Indian Real Estate Perspective

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1 Indian Real Estate: Perspectives PREPARED BY SUKETU KOTHARI-07UP01 SUB:HOUSING POLICY AND FINANCE 3 RD SEM,OCT 2008 A.P.I.E.D BHAIKAKA CENTRE FOR HUMAN SETLEMENT V.V.NAGAR

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Transcript of Indian Real Estate Perspective

Page 1: Indian Real Estate Perspective

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Indian Real Estate: Perspectives

PREPARED BYSUKETU KOTHARI-07UP01

SUB:HOUSING POLICY AND FINANCE3RD SEM,OCT 2008

A.P.I.E.DBHAIKAKA CENTRE FOR HUMAN SETLEMENT

V.V.NAGAR

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Demographics and Development

1. Global urban population is expected to grow from 2.86 billion in 2000 to 4.98 billion in 2030, of which high-income nations will account for only 28 million out of the expected increase of 2.12 billion (Source: UN-Habitat 2004)

2. In India, 19.9% (in 2001 that translated to ~200 million) of total population lived in our urban areas, and contributed 38.9% of GDP.

A simplistic but linked projection based on the two statements above seems to indicate at least 500 million of India’s 2030 population could be urban, but only by assuming that the rural-to-urban population shift remains static, and zero percent population growth!

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State of the Real Estate Market

• The sector remains largely urban & semi-urban, and again, largely unorganized

• There are less than a dozen developers in the country who are able to deliver relative quality, and operate in niche territories, although a few amongst them are seeking to expand their geographical footprint

• The sector has recently shown explosive growth, and this growth was not caused by increased FDI

• Nevertheless, many (incl. FIIs’) feel that prices are overly rich and unsustainably high

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State of the Real Estate Market

• A key question: Is relative pricing predominantly set by investors or end users? Industry sources say that end user buying has gradually increased over the last ten years (to 60+% from 35%)

• India could do with a clutch of quality foreign developers to offer much needed competition and improve the quality of our (perhaps already improving) residential and office offerings that mostly come to us from less than a handful of Indian developers

• Many of you are probably just as surprised as others elsewhere how tenets of basic urban planning especially related to primary infrastructure are so casually ignored. This is true in both tier-1 and tier 2/3 cities

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State of the Real Estate Market

• First time home buyer numbers have multiplied• The median age of home buyers has reduced from 38

years in the early 1990’s to about 28 years today • The ready to migrate office worker (especially in

IT/ITES sector) would much rather now buy than rent, even if stability of job & location in one city is not assured

• Low mortgage rates & easy access; many competing players in the mortgage business

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A Bubble in the Making?

• Over last 12 months, some parts of the country have seen land price surge by 40-45%

• Investors who traditionally stayed out of real estate are now acquiring a land bank in the hope of quick profits

• Many such investors are acquiring agricultural land in multiple locations for conversion later, or sell such land parcels to other investors or developers

• However, does this apply to raw or even serviced land, or only to developed single & multi family homes?

• Class A (& now, any) office space is in short supply

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A Bubble in the Making?

• We all know that some segments of the market (retail in particular - in some over reached parts of the country), has cooled off

• Has the projected incremental demand (200 million sq. ft. by 2010) by IT/ITES caused the current volume of new developments in this sector?

• Even currently available/scheduled BTS office yields will be seriously jeopardized if IT/ITES demand projections are negatively impacted by as much as 7-10%

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A Bubble in the Making?

• Are developers (esp. office and residential) building & expanding aggregate land bank in anticipation of a continuing boom in one sector

• In some cities, very high land prices make sensible returns from development unrealistic, or at least very difficult to achieve

• Some recent land transactions (in urban areas pan-India) would point to such a situation

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So, is this a Bubble - after all?

• Probably not, for a variety of reasons• That does not mean a correction is not overdue in

certain selected regions• Tier 2 cities have potential to grow from where they

are today because prices are not rich, and their populations have ample purchasing capacity, and most of all, they also know what they want in terms of layout, quality of fit-out, and design

• Tier 1 cities pricing may or should(?) correct, or at the very least, plateau

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Reduced Developer Margins?

• There is clear evidence though that while land prices have risen sharply & finished product price may be looking up, this is happening very selectively

• Building material costs have also recorded increases adding to developer woes

• So, developer margins must be under pressure?• Niche developers of repute offering quality may yet

attain higher margins

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Reduced Developer Margins?

• Land prices could plateau during a cool down period while finished product prices catch up?

• In many ‘mature markets’ developers have to be satisfied with un-leveraged returns of 5-7%, but India has revealed the glimpse of much higher returns, which though attractive, may reduce over time.

• This explains the continuing interest of FDI in Indian real estate

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Relevant Base Data

• The Planning Commission is said to hold the view that urban housing is currently short of ~9 million units

• The Asian Development Bank believes that the deficit will balloon to ~22 million units by 2007/8

• Do the above statistics include all segments of demand, incl. low/affordable housing?

• It is thought that FDI may tend to eye the upper end of the market, while the middle to affordable end of the market may be just as attractive in absolute terms!

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Relevant Base Data

• Urban dwellers in India accounted for ~20% of population in 2001, compared to ~18% in 1961 (China: 32-34% ~ 2001). While our economic planners try and arrest the rural-to-urban shift, it is currently a fact of life

• Although it merits little comparison, a similar statistic for urban dwellers in Western Europe or most of North America would be 75-80%

• The real estate sector in India is estimated to be growing at just under 10% (development & construction) and looking ahead this is an important driver for GDP growth

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What does today’s relaxed FDI Policy allow?

• FDI allows FIIs’ to invest in smaller developments (of 25 acres, relaxed from 100 acres)

• 100% investment in townships, housing, hospitality, education, recreation, etc.

• Some concessions for JVs with Indian companies

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What FDI Policy does not allow

• Sale of un-serviced or un-developed plots• Access to re-furbishing and re-fitting existing

developments• Logistics for retail; Storage and warehousing

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Impediments to FDI in this sector

• Indian developers mostly have no need for offshore capital, although some, arguably, could do with an infusion of better development skill-sets

• This is either because most Indian developers are already adequately capitalized, or because cheaper debt finance is liberally available

• Besides, sale payment terms currently concede adequate progress payments cash flow to the developer

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Impediments to FDI in this sector

• There is a lack of a proper exit strategy. • A REIT form of exit would assist enormously• It is just possible that Indian REITS will become real in

the near future as intervening tax structures are further rationalized and liberalized

• This could potentially enable retail real estate investors invest in REITS instead and let mature developers play a meaningful role in a sustainable market

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Impediments to FDI in this sector

• Although the Urban Land Ceiling Act 1976 was repealed in 1999, many States have not complied in repealing at State level. In some such States, the ceiling is as low as 500-2000 sq. metres

• Stamp duties continue to vary State to State, and in any case some would even consider 8 (+1)% still far too high and as a transactional cost, an obstacle to home ownership.

• Stamp duty + registration should not exceed 2-2.5%• The Central Govt. should do more to actively persuade

State Govts. to act coherently in this regard

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Impediments to FDI in this sector

• One of the most critical obstacles impeding FII investment is the lack of transactional transparency

• This remains the number one reason why FDI into this sector remains low

• The real estate sector in India is still largely unorganized and partly as a result, prone to seeking part cash payments to fund purchases

• This is especially true in higher value properties

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Impediments to FDI in this sector

• This arises partly because the sector needs unaccounted cash to lubricate the various approvals process at different (lower?) levels

• The high end property market attracts players who are only able to pay (at least in part) for property with unaccounted funds earned from business

• The solution probably lies not just in overhauling the tax system (where we have made good progress), but

in simplifying the approvals process for development

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Impediments to FDI in this sector

• However, as more and more first time buyers are raising mortgage financing, the ubiquitous cash element will hopefully disappear

• It is even possible that buyers are not willing to pay ‘cash’ for real estate when financial institutions are willing to lend against lower equity, and surplus ‘cash’ if any may be spent to support a consumer lifestyle

• This situation is probably true of the affordable to mid market housing (defined as Rs. 900-Rs. 1200 per sq ft price range)

• Be that as it may, land deals – in particular large value deals, and high end housing is still plagued by a high cash component

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Impediments to FDI in this sector

Last and by no means the least, our urban infrastructure is yet to catch up with projected development. Indeed, it is sadly true that infrastructure has not caught up with existing development. The prospect of more density without urban planning, matching city infrastructure for roads, water, waste disposal, power, education and public transportation (to name a few), is daunting and will remain our biggest challenge as we move ahead

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