Space Index (F.S.I). This essentially means that the government sets a proportional relation to the area under construction and land owned. In developed economies like the United States of America, metros such as New York command a FSI in downtown areas of close to 50x, advocates Mr. Kedia. In Indian metros such as Mumbai, the FSI at an average is close to 2x. To enumerate the significance, for every 1 square foot of land owned, a developer can construct 50 square feet in New York compared to 2 square feet in Mumbai. Relaxation on F.S.I can allow builders to check costs and keep prices under control making it affordable for the middle class consumers of the economy.

As discussed in the paper above, a concern in pricing was witnessed in the interviews with the consumers. There is a norm for the builders and developers to charge the consumers of built up and super built up areas which on an average are 20% and 33% more than carpet area respectively. However, this norm is not a standard policy. Of personal experience in purchasing real estate, I am aware that certain builders are known to charge in the region of 50% as super built up also while some builders remain at the lower band of pricing. If there was standardization by the government for this price opacity, consumers could witness price stabilization and increase their affordability in housing. This would be a significant boost to the sector.

If most of these recommendations were implemented, the evolving real estate segment would witness active participation from foreign direct investments and domestic consumers and investors.

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Websites: www.indianground.com www.indianrealestateforum.com www.sociologycommission.org/docs/glossary.htm http://www.atkearney.com/shared_res/pdf/Making_Offshore_S.pdf http://www.moneycontrol.com/india/news/ipo-upcoming-issues/dlf-ipo-likely-to-open-june11sources-/282667

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APPENDICES

A sample questionnaire used for conducting primary research through the medium of survey and structured interview process has been shown ahead in Appendix A and B.

Appendix A: Objective questionnaire

Appendix B: Interview questions

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APPENDIX A - QUESTIONNAIRE
INVESTMENT OPPORTUNITIES IN THE INDIAN REAL ESTATE MARKET [The following information is required for a Masters in Finance & Investment Dissertation. Kindly complete the questionnaire as per the instructions given being rest assured that the information provided will be used strictly for project purposes] Name: ____________________ Age: ____ Company Name: ____________________ Position at work: __________________ 1. How significant do you think is Indias position as an investment destination for real

estate at present from the point of view of both foreign and domestic investors? Please tick the appropriate box. Very Significant Increasingly gaining Significance Minimal Significance

2.

What importance does investment in real estate hold for you as an individual in

contributing to your net worth? Please tick the appropriate box Very Important Increasingly becoming important Not so important

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3.

What according to you is/will be the most preferred avenue for investment for an

individual/ company in the real estate sector? Please tick the appropriate box. Direct Investment in land/property Investment in Listed Real Estate Company shares Joint Venture with Realty Developer Others (Please Specify)

4.

Do you think the sudden surge in property prices across India over the last two years is

justified? Please tick the appropriate box. Yes (Boom) No (Bubble) Cant Say

5.

What according to you is the key problem faced by this sector? Please tick the

appropriate box. Lack of Infrastructural facilities Ownership issues, unclear titles and abnormally high stamp duties Rising Interest Rates dampening affordability Others (Please specify)

6.

Which segment according to you has the greatest scope for improving profits (IRR)

residential, commercial, retail or SEZs (Special Economic Zones)? How much return do you think it generates? Please tick the appropriate box Segment _______________ 5 10 % 10 20 % More than 20%

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7. box

How do you see the real estate sector 10 years from now? Please tick the appropriate

A stabilised sector A risk- perceived sector A high growth sector Cant say

If you are not a property developer, please ignore the remaining questions. 8. Which of the following sources of capital is most tapped by you? Please rank in order

of preference: 1 being the most preferred and 3 being the least preferred Bank loans Foreign Direct Investment (FDI) Capital Markets IPOs (Initial Public Offer)

9.

Do you think the Government of India has taken adequate measures for the

development of the real estate sector in recent years? Please tick the appropriate box Yes No Dont Know

Thank You for your time and help!

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APPENDIX B - INTERVIEW QUESTIONS

INVESTMENT OPPORTUNITIES IN THE INDIAN REAL ESTATE MARKET 1. Why has India become one of the most favoured destinations for investment in the real

estate sector in the past 3 years? 2. What are the reasons for the sudden surge in property prices across India? Could you

throw light on whether you think this is a boom or a bubble? 3. What is the scope for the real estate segment in India? Can you suggest the

demand/supply dynamics for the sector? 4. What according to you are the key risks/ problems this sector will/ is facing? Could you

recommend any solutions to the above problems? 5. What are the various approvals and regulations needed to be adhered to for the

acquisition, development and completion of a project? 6. What are the different avenues for investment for an individual/ company in the real

estate sector? 7. 8. What are the different sources of capital available to a real estate developer? Which segment according to you has the greatest scope for improving profits (IRR) -

residential, commercial, retail or SEZs (Special Economic Zones)? 9. What role according to you has the Government played in the development of the real

estate sector? 10. Where do you see the real estate sector 10 years from now?

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