154 The Masterbuilder - November 2013 www.masterbuilder.co.in

Realty: Analysis

Bhavani Balakrishna

THE INDIAN REAL ESTATECONUNDRUMThe Indian real estate industry has grown considerably over the past few years. Brands with a

single city focus have moved into multi-city projects. The financing schemes in the industry

have also turned more corporate with private equity and public offerings. Indian real estate will

stay attractive due to its strong economic fundamentals. There is no doubt that the sector

holds huge potential to attract FDI in its various segments. However, progress is possible only

with the joint efforts of both the industry and the Government.

Consequent to the government's policy

to allow Foreign Direct Investment (FDI)

in this sector, there was a boom in

investment and developmental activities.

The sector not only witnessed the entry

of many new domestic realty players but

also the arrival of many foreign real estate

investment companies, including private

equity funds, pension funds and devel-

opment companies entered the sector

lured by the high returns on investments.

The real estate sector has since then been

riding through many highs and lows since

then. The industry achieved new heights

characterized by a growth in demand,

substantial development and increased

he real estate sector is a critical

sector of our economy. It has a huge Tmultiplier effect on the economy and therefore, is a big driver of economic

growth. It is the second-largest employ-

ment-generating sector after agricul-

ture. The Indian real estate industry has

been on a roller-coaster ride since 2005.

155www.masterbuilder.co.in The Masterbuilder - November 2013

foreign investments. However, recently

the effects of the global economic slow-

down were evident here too, and the

industry took a 'U' turn. However, indus-

try experts look upon this as just a pass-

ing phase.

According to the Merrill Lynch fore-

cast, the real estate business in India

will grow to $US 90 billion by 2015 and

touch USD 180 billion by the year 2020.

Demand is expected to grow at a com-

pound annual growth rate of 19% between

2010 and 2014 with tier 1 metropolitan

cities projected to account for about 40%

of this.

As per Cushman & Wakefield, based

on the estimated growth of population

across India, the total new housing

demand across India will be nearly 12

million units in the next five years (2013-

17). The top eight cities will constitute

about 23 per cent out of the total demand.

These cities are National Capital region

(NCR), Mumbai, Kolkata, Chennai,

Hyderabad, Bangalore, Pune and

Ahmedabad. Of the total demand in top

eight cities, middle income group (MIG)

and higher income group (HIG) catego-

ries constitute a majority of the demand

at 2.5 million units. The demand for lower

income group (LIG) will be a mere 3,

00,000 units in these eight cities, due to

expected increase in the housing and

income standards in these key economic

centres. The gap between cumulative

supply and demand in HIG and MIG

segments during 2013- 2017 is estimated

to be about 45 per cent in the top eight

cities.

State of the Market

Decelerating sales, hardening inter-

est rates and weakening cash flow have

severely impacted the real estate indus-

try. Construction activity constrained by

approval delays and tight liquidity fur-

ther inhibited recovery of the sector. All

across the micro-markets in India the

investor sentiments seemed to have

impacted because of the inflationary

pressures and increasing interest rates.

The recent move by Reserve Bank to raise

the repo rate by 0.25 per cent disap-

pointed the industry further as this could

make funds costlier for both developers

as well as consumers. Also, with the Real

Estate Regulation Bill and the Land Bill

coming into force in the next few quar-

ters, this may add further burden to the

developers as it will stagger supply and

lead to more delays in approvals.

Rising Inventory Levels

The real estate sector is saddled

with huge inventories. Unaffordability

continues to be reason for decline in

home sales in the city with developers

refusing to lower prices in a stagnant

real estate market. Despite the prevalent

economic uncertainty, residential sup-

ply in key markets across the country

witnessed an increase in the first half of

2013 according to CBRE's latest report

on the residential segment, 'India Resi-

dential Market View H1 2013'. Accord-

ing to the report, more than 65,000 units

were launched across India's leading

cities during the period under review, as

compared to about 48,000 units launched

during the second half of 2012. About

88% of this supply was concentrated in

the Delhi-NCR, Mumbai and Bangalore

markets indicating their prominence as

residential investment destinations. Most

new launches across these cities were

Realty: Analysis

Rapid urbanization, positive demographics, growing nuclear

families' trend, rural-urban migration, infrastructure devel-

opment, rising income levels and growing housing demand

are driving real estate growth and development in India as the

sector contributes about 6.3 per cent to India's gross domes-

tic product (GDP) and annually generates about eight million

direct and indirect jobs. While so far, mostly tier I centres

accounted for major chunk of real estate development there

is a need to take it to smaller cities to negate the growing hous-

ing demand-supply gap across India. D.S. RawatSecretary General,

ASSOCHAM

Decelerating sales, hardening interest rates and weakening cash flow

have severely impacted the real estate industry

The total new housing demand across India will be nearly 12 million units in the

next five years (2013-17).

156 The Masterbuilder - 2013 November www.masterbuilder.co.in

in peripheral areas, and in the mid-end

segment to cater to the rising demand

for affordable housing in view of the cur-

rent economic situation.

As buyers faced a scenario of high

price points amidst sticky borrowing

costs, demand remained largely slug-

gish across most markets. Buyers

remained cautious of making invest-

ments as current price points in most

leading cities (especially Mumbai and

the NCR) seemed inflated.

In spite of slowing demand, devel-

opers are unfazed and continue to launch

project after project. Developers are not

oblivious to the high demand for afford-

able houses. Many are re-aligning

offerings to attract those looking for a

reasonable price tag.Due to lack of

available land parcels within the cities,

suburbanization has accelerated in sev-

eral metropolitan cities during the past

decade. Unaffordable land prices have

resulted in leapfrogging of residential

development to even suburbs of sub-

urbs or exburbs. The introduction of

metros and general improvement in

infrastructural connectivity to these sub-

urbs is increasing their acceptability as

residential destinations.

Potential of Tier II and Tier III cities

Since metros are seeing less trac-

tion due to high prices, developers are

seeing great potential in the real estate

markets in Tier I & II cities. These cities

have seen immense growth in both

industrial and service sectors. Thus, the

purchasing power of the people has been

on the rise. Also, these places are not

affected by global factors unlike the met-

ros, which are heavily dependent on

global economic developments. Fur-

ther, land prices in Tier II and Tier III cit-

ies have not become as expensive as in

metros and super-metros. Cities like

Ahmedabad, Surat, Vadodara, Kochi,

Coimbatore, Tiruvananthapuram, Jaipur,

Jodhpur, Vishakapatnam, Vijaywada,

Chandigarh and Ludhiana are the new

hot-spots for real estate.

However, it is believed that local

developers will have a better stronghold

over these markets vis--vis outsiders

as they understand their geographies

better than any players who arrive from

the outside to experiment on the Tier II /

Tier III story. Also, each local market has

its own development control regulations,

own municipal byelaws and regulations

and it is difficult, tedious and time con-

suming.

Affordable Housing

Affordable housing industry has

emerged as the most vibrant and dyna-

mic segment of the Indian housing sec-

tor. As per reports, the Indian affordable

housing industry is expected to surge at

a CAGR of around 40% during 2012-

2014.

While most developers have shied

away from this segment previously, an

increasing number have been entering

into the affordable housing space. There

is a gradual realization that affordable

India's economic growth prospects continued to face strong

challenges from a depreciating currency, weak industrial out-

put and a stagnating policy environment, thereby hurting

investor sentiment in the real estate sector. RBI's latest ruling

on disbursement of loans on special schemes will further

impact the residential market across most micro markets. I

expect the market to remain sluggish in the short to medium

term. NRI investments, however, might witness an increase

owing to the depreciating value of the rupee. Anshuman MagazineChairman &

Managing Director,

CBRE, South Asia Pvt.

Unaffordable land prices have resulted in leapfrogging of residential

development to even suburbs of suburbs or exburbs

Since metros are seeing less traction due to high prices, developers are seeing great

potential in the real estate markets in Tier I & II cities

Realty: Analysis

158 The Masterbuilder - 2013 November www.masterbuilder.co.in

housing calls for a different mindset from

developers. Whilst price of premium

residential projects are largely guided

by land costs, construction costs have

a significant share in the price of afford-

able housing. This is due to the fact that

whilst land prices fall exponentially from

city centre to peripheral locations of the

city, construction costs generally follow

a gradual trend from premium luxury,

mid-income to low-income housing.

Hence, it becomes important that costs

are minimized for construction of low-

income housing whilst balancing the

amenities provided as well as ensuring

the safety and serviceability of the built

structure during its lifecycle.

Emergence of microfinance institu-

tions focused on low income housing

has helped in improving buyers' access

to housing finance.The Government's

introduction of policy initiatives such as

Affordable Housing in Partnership

(AHIP) focused on transition of public

sector role as `facilitator', increased role

of the private sector, decentralization,

development of fiscal incentives and

concessions, accelerated flow of hous-

ing finance and promotion of environ-

ment-friendly, cost-effective and pro-

poor technology has to some extent

encouraged the private players to enter

this space.Under the Union Budget

2012-13, External Commercial Borrow-

ing (ECB) has been allowed for afford-

able and low-cost housing.

During 2009-2012, real estate devel-

opers have launched projects in the affor-

dable segment across Indian cities, with

units priced between ` 5-10 Lakhs (USD

10,000-20,000). Several of these pro-

jects have been sold on an application

model due to huge demand, with multi-

ple takers for the same unit. Developers

have successfully executed affordable

housing projects of nearly 15-35 acres

having 1,500-3,500 units at locations

beyond 2025 km from the city centre.

There have been several affordable

housing projects that were sold out

within days or weeks of launch. Whilst a

short period of construction results in

an accelerated construction-linked pay-

ment from buyers, assured sales and

reduced cash-flow risks. However,

despite the high rate of returns achieved

by undertaking the measures mentioned

above, unavailability of land at suitable

prices and locations, low absolute value

of returns and lack of financing to under-

take large-scale mass housing projects

could prevent several developers to

enter the segment. For higher absolute

value of returns, the scale of the project

needs to be significantly higher, where

large volumes can ensure a larger profit

to the developer.

Investments

Approximately ` 118.54 billion is

available with private equity (PE) firms

ready to be deployed in real estate

despite a drop in the PE investment in

the first half of 2013. While PE invest-

ments in the real estate was recorded at

INR 16.38 billion in H1 2013, which is

During 2009-2012, real estate developers have launched projects in the affor-dable segment across

Indian cities, with units priced between ` 5-10 Lakhs

Lack of financing to under-take large-scale mass housing projects could prevent several

developers to enter the segment

Realty: Analysis

46% lower when compared to H1 2012

(` 30 billion). This decline in the quan-

tum of PE investments was primarily

due to fewer deals as the average ticket

size remained the same.

The total value of investments in the

residential segment recorded at INR

9.3 billion in H1 2013 witnessed a drop

of 48% over the last year. The total value

of investments in the office segment

was also lower in H1 2013 at INR 7 bil-

lion. However, there is a strong growing

trend towards investments in ready

office space. The growing stability of the

market is reflected by the continuous

growth of the core investors (number

and value) with over INR 77.05 billion

invested in ready office space during

the last years.

India's construction sector compris-

ing of townships, housing, built-up

infrastructure and construction devel-

opment projects has attracted a cumu-

lative foreign direct investment (FDI)

worth over US $22 billion (bn) during

April 2000-June 2013, highlighted an

ASSOCHAM paper.

Evolving Standards

Real estate, which was earlier an

unorganized, family-driven practice,

has been slowly and steadily driven to

becoming more organized. Opportuni-

ties for tie-ups with international real

estate organizations and access to

funding from international firms have

seen some Indian players getting out of

their comfort zone and adopting inter-

national practices. This move was pro-

pelled by the unified effort of stake-

holders, including the government, to

regulate the practice and increase cred-

ibility of the real estate industry.

Today, the industry is levitating

toward adopting professional practices

that have traditionally been characteris-

tic of the service industry. This transfor-

mation, however, is bringing in opera-

tional hurdles for the industry. Some of

the numerous challenges include find-

ing and retaining trained human

resources, dealing with aware custom-

ers, enhancing customer experience,

employing technology to enhance prod-

uct offering, cutting down on construc-

tion cost and time, or just being an envi-

ronmentally responsible company.

As India continues to attract interna-

tional attention with multinationals

entering the country and penning their

expansion further, real estate needs to

step up and offer more professionally

managed service offerings.

Challenges

The key challenges that the Indian

real estate industry is facing today are

lack of adequate sources of finance,

shortage of labour, rising manpower

and material costs, approvals and pro-

cedural difficulties.

Delay in Approvals

The real estate industry has been

continuously emphasizing on the need

for a single- window clearance for

approvals of realty projects since the

cost goes up by 40 per cent due to

delay in approvals, which generally

takes 12-24 months.

The government has recently

announced it will soon appoint real

experts and consultants in 15 major

159www.masterbuilder.co.in The Masterbuilder - 2013November

While demand for housing units will grow proportionate to the

rise in population, supply is expected to be less aggressive in the

short to medium term. New regulations like LARR Bill and Real

Estate regulatory bill which are expected to come into force in

the next few quarters will stagger supply. Additionally, there

may also be a rise in construction cost which may affect pricing

and therefore adversely affect end user demand. The key issue

of financing real estate projects remains critical especially in

the wake of recent announcements where apex bank RBI has

been cynical of financial institutions lending upfront money to

developers. As expected, the demand will be higher in MIG seg-

ment rather than in the HIG however, developers are unable to

meet this demand due to aspects such as high land costs,

development costs and escalating inflation which also affects

the cost of construction.

Sanjay Dutt

Executive Managing

Director, South Asia,

Cushman & Wakefield

The key challenges that the Indian real estate industry is facing today are

lack of adequate sources of finance, shortage of labour, rising manpower

and material costs

India's construction sector comprising of townships, housing, built-up infrastructure

and construction development projects has attracted a cumulative foreign direct

investment (FDI) worth over US $22 billion (bn) during April 2000-June 2013

Realty: Analysis

5-7

Conversion of land use

Project letter of intent and license /

Intimation of disapproval (IOD)

Pre-construction approvals from

state level bodies*

Pre-construction approvals

from central bodies*

Approvals for commencement of construction

Approvals for construction plan sanction

Construction period

Inspection and approval

procedure for building completion

Occupancy certificate receipt

from data of completion of above

Months 0 12 24 32 60 65

Approval Process after Land Acquisition Till

Commencement of Construction (24-32 months)

8-12(Months)

4-6

6-8

5-7

2-3

2-3

2-3

24-30

Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011

Note: The stages - Pre-construction approvals from state level bodies and bodies and central bodies can happen simultaneously

states for helping them to prepare

affordable housing policy and stream-

line the rules for approving realty pro-

jects. These consultants will help the

states to develop a housing policy with

special emphasis on the affordable

housing and also study the various

laws, rules and regulations which are

involved in getting a clearance of build-

ing activities. They would also develop

software that will help the states in expe-

diting the approval process. The pro-

cess of engaging consultants has

already started and the same would be

completed in the next two months.

Funding

The weak economy has affected the

demand for residential units. Inflation-

ary pressures and high interest

ratehave affected buyer sentiments. On

the other hand, a lot of projects have

been launched and inventory levels are

running high.Banks are cautious in lend-

ing to the real estate developers because

there is a huge mismatch in price and

demand. Real estate developers have

been expressing concern that many

projects are stalled due to lack of funds.

In order to boost fund flows to the

cash-strapped sector, the government

is mulling on introducing changes to

the current foreign direct investment

(FDI) norms for the real estate sector.

Foreign direct investment (FDI) of 100

per cent is allowed in real estate through

the automatic route, subject to condi-

tions, including a minimum built-up

area for projects.There are talks about

bringing down the minimum built-up

area to 20,000 square meters from the

existing 50,000 square meters.

Also, an investment of INR 40,000

crores has been earmarked to mobilize

money by the government and institu-

tional sectors to develop 2 million houses

in next four years.

To facilitate private sector participa-

tion in the affordable housing segment,

the government has redesigned afford-

able housing in partnership scheme in

which it would give a subsidy of 10-15

per cent of housing cost to build a house

and make it available for the poor sec-

tions.

The Securities and Exchange Board

of India (SEBI) has re-initiated the pro-

cess of introducing real estate invest-

ment trusts (REITs) in the country. REITs

will bring the muchneeded respite to

the commercial real estate sector and

enable developers sitting on assets to

both unlock value and create liquidity.

REITs, which will raise funds through

initial offers, will have to list their units on

exchanges for trade. They will be allowed

to raise additional funds through follow-

on offers as well.

To ensure that only established play-

ers launch REITs, the minimum size of

assets under management has been

proposed as ` 1,000 crore. Initially, the

minimum investment size will be ` 2

lakh, which may keep retail investors

away from this new market. At least

90% value of REIT assets should be in

ready properties generating revenue.

The remaining 10% can be in other

specified assets. REITs will have to dis-

tribute at least 90% of their net distribut-

able income after tax to investors.

According to Cushman & Wakefield,

around 57 million square feet of office

space is vacant in India and over 200

million square feet of investible 'Grade

A' leased offices are unsold. These

properties can be used by REITs to gen-

erate rental incomes. The residential

segment, where annual rental yield is

low (2-5%), will be better suited for capi-

tal appreciation.

Future Outlook

The Indian real estate industry has

grown considerably over the past few

years. Brands with a single city focus have

moved into multi-city projects. The fi-

nancing schemes in the industry have

also turned more corporate with private

equity and public offerings. Indian real

estate will stay attractive due to its

strong economic fundamentals. There

is no doubt that the sector holds huge

potential to attract FDI in its various seg-

ments. However, progress is possible

only with the joint efforts of both the

industry and the Government. On the

one hand, the industry should work

towards increased transparency, clear

land titles, improved delivery and pro-

ject execution while on the other hand,

the Government must provide fiscal

incentives to developers to build low

cost and affordable housing for the

masses and also review the existing

FDI guidelines for investment and

development in Indian real estate in

order to increase the flow of foreign cap-

ital into the sector. In the coming years,

the opportunities in the real estate sec-

tor will attract more global players to

India and hence will help the industry to

mature, become more transparent, im-

prove management and adopt advan-

ced construction techniques.

160 The Masterbuilder - 2013 November www.masterbuilder.co.in

Realty: Analysis