Real Estate Sector - Final

8/8/2019 Real Estate Sector - Final

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Indian Real Estate sector:Problems which are faced by Key

Players and Proposed Solutions

Submitted By

Harshit Garg

(PRN # 08020841015)

Specialization: Finance Management

Under the guidance of

Prof. MVS Prasad

Associate Professor

SIBM, Bangalore

Symbiosis Institute of Business ManagementBangalore



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STUDENTS’ DECLARATION

I, Harshit Garg, hereby declare that the dissertation work titled ―Indian Real

Estate sector: Problems which are faced by Key Players and Proposed

Solutions‖ has been carried out by me under the guidance and supervision of

Prof. MVS Prasad, SIBM, Bangalore.

I further declare that this dissertation is the result of my own efforts and that it

has not been submitted to any other university or institute for the award of a

degree or diploma or any other similar title of recognition.

Place: Bangalore Signature of Student

Roll No: 11015 Name of Student: Harshit Garg

MBA, 4th SEM

Signature of Guide

Name of Guide: Prof. MVS Prasad



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ABSTRACT

The research on the topic - ‗ Indian Real estate sector - Problems being faced and proposed

solutions’ focuses on the situation of the Indian Real estate sector and companies in different

economic phases, tries to identify factors which affect this sector, the factors realty players

should consider from consumers‘ point of view and Problems being faced by this sector along

with probable solutions.

This report has been done to advise Indian real estate companies about the measures they

should be taking provide this sector more growth opportunities with least cost along with new

potential customer segment & different operating models.

The method adopted for this report is the secondary research method which has helped in

analysis and final recommendations to the Indian Realty companies as result for the future

scenario point of view.



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Objective of the Study

The Indian real estate sector plays a significant role in the country's economy. The real estate

sector is second only to agriculture in terms of employment generation and contributes

heavily towards the gross domestic product (GDP). Almost 5 per cent of the country's GDP is

contributed to by the housing sector. In the next five years, this contribution to the GDP is

expected to rise to 6 per cent.

Moreover, India leads the pack of top real estate investment markets in Asia for 2010,

according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute, a global

non-profit education and research institute.

According to the Tenth Five Year Plan, there is a shortage of 22.4 million dwelling units in

this sector. Thus, over the next 10 to 15 years, 80 to 90 million housing dwelling units will

have to be constructed with a majority of them catering to middle- and lower-income groups.

Looking at the demand and contribution, Realty sector makes to the Indian economy one can

easily say that this sector is one of the most promising sectors for Indian economy growth and

development, but despite such a high growth potential and contributing field, financial

meltdown and economic crisis of 2008 resulted in significant downturn in the Indian real

estate sector. Indian real estate sector saw a reversal of sorts with the declining affordability

of the end users and reducing funding options for the developers.

Considering both of these aspects of importance of real estate for Indian economy and

problems it has faced in the recent years, this report tries to meet the following objectives:

Provide an insight on the various factors that impact this sector along with factors that

Realty players should consider from consumer‘s point of view.



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Study the impact of various phases on the Indian real estate sector and its player‘s

Profit margin and Market capitalization with the help of BSE Realty index.

Study the problems which have been faced by the whole sector or few of its players

during different phases of the Indian economy and find out the reasons behind them.

Study the problems real estate sector has faced in finding the cost-effective and stable

source of finance and suggesting the various alternative sources of finance.

Suggest the new market segments this sector should look focus upon considering

Govt. initiative and potential demand.

Suggest the appropriate growth potential areas in India where investment should be

made.

Suggest the new asset classes and formats which it should adopt.

Suggest different cost effective innovative Business and Investment models for future

operations.

Suggest the learning players should adopt from past and apply in future states of

Indian economy.



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Executive Summary

The dissertation has been initiated to focus on the factors that do matter for this industry and

its customers, different phases of growth rate Indian real estate has seen till now and

challenges that are being faced by Indian real estate sector in terms of either demand from

customers (either commercial or residential property) or identifying appropriate source of

finance. Also, discussed are different operational models, which this sector can try along with

possible measures to increase the return on investment. In the end, this report contains the

conclusion of this analysis and final recommendation to industry players for the challenges

till now or possible challenges.

The first part of this report focuses on this sectors‘ different phases of growth, decline,

stability and potential growth from 2010 onwards as in all these different phases this sector‘s

companies (either all or few) have got impacted in terms of Profit Margin as well as Market

Value of shares which has been highlighted with the help of BSE realty index was launched

on July 9, 2007 with 11 scrips and which represents 95% of market capitalization of real

estate development companies in BSE. Also done in it is the analysis of these companies to

find out the reasons for few players‘ success and others failure.

The second part focuses on the various sources of finance which includes borrowing from

banks, IPO, FDI, Private Equity, Real Estate Mutual Fund and Real Estate Investment Trust.

Of late, Real Estate industry has faced various challenges related to looking at the best and

stable source of raising money as instability of these sources has led to high cost with no

guarantee of future availability. Alternatives have been suggested for different kind of

finance along with various potential business and investment models to generate positive

response from retail investors and FDI.



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The third part of this report contains the potential areas for growth i.e. which areas/cities real

estate companies should concentrate now. These areas are Tier II and Tier III cities and space

in Commercial office, Residence, Retail, Hospitality and Special Economic Zones as well as

different asset classes and formats which can be named as Logistics and Warehousing,

Healthcare Infrastructure, Education Infrastructure and Low-cost housing.

Finally mentioned are the various learning that Real estate players should adopt in different

phases of Indian future economic state and factors that Realty players should consider from

consumers‘ point of view.

This report ends with the conclusion and final recommendation to the Indian Realty players

to have growth with least cost.

The data for this report has been taken from secondary resources which are mentioned in

Bibliography at the end and hence this data is as accurate as given in these sources. Also,

this report focuses on few of the real life problems being faced by this sector along with

probable solution hence this report should not be considered one stop-shop for all the

problems and final solutions for the Indian realty sector. However, this can be taken as a

guide to gain insight or a starting point to have alternative solutions to problems in Indian

real estate sector.



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Index

S. No. Topic Page No.

1. Introduction to Indian Real Estate Sector

What is real estate??

Factors that impact Real Estate Sector

Importance of Real estate sector for our economy

and Initiatives taken by Govt. for this sector

Areas which claim the major chunk of growth pie

in India

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2. Indian Economy - Different phases 20

3. Real Estate – In Different phases

a. Boom (FY 2007-08)

b. Recession (FY 2008-09)

c. Stability (FY 2009-10)

d. Growth (FY 2010-11)

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4. Problems being faced by Indian Realty sector and probable

solutions 42



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5. Learnings Real estate players should adopt in different

phases of Indian future economic state 63

6. Factors - Realty players should consider from consumers’

point of view 66

7. Conclusion 69

8. Recommendations 71

9. Bibliography 72



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Real Estate - Introduction

What is Real Estate?

Real estate also called real property or realty would refer to not only land but also

improvements to the land, such as buildings, fences, wells and other site improvements which

are immovable. Title to real estate normally includes title to air rights, mineral rights, and

surface rights which can be bought, leased, sold, or transferred together or separately. The

term real estate is often used interchangeably with the term real property, but the term real

estate emphasizes the asset itself, and real property encompasses the legal issue of ownership.

Major Types of Real Estate Property

1. Vacant Land

Vacant Land can be used for farm and ranch purposes. Generally the property size and price

is quite large. As long as the spread continues, the area one has to cover gets farther out from

the city.

2. Residential Properties

Residential Property can be referred to as property which is zoned for single-family homes,

multi-family apartments, townhouses, condominiums, and co-ops.

3. Commercial Properties

Commercial property can be empty land zoned for commercial use, or an existing business

building or buildings. Commercial Properties can be further classified into:



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a. Multi-Family Commercial Real Estate: Multi-family commercial real estate

property types include duplex homes, and other construction for habitation by

multiple family groups. Condominiums are frequently called multi-family because

of their construction as a group, but are normally listed and sold as single family

residential units. Duplex homes are also frequently listed and sold as residential

units to a buyer that lives in one side and rents out the other.

b. Retail Space Real Estate Properties: This category would include single

buildings used as stores for clothing, electronics and other consumer products, as

well as malls, strip centres and the like. Restaurant spaces are a specialty subset of

the retail category, with some listings shown as restaurant/retail. Valuations can

be based on size and land value, retail sales per square foot or other investment

return calculations.

c. Office Buildings and Office Complexes: A single building designed for office

use, or a group of offices in a single building or cluster of buildings would fall

into this category. When offices are grouped in structures with single ownership,

they are listed as commercial office rental property. The owner derives income

from the rental payments of the office tenants. These can be valued based on the

rental income return on investment, rather than methods using square footage and

land value. Medical & Dental offices are a subset.



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Factors that impact Indian Real Estate Sector

(I) Economic Growth

As the GDP increases the real estate prices also increases because there is a high

degree of positive correlation between the real estate prices and GDP. Real estate

prices also increases with increase in the per capita income as there is high degree of

positive correlation between these two also. Positive signs for the real estate are

Double-digit income growth rate for the next 3-4 years which should improve

affordability, driving demand for residential units. Also, GDP growth rate is predicted

at 7.5% as per World Bank in 2010.

(II) Demographics and Urbanization

Indian household families are moving from joint families to nuclear families leading

to more demand of households. Also, UNDP forecasts that urban population will

constitute about 40% of total population by 2030 from the current about 28% leading

to more demand by population for urban households. Currently, positive demographic

trends in India are visible as middle class or the aspirers to show a CAGR of 10.4% to

each 124m in 2013 compared to 46m in 2003.

(III) Favourable Interest Rate and Fiscal Incentive

Interest rates affect the real estate prices because they affect the lending and

borrowing by the investors. Fiscal incentives offered on owing a residential house is

also a significant demand driver, as, if there is easy availability of finance, more loans

will be taken to purchase or build new homes. The correlation between interest rates

and home loans can be drawn from the fact that in 2008 the growth of real estate



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sector is going down due to high inflation and hike in home loan rates by the banks

following the increase in bank rate and SLR by the RBI.

(IV) Influx of FDI in Real Estate business

The FDI into the country affects the real estate FDI and real estate having a positive

correlation which can lead to the boom in this sector. Increase in FDI from 2006 to

march 2007 is 10%. Earlier it was 16% and in 2008 it was 25%.Increase in FDI limit

for Indian Real Estate sector makes the real estate sector in India more organized,

increases professionalism in the sector, can introduce advanced technology in the

construction business and can create a healthy and competitive market environment

for both Indian and foreign investors.

(V) The Property Transfer Process

In efficient markets, information flows so quickly among buyers and sellers that it is

virtually impossible for an investor to outperform the average systematically. As soon

as something good or bad occurs, the prices of the affected company‘s stock adjust to

reflect its current potential for earnings or losses. Real estate markets are not as

efficient as stock markets, not only it takes its own time to adjust the real estate prices

but also acquiring a property necessitates a complex process. Several laws, rules, and

regulations cover the matter of property transaction. General purchasers do not have

enough knowledge about the minutest details of legal aspects involved in acquisition

of property.

(VI) Development of the special economic zones as real estate property

Development of SEZs in various segments such as multi-product, Information

Technology, Bio-technology, Gems and Jewellery, Textiles and technology intensive



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industries attracts both developers and corporate houses (refer table for a list of

corporate that have shown interest in development of SEZs).

Corporate Location

Reliance Industries Gurgaon, Mumbai/Navi Mumbai

Adani Group Mundra

TCG Refineries Haldia

Suzlon Coimbatore, Udipi, Vadodara

Hindalco Sambalpur

Genpact Bhubaneswar, Jaipur, Bhopal

Vedanta Orissa

Apart for the corporate clientele, the SEZs also attract a number of real estate

developers, including DLF, Ansals, Omaxe, Parsvnath, Shipra Estate to name a few.

(VII) IT/ITES Growth

The outsourcing and IT/ITES industry have contributed to the demand for quality

office-space. The estimated demand from IT/ITES sector alone is expected to be

150mm sq. ft. of space across the major cities by 2010 and this strong IT/ITES growth

should drive demand for commercial space with FY07-10 CAGR of 23% leading to

indirect contribution to residential demand as well. As of now, IT/ITES sector

consumes about 75% of the commercial space.



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(VIII) Organized Retail and Hospitality Demand

Organized retail penetration level right now is at 4.1% which is lowest compared to

other emerging markets. Economic growth and changing demographics increase the

retail penetration levels and with the opening of new malls, demand for land space

also increases. At the same time, strong tourist arrivals should spur demand for hotels

across India.



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Importance of Real Estate Sector for our economy

Contribution heavily towards the gross domestic product (GDP). Almost five per cent

of the country's GDP is contributed to by the housing sector. In the next five years,

this contribution to the GDP is expected to rise to 6 per cent.

Second only to agriculture in terms of employment generation

Average profit from construction in India is 18 per cent, which is double the

profitability for a construction project undertaken in the US.

Huge attraction for Foreign Institutional Investors (FIIs) as with BSE Sensex touching

a 15-month high, the market capitalisation of FII investment in construction has gone

up a whopping 422 per cent in the past six months.

Huge attraction for Foreign Direct Investment as well as FDI into India in the real

estate sector for the fiscal year 2008-09 has been US$ 12.62 billion approximately,

according to the latest data given by the Department of Policy and Promotion (DIPP).

Initiatives by Govt. for this sector

The stimulus package announced by the government, coupled with the Reserve Bank of

India's (RBI) move allowing banks to provide special treatment to the real estate sector, is

likely to impact the Indian real estate sector in a positive way.

RBI has decided to extend exceptional concessional treatment to the commercial real estate

exposure and restructured it to June 30, 2009.

100 per cent FDI allowed in realty projects through the automatic route.

51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-and-

carry through the automatic route.



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In case of integrated townships, the minimum area to be developed has been brought

down to 25 acres from 100 acres.

Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly

larger number of states.

Minimum capital investment for wholly-owned subsidiaries and joint ventures stands

at US$ 10 million and US$ 5 million, respectively.

Reduction of time taken to develop Special Economic Zones by simplifying

procedures to get the tax-free industrial enclaves notified.

Budget 2009-2010, has also given sops to the realty sector. Developers of affordable

housing projects (units of 1,000-1,500 sq ft) have been granted a tax holiday on

profits from projects initiated in the 2007-08 financial year. Such projects would have

to be completed before March 1, 2012.

At the same time, the finance minister allocated US$ 207 million to grant a 1 per cent

interest subsidy on home loans up to US$ 20,691, provided the cost of the home is not

more than US$ 41,382. This subsidy is expected to give a further boost to the housing

sector.



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Areas which claims the major chunk of Growth pie

The major primary cities in India, namely Mumbai, Delhi, Bangalore, Chennai and

Hyderabad, are preferred cities for locating IT-enabled services (ITES) ventures. This is not

limited only to location factors, but also due to the presence of the support services. These

cities are also experiencing development activity due to greater availability of land,

construction of larger floor plates and offers of custom-built facilities. Secondary cities like

Pune, Cochin, Mysore, Jaipur, Vijayawada, Nagpur, and Kolkata qualify with many of the

required attributes but lack adequate support services.

The primary cities in India which are sought-after destinations by corporations for locating

business operations are briefly reviewed below:

(a) Mumbai - The financial capital of India

The Mumbai commercial real estate market comprises the Central Business District (CBD) of

Nariman Point in south and the suburban business districts of Bandra-Kurla complex,

Andheri-Kurla complex, Powai and Malad in the north. Suburbs in Mumbai have seen an

upsurge in commercial space supply over the past few years with IT/ITES companies driving

the market, especially in the central and northern suburbs.

(b) Delhi - The political capital and power centre

The Delhi commercial market comprises largely of the CBD of Connaught Place and

secondary Business Districts (SBD) of Gurgaon and Noida, with Gurgaon has experiencing a

substantial increase in 'A' grade office supply. Noida continues to witness the development of

small buildings built on industrial and institutional lands, primarily for companies in the



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ITYITES sector. Overall Gurgaon and Noida continue to remain the favoured location for

IT/ITES companies.

(c) Bangalore - The Silicon Valley of Asia

With a population of approximately 6 million, Bangalore is the fastest growing city in India.

The city experienced rapid economic growth during the 1990s, where the liberalisation of the

economy has since transformed the city from a retirement destination to a business

powerhouse that is arguably the leading information technology centre in Asia and one of the

top 10 hi-tech cities in the world; a distinction shared with Salt Lake City, Seattle, Boston,

Tel Aviv and Singapore.

(d) Chennai

Chennai commercial market comprises the CBD of Gundy and the SBD of Old

Mahabalipuram Road (IT Corridor). The IT/ITES sector continues to be the main demand

driver in the city, and companies have established offices in areas where ready-to-move-in

office space is available. Demand for commercial office space continues to be for quality

buildings and is concentrated around South Chennai.

(e) Other cities

Two other cities on the list for companies opening offices in India are Hyderabad, called

India's 'Cyber City', and Pune called India's 'Silicon Alley'. Both cities have also experienced

substantial growth in the commercial real estate sector during the past couple of years,

primarily due to IT and ITES sector.



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Indian Economy - Different Phases

Source: http://www.dipp.nic.in/fdi_statistics/india_FDI_December2009.pdf

http://www.dipp.nic.in/fdi_statistics/india_FDI_December2009.pdf






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Real Estate – In Different phases

Source: http://pmindia.nic.in/Economic_Outlook_Final.pdf

As shown in the chart above, past few financial years in India have seen various phases in the

Indian Real estate and the next financial year is starting off with new phase in this industry.

All the past, current and expected phases of Indian real estate are being analysed in the pages

given below on the basis of following parameters:

1. Type of phase

2. Factors responsible for that phase of Indian real estate Industry

3. Govt. initiatives to help industry in that phase

4. Areas which got impacted the most in that phase

5. Overall impact on the Realty Industry with the help of BSE Realty Index players’

performance. (BSE realty index was launched on July 9, 2007 with the base year for

index – 2005 and index value – 1000. 11 scrips are included in this index with

companies representing 95% of market capitalization of real estate development

companies in BSE.)

6. Reasons for Realty players success/ failure in that phase

http://pmindia.nic.in/Economic_Outlook_Final.pdf





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Phase-1

Boom (FY 2007-08)

Up to the end of FY2008 real estate sector in India was growing at a very high rate. There

was a situation of boom in this sector. It was estimated that the value of domestic India Real

Estate Market 2007 was about US$ 14 billion. Not to forget the he realty score in the capital

market. The market was on a high with the initial public offering of DLF raking in a record

Rs 9,625 crore.

Factors which led to boom in real estate business

IT sector was one of the major grosser with large volumes generated in IT office

space. The residential segment too was closely IT-driven and reported robust growth.

Non-IT commercial space too kept pace, more in line with the overall economic

growth.

Insurance companies could invest in special economic zones (SEZs), particularly in

infrastructure such as roads and power plants and other facilities

Private equity (PE) players keen interest in including Indian real estate investment in

their overall investment portfolio.

Govt. contribution in this phase

The home loans were easily available and RBI was following very liberal policies

regarding the interest rates. Commercial banks exposure to the real estate sector

almost doubled in last year.



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Encouragement by Indian government to the involvement of Foreign Direct

Investments or FDIs in the India Real Estate Market 2007.

The finance Ministry announced a 10-year tax holiday for developers of Industrial

parks set up from April 1, 2006 to March 31, 2009.

Developers have been given a tax holiday on profits arising from the projects that

started backing 2007-08. All such projects should be complete prior to March 1, 2012.

Areas which benefitted

Tier 1 cities focussed on the development of suburbs and peripheral locations.

Especially, Delhi and Mumbai as their offices and shopping mall rentals continued

their upward trend at a very vigorous pace. Contrary to this, destinations like

Bangalore and Gurgaon were categorized under fast growing metropolis and the

locations witnessed spearheaded improvement in every phase.

Great times were there for commercial office real estate at tier II and tier III

cities. Besides the sky-rocketing property prices and rentals, human resource issues

like employee attrition and rising CTC have surfaced up as a major force to drive IT

and ITES companies to smaller cities. In fact, IT giants like TCS, Infosys, Wipro and

Satyam candidly launched their operations in frontline Tier II and Tier III cities like

Mysore, Goa, Chandigarh, Indore and Bhopal at that time. The property boom in Tier

II and Tier III cities was further fuelled by the factors like opening up of financial

sector, rationalization of income tax and loan policies in addition with well-paid IT

jobs.

Tier-III areas got attention of technology sector players who waited to expand

their operations into these previously untapped areas and markets. Tier-III areas

including Jaipur, Coimbatore, Ahmedabad, and Lucknow were also predicted to get



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a part of the boom, making them one of the preferred investment destinations for

overseas realty players especially for technology sector development. Tier III cities

offered cost advantages of 15%-30% over Tier I and II cities through lower labour

and real estate costs. Of the leading Tier III cities, Jaipur and Lucknow were likely to

see huge growth in the coming years.

Some upcoming cities that turned to ‗growth centres‘ include Guwahati, Nagpur,

Bhubaneswar, Ludhiana, Surat, Kochi, Indore, Vishakhapatnam, Mysore, Coimbatore. These

cities were characterized by low real estate costs, availability of large chunks of land for

development, and untapped manpower,

Impact on the Realty Industry

A) Financials

Note:

1. Green highlight shows the top highs at the parameters mentioned

2. Orange highlight shows the bottom lows at the parameters mentioned



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B) Percentage increase in Share Price and PAT in last one year

Reasons for Realty Index players being gainer/Lagged Behind

A) Gainers

1. Anant Raj Industries:

Focus on NCR, buying at the right price and strong execution skills.

Diversified mix of projects.

Strong relationships with local owners, brokerage community and property

managers.

Zero debt, strong liquidity and sanctioned debts limits available providing

excellent options for future investment and returning value to shareholders.

High-quality portfolio with a strong tenant base which ensures strong cash

flows in the coming years, ensuring flexibility and resources to take

advantage of the emerging opportunities in a changing environment.



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2. India Bulls Real Estate Limited:

Huge cash raised from warrant issues to promoters parked in interest-

earning instruments, taking the ‗other income‘ component to a whopping

Rs 624 crore, bolstering total income. Deployment of this cash can be

expected to ramp up revenues through additional business.

Projects listed as real-estate investment trusts in Singapore, ensuring a

steady stream of revenues (in the form of dividends) from the rentals.

Cash and investments, amounting to over Rs 5,700 crore on IBREL‘s

books, are a source of comfort at a time when most realty developers

witnessed a funds crunch and are able to raise funding only at prohibitive

rates.

IBREL‘s main advantage due to its possession of mall space in key space-

constrained areas in Mumbai, apart from less penetrated markets.

3. Unitech:

Unitech‘s focus on Capital Efficiency enabling it to grow to a US 21

billion market cap company with an external capital of under US 10

million.

Diverse residential, commercial, retail, entertainment and hospitality

projects.

Strong ties with financial institutions – ability to raise funds at competitive

rates for large projects.

Ability to work and effectively liaise with Government agencies to ensure

timely completion of projects.



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Undertaking large mixed-use projects like integrated townships in the

suburbs of main cities.

4. DLF:

Completion of initial public offering and listing on NSE and BSE.

Low risk, robust model with a mix of development and rental earnings.

Multibusiness, multi-segment within business and operations across

geographies mitigates risk due to cycles in the business.

DLF's successful business model based on independent business verticals -

homes, offices, retail and hotels - organized and operating on an

independent basis.

Aggressive launch of premium homes targeted at mid-income earners in

this year with specific focus on affordability and actual user.

Attraction of private equity investment amounting to Rs 16,750 mn from

Merrill Lynch & Brahma Investments in 8 residential projects in

Chandigarh, Chennai, Kochi, Bangalore and Indore, reflecting the

confidence of global institutions investing in DLF and the economic

viability of the projects which also enabled DLF to partially monetise the

value of its land resource at a premium and significantly improve the rate

of returns from these projects.



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B) Lagged Behind

1. Ansal Properties and Infrastructure Ltd.:

Concentration in NCR and Tier III cities in the North, where the risk of

prices softening was high.

High dependence on plotted development and risk of delays in large

township projects, particularly Dadri (27% of NAV value), was high as

land was still being acquired.

Phase-2

Recession (FY 2008-09)

Share Market Depression. In 2008, things got changed; there was uncertainty in the market

as share market did show depression. People, who invested in real estate from earning of

share market, wanted an exit to pay off the liabilities created by them in the share market.

Also, the buying power got reduced.

Drop in PE fund flow. PE investors, who had been happily picking realty deals earlier, did

tighten their purse strings, with September witnessing only two transactions worth just $12

mn compared with August, when PE funds pumped in $427 mn into Indian realty sector.

According to data compiled by Grant Thornton, while the number of deals during January-

September was higher at 45 against last year‘s 39 deals, the average ticket size of the

transactions has come down substantially in the first three quarters of 2008, reflecting

softening valuations across the crisis-ridden real estate sector.



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Factors which led to Recession in Real estate business:

High rate of inflation in Indian economy.

Hike in housing finance interest rates.

Unaffordable property rates.

Low rate of GDP growth rate.

RBI increased the Bank rate leading to the increase in the interest rates.

Bankruptcy of Lehman Brother and sell process of PE firm Merryl Lynch by the

largest US bank, Bank of America, created a very fast drops/recession in financial

industry and created a crisis in all over US economy. All of these changes in the US

economy have affected Indian economy as well as real estate segment as most of the

Indian players have their liquidity funded by both of these firms.

Lack of uniformity of land laws, slowdown and approval delays leading to the

developers missing to complete their projects within the boom period.

Increase in the price of cement, steel, sand, labour has affected the real estate sector.

Many companies gave pink slip to the employees, which forced the employees to

cancel their bookings and forego whatever deposit made by them to the builders.

Banks and foreign investor started withdrawing their money from the market.

Govt. contribution in this phase

Favourable policies for addressing the urban housing problem. Affordable housing

became the Indian government‘s new mantra and it introduced the Bharat Nirman

project, to double the construction of low cost houses to 12 million units.

Under the Rajiv Awas Yojna scheme, it has rolled out a massive plan to build 5

million dwelling units in five years to house 6 crore slum dwellers. It has allocated Rs



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225,000 crore for this purpose (Rajiv Gandhi Yojna, 2009) with two reasons: One was

its vision for slum free India, second was to boost the demand for steel, cement and

construction material as part of its fiscal stimulus plan.

Government introduced an interest subsidy of 1 per cent for one year on loans up to

Rs 10 lakh for properties worth less than Rs 20 lakh (FM's new subsidy, 2009). It also

earmarked housing loans up to Rs 20 lakh to qualify as priority sector lending (FM's

new subsidy, 2009).

Recession affected areas

Real-estate prices across the country did fall by 10-40 per cent. Slowdown is

biting the real bullet, lowering prices in key apartment zones in or around Delhi,

Mumbai, Bangalore and Hyderabad.

Property prices in metropolitan areas dropped by 10%-15%. Seven major Indian

cities, including Delhi, Mumbai, Kolkata and Bangalore, showed a marked decline in

demand during the quarter ending September.

In the Mumbai-Pune zone, realty prices for ongoing projects already crashed by

25 to 40 per cent in the past six to nine months and buyers in Mumbai and Pune

already expected a further 10 per cent reduction in prices.



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A) Financials

Note:



B) Percentage increase in Share Price and PAT in last one year



32

Reasons for Realty players being gainer/Lagged Behind

A) Players which did not lose much

1. Anant Raj Industries Limited:

No land acquisition through Auctions. Land for IT Parks acquired through

government allotment having very low land cost FSI.

Preference on rental/leasing income as opposed to outright sale ensured

cash flow driven business model.

A 50.1:49.9 Joint Venture agreement with Monsoon Capital for

development of an IT Park at Panchkula, Haryana.

A Co-Investment Right Agreement with the Govt. of Singapore

Investment Corporation (GIC) to pursue investment opportunities in

infrastructure development and hospitality.

Focus on Low-cost Housing as urban population expected to reach 576

million in 2030 from the current 328 million. With this rapid urbanisation,

one of the biggest challenges will be providing affordable housing to city

dwellers.

2. Ackruti City Ltd.:

Launching of the ‗Just Perfect Homes‘ series in the first week of January.

The upwardly mobile urban family is on the lookout for a dream house,

with all the modern facilities to fit into their budget. These families are

willing to pay for the value derived in providing them the appropriate

ambience to come home to from a hard day‘s work and the environment in

which they can raise their families. ‗Just Perfect Homes‘ are residential

complexes, which are aesthetically designed, with maximum optimization



33

of space, well conceived to meet the aspirations of modern living, and

benefits, which hitherto was available only in high-end luxurious

complexes.

B) Lagged Behind (Players which got affected the most)

1. Ansal Properties:

Net debt-to-equity ratio (incorporating the impact of outstanding land

payments) stood at 165% which does not include any impact of off-

balance sheet financing.

APIL‘s stretched balance sheet and the general scenario of tight liquidity

were primary concerns.

Rest most of the stocks found the recession as their reason for bad performance.

Phase-3

Stability (FY 2009-10)

2009 saw at least 12 public offerings, a slew of new projects and the return of private equity

funds that had turned away proposals due to the global slowdown last year. Affordability is

expected to return to around 49% by the end of March 2010, after the price correction and fall

in interest rates. The residential segment is expected to recover by the end of FY2009 with a

25-30 per cent renewal in demand.



34

Factors leading to Stability in Real estate business:

Improvement in IT sector outlook positive for RE companies

Leading IT companies including Infosys have announced salary hikes and

promotions. This should result in improvement in sentiment and boost real estate

demand. Historically, IT companies accounted for ~80% of commercial demand and

have been a significant driver of residential demand. Renewed momentum in demand

is expected in IT hubs like Bangalore, Chennai and Hyderabad.

New Projects lined up

To name a few, Zuri Group Global is planning to invest about US$ 247.5 million for

setting up five-star business hotels and luxury residential properties over the next

three years. Accor Hospitality, the largest hotel chain in Europe, with 4,000 hotels in

90 countries will invest US$ 130 million to come up with 50 hotels in India by 2012.

An investment of US$ 627.3 million will be made by industries in the Aeropsace and

Precision Engineering Special Economic Zone at Adibatla, Andhra Pradesh. Shriram

Properties, part of Chennai-headquartered diversified Shriram Group, is planning to

invest around US$ 1.02 billion in various residential and commercial projects.

Govt. Contribution in this phase

The stimulus package announced by the government, coupled with the Reserve

Bank of India's (RBI) move allowing banks to provide special treatment to the

real estate sector. It is likely to impact the Indian real estate sector in a positive way.

RBI has decided to extend exceptional concessional treatment to the commercial real

estate exposure and restructured it to June 30, 2009.



36


A) Financials

Note:



B) Percentage increase in Share Price in last 9 months

Note: Did not compare March 2009 & Dec 2009 data on Profit Margin parameter, as data

only till Dec. 2009 is available and it is not considered appropriate to compare FY closing

with Quarter end December 2009 or 9 month aggregation till same date.



37

Reasons for Realty players being gainer/Lagged Behind

A) Gainers

1. Indiabulls Real Estate:

Strategy to develop macro foothold and encash opportunities for

infrastructure development - the power and SEZ space in India as well as

New Project as the company bagged an order worth Rs 1,400 crore for the

redevelopment of Mantralaya and ministerial homes in Mumbai. This is a

modernization project and scheduled to be finished in the next 3-5 years.

2. Orbit Corporation:

The balance sheet improvement with net debt-equity reducing from 1.3 in

June 2009 quarter to 1 in September quarter.

The credit ratios have also shown steady improvement.

Net debt to trailing four quarters EBITDA has decreased from 5.4 in

March 2009 quarter to 3.7 in September quarter.

Debtors have also shown a decline in September quarter.

Sales have shown steady improvement from 16,521 sq ft to 62,650 sq ft

during the same period.

3. Anant Raj Industries:

Acquisition of high quality / prime land at attractive rates. Land prices in

prime areas like Connaught Place, Jasola, South Delhi and Gurgaon have

corrected by more than 30-40%. Prime land is now available at attractive

rates.



38

Ade-leveraged balance sheet and free cash reserve which can help in

planning to show aggression in acquiring land at these prime locations.

Low – Cost Housing serving as Demand Driver

A) Lagged Behinds

1. Sobha Developers:

Crunch for cash and Debt-ridden company leading to not so good a

performance and lower Profit margins.

2. Akruti City:

It was asked to explain why PIDB should not bar the company due to the

latter‘s unfair trade practices while bidding for contracts for the

development of bus terminals at Mohali and Bathinda.

The blacklisting order says Ackruti‘s methods of operation delayed the

projects in question by eight months. PIDB has also taken legal steps to

ensure Ackruti gets no stay in any court without PIDB being heard.

National Stock Exchange (NSE) excluded the scrip from the F&O

segment.

Phase-4

Growth (FY 2010-11)

Demand in the Indian residential market is expected to turn positive in 2010, while

Commercial and retail markets will continue to see erosion of lease rentals in the next two

years as per Crisil research report on the real estate sector. The demand outlook for



39

commercial offices from IT companies is also improving, with indications of pick-up in

hiring, by key IT companies. This trend is expected to gain strength going into FY11.

Expected changes 2010 onwards

16 real estate initial public offerings (IPOs) set to hit the market in 2010. Emaar MGF

Land Ltd, Sahara Prime City Ltd, Lodha Developers Ltd, DB Realty India Ltd and 12

other realty firms have filed with the market regulator to raise funds through IPOs this

year. These companies are set to raise over Rs 12,000 crore collectively.

The revival is expected to accelerate from activities both in the residential as well as

commercial spaces.

Development of other asset classes like warehousing, logistics, tourism, hospitality,

etc., will also boost real estate activity.

Developments in the IT sector will also be a prime contributor to the real estate sector

as most of the demand of commercial property comes from this sector only.

Major growth is expected from affordable housing sector.

Factors leading to Growth in Real estate business:

Improvement in affordability, steady economic growth and greater liquidity

Lower Home loan interest rates

Better Job Security due to higher growth in the economy

Improvement in IT sector outlook

Occupancy levels in existing office and retail properties are likely to plunge to 60-

70% and 30-40% in new projects.

Improved liquidity, softening interest rates and price corrections along with improved

economic conditions, positive market sentiment and Growing corporate confidence is

creating a positive outlook for real estate Industry in India.



40

Expectations for this Financial year by Indian Real estate Industry from Govt.

1) Permit of ECB for all FDI Compliant projects under PN-2 for real estate.

2) Increase in housing loan deduction U/S 80 C to at least Rs. 2 Lacs from the present

Rs. 1 Lac which will substantially boost housing.

3) No Service tax on rentals from immovable properties and Extension of benefits under

Sec 80 IA to LLP (Limited Liability Partnership).

4) Restriction of 5% for commercial space under Sec 80 IB (10) to be removed for

affordable housing projects.

5) Stabilized bank interest rates and Reduced stamp duty.

6) High-priority provisions from the government for laying down the necessary

infrastructure to open up new areas.

7) Flexibility in FDI norms.

8) Clarity on the introduction of a real estate regulator, which may not necessarily decide

on rates, but should put down firm principles in terms of property dealings and also

quality parameters in terms of rating of constructions.

9) Decreasing the excise duty to decrease the costs of infrastructural projects.

10) The government must look at reducing the property and related taxes along with the

taxes on cement and steel, which together contribute to the growing infrastructure

needs.

Govt. Budget Proposal for Financial Year 2010-11 Analysis

Budget Proposals

One per cent interest subvention on housing loans up to Rs.10 lakh (where the cost of

the house does not exceed Rs.20 lakh) to be extended till March 31, 2011.



41

Under section 80-IB (10), pending projects to be completed within a period of five

years instead of four years for claiming a deduction on their profits.

Relaxation of norms for built-up area of shops and other commercial establishments

in housing projects (earlier 5%) to enable basic facilities for their residents.

Allocation of Rs.1,270 crore for Rajiv Awas Yojana (RAY) and Rs.10,000 crore for

Indira Awas Yojana (IAY).

Increase in tax slabs for personal income tax.

Increase in excise duty structure for cement and steel.

Budget Impact: Industry

Extension of one per cent interest subvention indicates continued support to the lower

and middle income housing. Developers catering to the affordable housing segment

will be benefited.

Extension of tax holiday under 80-IB (10), would provide a breather to the industry

affected by the downturn. It will have a positive impact on the margins of the real

estate players.

Implementation of RAY, a scheme for slum dwellers and urban poor, would mean

additional business in terms of redevelopment projects for the real estate players.

Such projects usually have quite high margins. Increased outlay for IAY would benefit

the construction contractors and small real estate developers.

Increased disposable income due to reduced tax burden would spur spending for the

housing sector.

Increase in excise duty of cement as well as steel would increase the input cost for the

developers. These costs would mostly be passed on to the consumers.



42

Problems being faced by Indian Realty sector

and probable solutions

Problems being faced

Various problems which are being faced by Indian realty sector of late can be classified into

following headings:

1. Lack of consistency in Interest rates by Govt. & volatility in Real estate share

prices, both making it tough to raise money

2. Lack of retail investors interest in Realty shares IPO due to mispricing

3. Lack of Foreign Direct Investors interest

4. IPO issue and Private Equity investment proceeds consumed for paying off debt

rather than expansion

5. High Investment and Low returns on projects

6. Oversupply of Costly and high-end products leading to lack of sufficient revenue

7. In the current growth scenario, which areas to focus on for maximum growth?

Problems description with analysis and probable solution

Problem 1: Lack of consistency in Interest rates by Govt. & Volatility in Real estate

share prices making it tough to raise money

Some macroeconomic factors such as inflation and economic growth affect companies

and their stock prices. As we know inflation in India was around 11.5% (October 2008)

which was quite high compared to 2007 figure of 3-4%. Banks had to increase interest

rates to counter high inflation. For real estate companies higher interest rates environment

is not suitable because customers avoid taking home loans (due to higher EMI) which



43

decreases the demand for properties. A bad prospect of growth in the earnings of the

firms gets reflected in their stock prices. In fact, this is because of higher interest rates,

global slowdown and heavy selling by financial institutions, seriously cutting down these

companies expansion plans. They got stuck with their existing projects while investors

have pulled out.

The investors in the stock market provide these developers cash for their projects by

taking some stake in the company or projects. Hence, the market to a large extent decides

the fortune of these companies. A large number of financial institutions (Banks, Mutual

Funds and Hedge Funds) buy or sell these companies‘ securities on the exchange but

these companies are not yet fit as a long-term investment as the sector is cyclical and

stocks have high beta.

The stocks are very sensitive and react sharply to every small bit of news – good or bad.

For example, Housing Development and Infrastructure (HDIL). At the month-beginning

(November 3), it traded at Rs 291.75. A week later it went up to Rs 374.75 (28.44 per

cent rise). After one week, it closed at Rs 308.9 (down 17.57 per cent from November 11

price).

The companies are too complicated to make an investment decision as per analysts

despite the listed entities in the sector giving an annual net profit-to-sales ratio of 36 per

cent till September-end even in the face of an economic slowdown.

Solution 1:

Look for other measures to reach out to investors like REMF/ REITs or look for different

kind of investors like Private Equity, QIPs or FIIs. One example in this regards, can be of

Unitech, which had planned to raise money through Special Purpose Vehicle (SPV) to



44

fund their projects after the fall of Lehman and now-a-days, firms are seeking PEs help to

raise capital.

Potential sources of raising money

Go for REITs/REMFs/ RE Funds: The real estate sector is also likely to get a boost

from Real Estate Mutual Funds (REMFs) and Real Estate Investment Trusts (REITs). In

fact, according to a CRISIL paper, the REITs would have the potential to hold at least 5

per cent share of the total global real estate market by 2010, the size of which would turn

to US$ 1,400 billion in the next 3 years. The paper titled, ‗Indian REITs; Are We

Prepared', says that by 2010, REITs alone would hold a market size of US$ 70 billion of

the total real estate market as its concept is gaining ground in countries like India and

other developing nations.

Have more focus on Private Equity: In the context of real estate India, this sector has

$1.5 billion additional investment in 2010-11, real estate groups in India like Emaar,

Sub-prime

meltdown

can lead to

credit

crunch

Weak

Market

sentiments

can lead to

depressed

valuations.

Restriction

can be

imposed on

External

Commercial

Borrowing

RBI

intervention

can lead to

curb in

domestic

lending

Great

appetite due

to long-term

and short-

term

funding



45

MGF, Purvankara, Omaxe, Ambience, etc. are reported to be planning to enter in to

private equity (PE) deals for their residential property projects. Reportedly, a number of

Tier 2 developers in the Delhi NCR, Bangalore and MMR regions are in negotiations

regarding PE funds for their residential units at various locations in the country. Most of

the projects are located in metro centres such as Delhi NCR, Kolkata, Chennai, Mumbai,

Bengaluru, Gurgaon, Ghaziabad, Faridabad, Pune, Hyderabad, Bhopal, Bhubeneswar,

Jaipur, Lucknow, Goa, Chandigarh, etc. In fact, of late, markets are witnessing a wide

variety of PE Transactions with average deal size of over US$ 60 mn.

Growing importance of foreign investors: Of the additional $1.5 billion additional

investment in the real estate sector in India in 2010-11, domestic contributors will put in

to the tune of $400 million. The remaining fund of $1.2 billion is to come from

international investors.

Problem 2: Lack of retail investor’s interest in realty shares IPO due to mispricing

DB Realty‘s IPO received just 23,000 applications for its Rs 1,500-crore issue. It

received a pathetic 457 applications from high net-worth individuals (HNIs), after the

company spent Rs13.50 crore for its ads in The Times of India alone, while, NTPC‘s

FPO received just 80,000 applications 16% of the total 42.8 million shares reserved

for the retail investors‘ category. This has set the alarm bells ringing for decision

makers.

The gross and continuous failure of issues to attract retail subscriptions has ringed

alarm bells among decision makers.

Poor retail participation is the result of years of poor regulation and malpractices by

market participants, which have caused equity products to perform very poorly.



46

Out of the 22 IPOs listed in 2009 and now, 13 returned between 4% and 27% while

the rest led to losses between 3% and 20%. This is in sharp contrast to the trend in

2007 when all the listings, about 100, returned between 82% and 175% on their debut,

some of which subsequently declined too.

Pricing pressure: IPOs launched in 2009 failed to perform on the bourses because of

aggressive pricing and low retail interest

Name of the issue

Amount

invested

(Rs Cr.)

Current

value

(Rs Cr.)

Current MTM

return

(%)

Profit Loss

Mahindra Holiday 278 321 15 Profit

Excel Infoways 48 39 -18 Loss

Raj Oil Mills 114 71 -38 Loss

Adani Power 3,017 3,078 2 Profit

NHPC 6,039 5,535 -8 Loss

Jindal Cotex 84 98 16 Profit

Globus Spirits 75 60 -20 Loss

Oil India 2,777 3,158 14 Profit

Pipavav Shipyard 496 487 -2 Loss

Total 12,927 12,847 -1 4 5

Source: SMC Capitals



47

Not only higher price can be issue but also mismatch in price quoted can lead to issue failure

like in case of Dubai-based Emaar Properties which quoted at about 12.15 dirham (Rs 130)

against the Emaar MGF price band of Rs 530-630.

Solution 2:

Give incentives to sub-brokers, who used to play a major role in marketing IPOs to retail

investors. Their commission income has declined substantially in the past few years,

which creates their disinterest in promoting the IPOs.

Revise price band downwards and extended the date if failure to attract investors.

Issue IPOs when the market is going up.

Educate retail investors better about the financial markets and financial regulations.

Income tax policies and primary allotment prices should be in favour of retail investors.

Mutual funds can be a better route for retail investors who do not want to invest directly

like one mutual fund is IDFC Real Estate Equity Mutual Fund NFO aimed at investing

65%-100% of money in Equity and related instruments of companies engaged in real

estate related activity.

For the retail investor, subscription figures from institutional and QIB investors may be

one indicator of business fundamentals, so better to try and get good response from these

investors first.

One of the Govt. initiatives in this regards is having new SEBI IPO guideline where the

regulator introduced the pure auction method of book building in share sales, in which

institutional bidders could bid at any price above the floor price instead of restricting

them to bid in a band fixed by investment bankers. Allotment of shares would be done to

those whose bids are at top prices, starting from the highest bidder.



48

It gives the company the price it deserves; it gives the institutional investor the number of

shares at the price they want and reduces the hassles of price discovery for retail investors

who will now only get a fixed price option. Under the auction method, retail and high net

worth investors will surrender their choice to play a part in the price discovery as they

would be allotted shares at the floor price discovered in the auction. However, the auction

method has not been mandated by the regulator. The company could choose this, or the

book-building method.

Although the new method sounds more democratic for institutional investors, it runs the

risk of getting rigged if a few funds corner the shares. So, the regulator has left it to the

companies to decide on the number of shares it wants to allot a fund.

\

Problem 3: Lack of Foreign Direct Investors interest

The biggest problems in attracting the FDI in the real estate sector are the lack of clarity

of titles or transparent ownership records and the high stamp duties that are prevalent

across India, varying between 8% and 13% in different states, which fail to generate

foreign investor‘s interest. FDI cumulative inflows to the Indian realty sector have so far

been very low at 6% considering the tremendous growth opportunity it has.



49

Solution 3:

Choice of Business and Investment Models for FDI

Problem 4: IPO issue and Private Equity investment proceeds consumed for paying off

debt rather than expansion



50

a) IPO issue

Nearly a dozen developers have announced plans to raise a large amount of capital

from the primary market and most of them are raising equity to pay off debt rather

than use the proceeds to fund growth.

While a company has full discretion over the use of IPO proceeds, as long as it

makes full disclosures, hitting the market to raise money to settle debt primarily is

a sign of the precarious financial health of some of the real estate developers.

An example can be of infrastructure developer Ashoka Builcon is also planning to

raise Rs 225 crore but has allocated a meagre Rs 14 crore from the proceeds for

buying capital equipment. The bulk of the money would go towards meeting

working capital requirements and paying loans of subsidiaries.

The flood of realty IPOs comes at a time when RBI has tightened norms relating

to bank funding for the sector. Though the move is primarily aimed at curbing any

build up of asset prices, it may have a significant impact on the operating

capabilities of many of the developers.

b) Private Equity

Private Equity firms have been sending feelers of late to some developers, which

urgently need money to retire debt but may not be able to find buyers for their

shares in IPOs in volatile markets.

Though many realty companies may not be too keen to induct a private equity

firm as a stakeholder, some of them could be forced to sell a stake to one, as they

have little room to raise further money through loans, according to investment

bankers.



51

While some developers may be able to sail through in difficult market conditions

due to their superior land bank, some may not because of their low-quality assets.

It will be the ones with land in Tier-2 and -3 towns, which will find it difficult.

Most developers had aggressively bought land through debt when prices were at

their peaks in 2006 and 2007 but, as demand for office and residential property

dropped in 2008 following the global financial crisis, these developers were left

with land bought at high prices.

The availability of money in the latter part of 2009, thanks to the sharp decline in

interest rates, enabled many of these firms to stay afloat. But, with their debt

touching intolerable levels and rates showing signs of hardening, developers have

turned to share stake sale, as a source of funding. Real estate companies prefer

raising money through IPOs to private equity funding, as the latter is considered

expensive.

Solution 4:

Sell bond or go for a foreign currency loan to support to enclose high debt cost

Companies can also look at one of the method which has been adopted by DLF where

DLF seems to refinance of high cost debt mixing the part of a 17 billion rupees loan

taken from PNB [Punjab National Bank] at an interest rate above 13.5% which in

effect can help in rebuilding loan by changing in to a foreign currency loan at a lower

rate.



52

Problem 5: High Investment and Low returns on Projects

Solution 5:

Asset - Light Business Model

Positives: Typically, real estate companies are evaluated on the quality of the land bank

they own. However GPL has an asset-light business model wherein the land bank is shared

with the original owners of land. This model involves entering into development

agreements with the owners of land that are typically entitled to a share in the developed

property or revenues/profits arising from the same or a combination of the two. This model

helps to spread risk in an overheated market as the company need not lock up funds upfront

to buy property at sky-high prices.

Negatives: In the joint development model revenues would have to be shared with the land

owner whereas the entire construction cost of developing the land would have to be borne

by the developer. Also Holding land parcels has also allowed a number of developers to

sell plots to tide over the fund crunch and meet their construction costs on other ongoing

projects. Besides this, holding low-cost land banks from years ago helps to earn superior

profit margins for many companies.

Structuring projects – an important element in effective cash recycling

o Project structuring is an effective mechanism to recycle capital and in the process

earn higher IRRs.

o One effective means to recycle cash is to transfer a project or a group of projects

onto a special purpose vehicle (SPV).

o The SPVs are either sold to a REIT or are listed on a stock exchange (for example,

Ishaan, a group company of K Raheja, was listed on AIM in November 2006).



53

o Companies tend to adopt innovative ways to ensure the property developed can be

bundled into an SPV. One way is to provide a differentiation value by branding,

which can then be easily hived off into an SPV when the situation demands.

o Developers tend to earn higher IRRs the faster they are able to sell properties to

REITs.

SPV (Special Purpose Vehicle)

o In an SPV, the developer ties up with a private equity fund who provides capital,

or alternately, ties up with foreign developers who not only have capital but also

bring in technical and execution capabilities leading to lower cost and higher

returns.

o It is much easier to establish the forecasted profits in an SPV as opposed to when

it is pooled into the entity.

o Many developers are diluting a minority stake in their entity organization or going

in for specific FDI compliant SPVs for different projects.

o SPVs are the only way out in FDI projects, where you have a clear shareholder

agreement and control in the project and exits becomes easier.

o The foreign investor or fund wants to join hands with the local developer and an

SPV is formed, so that any unsettled claims, litigations with respect to the existing

entity are not carried forward.



54

Problem 6: Oversupply of Costly and high-end products leading to lack of sufficient

revenue

As per the CRISIL research 2008-2010 the supply of residential apartments is to the tune

727 million sq ft whereas the demand is only 614 million sq ft resulting in the oversupply,

which is based on optimum levels, as per the industry sources the oversupply is 35-40%.

The oversupply is more in cities like Hyderabad, Bangalore which have seen boom period

in the recent past due to information technology and subsequent developments in the

same sector due to recession around the world.

India is still a country of small towns and villages, so the concentration of builders in and

around big cities has contributed to oversupply of costly and high-end products.

Its failure to properly assess the situation like taking middle class into account and to

build houses to suit their needs.

The growth in realty sector is driven by India IT/ ITES sector. The IT/ITES sector has

increased the salaries of their employees by 21% but at present these companies have

frozen the salaries and also shown pink slips to their employees. This has forced the IT

employees to cancel their bookings and forego whatever deposit made by them to the

builders.

While household income fell, real estate prices dropped even more significantly as the

affordability of individuals (measured in terms of property cost to annual household

income ratio) deteriorated. After reducing prices by as much as 30% (DLF, Unitech slash,

2008), the middle income segment responded positively to the Rs 25 lakh price range. It

became clear that the then target segment for the real estate companies – luxury segment,

was not as big as they thought it initially was. It was evident that this premium segment



55

demand could not support their existing valuations and was highly dependent on market

sentiments.

Solution 6:

Adopt New Property Price Model

DLF, the country‘s largest real estate company, is adopting a pricing model that

resembles book-building in initial public offers (IPOs) of shares, using a process to test

the market while pricing. Only the style is informal unlike in shares, in which a price

band is set and formal offers are invited.

The company which earlier used to set property price internally is now surveying buyers

to arrive at a price for forthcoming projects.

DLF‘s authorised brokers and property consultants are collecting feedback from

prospective buyers on what should be the price of a project by sending out mailers, text

messages and in some cases, making personal visits.

The company had for the first time conducted such a survey before launching the first

phase of its Capital Greens project in West Delhi‘s Shivaji Marg area in April this year. It

initiated the second such survey in mid-August for the next phase of around 1,400

apartments it plans to launch next week during the festive period. Such surveys are going

to be regular feature for upcoming residential projects, Talwar said. The results of the

survey are expected by the end of the week and DLF is likely to launch the project at a

premium of around 20 per cent, in the range of Rs 6,500-Rs 7,000 per square foot

whereas it sold close to 1,400 apartments during the first phase at Rs 5,500 per square

foot.



56

Look for different Market Segment:

There is huge unmet demand for housing in India across middle and lower income

customer segments even as the premium segment was witnessing an oversupply. The total

value of this unmet demand is a staggering Rs 13, 00,000 crores (Monitor, 2009).

Developers need to look at lower income segments right up to the bottom of the pyramid,

where huge volumes could reap rewards. Different players are targeting different price

points which has actually amounted to targeting two distinct segments - middle income

segment (Rs 10-25 lakh) and low income segment (Rs 3-8 lakh).

Customer Segmentation and Market Potential

Source: Monitor, 2009, housing‖ p. 4 Exhibits: Market Potential ―The recession proof

business opportunity in low income.



57

Low Cost Housing Business Framework

Availability of finance for Low Cost Housing

Another important factor in the success of low-cost housing projects is availability of finance,

both for the customer and for construction. The housing finance companies too have realized

the magnitude of this opportunity. As a trendsetter, HDFC has picked up 10% in low cost

housing developer Value and Budget Housing Development Corporation‘s (VBHDC)

housing projects (Jerry Rao's Fourth, 2009). This has ensured easy availability of

construction finance as well as customer house mortgages for VBHDC‘s projects. Many

Micro-Finance Institutes (MFIs) are also venturing into this space to provide housing finance

to buyers.



58

Problem 7: In the current growth scenario, which areas to focus on for maximum

growth

Solution 7:

Concentrate on Tier II/III cities

Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues

may force companies to look at Tier II and Tier III cities for expanding their operations

o Tier I cities- Mumbai, Delhi and Bangalore

o Tier II cities- Kolkata, Hyderabad, Pune

o Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur

Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore,

Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate

demand from the IT/ITES sector.

According to Nasscom‘s projections, Tier II and Tier III cities, which account for about

29% and 5% of the total commercial space in FY07, respectively, will increase to 44%

and 20% at the end of FY17.

The price of land in Tier II and Tier III cities has been more moderate. While many

micro-markets in metropolitan cities had saturated, in Tier II and Tier III cities, supply

was still inadequate to meet the demand arising from the spread modern retailing,

outsourcing, IT and manufacturing to these cities.

By early 2009, many developers had adopted the obvious strategy of price correction in

existing projects to clear mounting inventories and lure consumers back to the market.

During the period, there was another paradigm shift as many developers realized that the

market had converted from an investor driven one to an end-user dominant one.



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Recognizing that the end users were seeking homes that were affordable, developers

altered their product portfolio and launched affordable housing across India to revive

demand by the end of the first quarter of 2009. The affordable housing concept, coupled

with reduced home loan rates, put the real estate market on the path to recovery.

In fact, considering the demand where few private players have gone before, India's

largest realty firm, DLF, is planning to build one lakh affordable houses, which would

cost less than Rs 20 lakh, in major cities across the country. It has also plans to cut its

debt by half, to Rs 6,200 crore, by the end of this fiscal year.

Opportunities in Market:

(I) Commercial office space

Commercial market expected to grow at a Compound Annual Growth Rate (CAGR)

of 20 per cent to 22 per cent over the next five years.

IT/ITeS sector expected to require 150 million Sq. ft. of commercial office space by

2010.



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(II) Residential space

Number of rich household growing at CAGR of 21 per cent.

Increasing working age population (almost 64 per cent in 16-64 age group).

Increasing income levels: per capita GDP increased by 66 per cent in last five years.

Current shortage close to 19.4 million units, predominantly in middle and low income

group.

Expected to grow at a CAGR of 18 to 19 per cent up to 2010.

Mortgage finance is expected to increase penetration into the urban housing finance

sector.

(III) Retail space

Rising consumerism with doubling of disposable income

Growth in organised retailing

Entry of international retailers

Government is exploring the possibility of a relaxation in FDI norms.

Organised retail expected to grow at a CAGR of 19 per cent over the next five years

By 2010, 220 million sq.ft. of new retail space will be required.



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(IV) Hospitality space

India acquiring recognition as a medical tourism destination

International events such as Commonwealth Games expected to drive growth

Emergence of India as a MICE (Meetings, Incentives, Conventions and Exhibitions)

destination.

Indian tourism industry expected to grow at an average rate of 8.8 per cent till 2013.

High potential for budget hotels

Service apartments, hospitals, wellness spas gaining popularity.



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(V) Special Economic Zones (SEZs)

Under the new SEZ Policy, formal approvals have been granted to 578 SEZ

proposals.

As of June 2009, there are 322 notified SEZs and 146 have received in-principal

approval.

Policy allows usage of as high as 50 per cent of the area as non-processing zone,

offering immense potential for residential and supporting infrastructure.

Missing Asset classes and formats



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Learnings Real estate players should adopt in

different phases of Indian future economic state

Boom Period (FY 2007-08)

Factors responsible for Gainers good performance

1. Strong relationships with local owners, brokerage community and property managers.

2. Strong ties with financial institutions – ability to raise funds at competitive rates for

large projects.

3. Ability to work and effectively liaise with Government agencies to ensure timely

completion of projects.

4. Zero debt, strong liquidity and sanctioned debts limits available which gave excellent

options for future investment and returning value to shareholders.

5. Focus on Capital Efficiency.

6. Huge cash raised from warrant issues to promoters parked in interest-earning

instruments, taking the ‗other income‘ component to a whopping amount. The

deployment of this cash to ramp up revenues through additional business.

7. A high-quality portfolio with a strong tenant base which ensured strong cash flows,

flexibility and resources to take advantage of the emerging opportunities in a

changing environment.

8. The projects, listed as real-estate investment trusts in Singapore ensured a steady

stream of revenues (in the form of dividends) from the rentals.

9. Diverse residential, commercial, retail, entertainment and hospitality projects.

10. Low risk, robust model of DLF with a mix of development and rental earnings based

on independent business verticals - homes, offices, retail and hotels - organized and



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operating on an independent basis. Multibusiness, multi-segment within business and

operations across geographies mitigates risk to take care of cycles in the business.

11. Aggressive launch of premium homes targeted at mid-income earners with specific

focus on affordability and actual user.

12. Attraction of private equity investment amounting to Rs 16,750 mn from Merrill

Lynch & Brahma Investments by DLF in 8 residential projects in Chandigarh,

Chennai, Kochi, Bangalore and Indore, reflecting the confidence of global institutions

investing in DLF and the economic viability of the projects. These also enabled DLF

to partially monetise the value of its land resource at a premium and significantly

improve the rate of returns from these projects.

Factors responsible for Lagged Behinds bad performance

1. Concentration in NCR and Tier III cities in the North, where the risk of prices

softening is high and high dependence on plotted development.

Recession (FY 2008-09)

Factors responsible for Not so affected companies’ performance

1. One of the companies, Anant Raj Industries Limited did not acquire land through

Auctions. Land for IT Parks acquired through government allotment having very low

land cost.

2. Preference on rental/leasing income as opposed to outright sale has ensured cash flow

driven business model.

3. Joint Venture agreements with other companies helped in having wider access to land.

4. Focus on Low-cost Housing,



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5. Catering to the upwardly mobile urban family‘s lookout for a dream house, with all

the modern facilities to fit into their budget; Ackruti City launched ‗Just Perfect

Homes‘ series. These urban families are willing to pay for the value derived in

providing them the appropriate ambience to come home to from a hard d ay‘s work

and the environment in which they can raise their families. So, direct cater to

customer‘s demand as well as shift of focus to a new segment was there.

Factors responsible for badly affected companies’ bad performance

1.

High net debt-to-equity ratio (incorporating the impact of outstanding land payments) as

high as 165%.

2. Stretched balance sheet and the general scenario of tight liquidity was also one of the

primary concerns.

Most of the stocks found the recession as their reason for bad performance.

Stability (FY 2009-10)

Factors responsible for Gainers good performance

1. Reduction in debt-equity ratio.

2. Improved credit ratios.

3. Availability of Prime land at attractive rates with less leveraged balance sheet and free

cash reserve, helping in aggression to acquire land at these prime locations.

Factors responsible for Lagged Behinds bad performance

1. Crunch for cash and high Debt leading to not so good a performance.



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Factors - Realty players should consider from

consumers’ point of view

1. Economy: If the economic growth rate slows down, there are fears of job losses and

as a result, few people or companies are willing to purchase real estate.

2. Reserve Bank of India’s policy measures: RBI policy related to FDI, FII allowed in

realty sector decides the cost of capital accessibility by Real Estate company. Also,

interest rate changes policy helps in deciding the availability of finance to consumers

at cheaper or costlier rates.

3. Volatility in Real estate share prices: For instance, in December 2007, DLF‘s share

price was quoting at a whopping Rs 1,073.80 because the economy was buoyant.

After recessions fears emerged, the company‘ stock price plummeted almost 86

percent to Rs 151.70 within three months. Also, some developers can get more

impacted than the others, depending on their presence in various segments. Orbit

Corporation‘s business, for instance, suffered more than diversified developers last

year as it only builds luxury projects.

4. Interest Rate: The hardening of interest rate affects the demand for houses, which in

turn impacts companies‘ profitability. Lower rates induce buyers to purchase houses.

The central bank also cautions banks time and again on lending to developers. In

some quarterly reviews, RBI has also increased risk weights for the sector. This

makes it difficult for banks to lend to builders.

5. Diversification of business: When a long-term cautious investor looks at a real

estate company, the first thing he observes is the diversification of business i.e. the

company‘s presence in verticals such as residential, commercial, retail and hotels.

This ensures that the business is diversified to the extent that if one segment is not



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doing well, the other one will. For instance, analysts say that revenues of listed

entities in Bangalore, such as Sobha Developers and Purvankara, come purely from

residential properties. As a result, when information technology (IT) companies

suffered due to the global economic slowdown last year, these companies were hit.

6. Accounting & Financials: Companies in property business have two methods of

accounting — project completion method and percentage completion method. Most of

the companies follow the latter model. In percentage completion, the companies book

revenues as and when the project is completed and sold. Some companies, such as

HDIL follows project completion method, wherein the income is realised when the

project is completed. Importantly, quarterly financials are of little importance.

7. Land Bank: In 2007, companies raised huge amounts through public offers, based on

their land bank. DLF, for example, managed one of the biggest initial public offers of

the country because it had a land bank of over 10,000 acres and now not only the

acreage of land that is important but the quality as well. The company having land

reserves in better locations should be preferred than one who may have large reserves,

but at regions where development has not yet started. Further, the cost of acquiring

the bank is also very important because it gives an idea whether the company has

been able to acquire land cheap to make huge profits when properties hit the market.

8. NAV: The earnings of developers get inconsistent due to the changing price of their

assets. So, the analysts/investors do not consider price-to-earnings as the right

parameter to gauge the performance. Instead, they look at net asset value (NAV).

Simply said, NAV shows the future cash-flow of the company. This is calculated by

assuming the money that the company will generate in the future and then,

discounting it to the present value.



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9. Debt: Most of the listed entities in the sector have a high debt burden. This is because

of their build-and-sell model. Real estate companies are always starved of money as

they first need to deploy money and build projects, revenues follow later, but, a high

debt-to-equity ratio also decreases the ability of the company to borrow more for

further construction. This can result in project delays, or even stalling of projects.

10. Transparency Issues: Many investors do not prefer to invest in realty companies as

they have high cash component that developers cannot account for. To top it, all listed

companies have several hundred subsidiaries. Even analysts find it tedious to track the

financials of each of these subsidiaries. Also, many promoters privately hold stake in

such subsidiaries that help them to garner profits from projects.



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Conclusion

After studying all the factors of the real estate it can be concluded that the Real Estate is a

very wide concept and it is highly affected by the macro-economic factors like GDP, FDI, per

capital income, Interest rates and employment in the nation. The most important factor in the

case of Real Estate is location which affects the value and returns from the Real Estate and

companies which have diversified holdings in most of the segment wise location seem to be

benefitted the most but at the same time, importance of relationship with financial

institutions, Govt. agencies, local owners, brokerage community and property managers

cannot be undermined.

Along with right location and good relationships, Indian Realty sector needs a stronger

capital market base for property financing. Volatility in interest rate by RBI and share prices

wide fluctuation has forced companies to look at alternative sources of finance like REITs,

Private Equity and FDI. The introduction of REITs in 2007, has given international investors

in particular a familiar investment vehicle. Private investors have also entered into indirect

investment in real estate through Private Equity route. FDI is serving a very important source

for funds but it needs different business and investment models to flourish.

This industry also need to try out new business models like new Property Price model and

new ways of operating like structuring projects and creating SPV which will help in low cost

high return with more business opportunities.

As far as demand in the new segments is considered, much better market size of around Rs.

130000 crore is from the Low Income segment and Govt. is also promoting the focus on

Middle and Low income affordable housing segment by providing interest subvention in the

budget proposal.



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Opportunities are also booming in Tier-II and Tier-III cities and Hospitality space and SEZs

are providing good potential as market.

All these opportunities and alternative solutions to problems look good but what use this all

can be if it is not able to attract customers finally either as a source for raising finance or for

generating commercial and residential demand of property. Customers look for less volatility

in real estate prices (very important if IPO of any new company has to come), diversification

of business, sound accounting and financials, good land bank, High Net Asset Value, Lower

leverage and transparency in financials. If any company in this sector fails to provide this, it

may become laggard or won‘t be able to garner a good share of the growing market.



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Recommendations

The following recommendations are made by this paper-

Real estate companies should try and have a diversified mix of projects

The companies should focus on strong relationship with financial institutions, Govt.

Agencies, owners, brokerage community and property managers.

For sources of funds, look for alternative sources of money like REMF/REITs/ RE

Funds, Private Equity and Foreign Direct investments to avoid losses due to interest

rate and share price fluctuations.

For IPO, mutual funds can be a better route for retail investors who do not want to

invest directly.

Have new business and investment models for FDI

Look at different business models like Asset Light business model adopted by Godrej

Properties Ltd., Property Price model adopted by DLF

Have structuring of projects to recycle capital and earn high IRRs or go for Special

Purpose Vehicle

Need for different asset classes and formats like Logistics and warehousing,

Healthcare Infrastructure, Education Infrastructure and Low-cost housing.

For demand, focus on Middle income and lower income group with affordable

housing

Keep a track of demand in tier II and III cities and for all over India track Hospitality

space and SEZ demand.

Since customers are paying attention to good quality land bank, NAV, leverage ratio

and transparency, real estate companies should consider these factors for laying out

any strategy for growth.



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