India Growth Story Today, India is one of the fastest growing
economies of the world. Expected to be the 3rd largest economy by
2025 and the largest economy by 2050. 70% of the future employment
opportunities will be created in the cities. India needs Rs.60000
Crores in the next 20 years to meet its infrastructural needs of
approx. 68 cities that will have above one million population.
Needs Holistic development with emphasis on construction and real
estate sector. The real estate sector will be the one that writes
the Indian growth story
Evolution of Real Estate Initially land was used as a tool to
hijack a countrys economic independence and subvert its social
processes. Post independence, Indian real estate sector was
unorganized and disaggregated. Land prices were low because of low
demand. FDI policies were too stringent, defensive and
discouraging. Post liberalization, real estate sector has seen
impressive growth owing to the following Multinational
Entrepreneurialism. Buoyant local stock markets. Robust economy.
With great demand for housing and commercial and industrial
premises for a booming economy, it transformed into one of the most
lucrative sectors in terms of investment and employment
opportunities
Stand Point Real estate sector is the second highest in
employment generation. Contributes almost 5% to Indian GDP which is
expected to be 6% in coming years. Increase in residential &
commercial real estate, hotel accommodation and SEZ demand. IT/ITES
sector and rising outsourcing trends have driven up demand for
premium offices. Rapid growth in retail, hospitality,
infrastructure makes it most lucrative investment area for next 5
to 10 years. It contributes to countrys infrastructure by
buildings, roads, flyovers, highways etc. Overall it can be
concluded that a unit increase in real estate sector can generate a
fivefold increase in national income.
Residential Real Estate Traditional mainstay of Indian property
market - largely driven by rising disposable incomes, growing
middle class, fall in interest rates, fiscal incentives, increase
in nuclear families and urbanization. There will be a shortfall of
2.6 crore housing units by 2012. It is anticipated that India will
add another 22 crore people to cities by 2025 which is going to
increase the demand-supply gap in housing sector. As a result of
the immense growth potential in housing, many retail investors are
viewing real estate as an attractive investment option compared to
mutual funds and stocks. The global recession in 2008 has slowed
down the growth in housing market.
Commercial Real Estate It mainly consists of office spaces,
retail, hospitality, multiplexes and malls. Demand for commercial
properties was 40 mn sq.ft. in 2011. Driving forces for the
commercial real estate: Increased revenues of service sector
companies particularly IT/ITES. Retail sector is expected to grow
at the rate of 25-30%. Overall increase in room rent and occupancy
rates of hotels is expected to create demand for development of new
hotels. Increase in demand for schools, colleges, hospitals, roads,
airports to cater rapidly growing population. Education industry
and healthcare sector boosted by medical tourism will create higher
demands for commercial real estate.
Derived Demand
Government Policies, Regulations and Restrictions Domestic
Scenario: Government of India has realized the significance of real
estate sector and has given some relaxation of the norms and
regulations keeping in view of - Employment Generation - Tax
Revenues - Encouraging Investment In addition to changing the tax
tariffs, it has also setup some regulatory bodies. Some of the key
policy decisions taken by Govt. of India are : Indirect tax World
Contract Tax (VAT) Activities like Construction of commercial and
residential complexes and renting immovable land are brought under
this tax. Stamp Duty Sale of flats attract Stamp Duty up to 10
percent of the sale consideration.
Land Reforms Traditionally, Indian Approach to Real Estate was
restrictive. First Land Reforms bill in 1950 Land Reform
Legislation that abolished Zamindari, Maheshwari and Ryotwari
systems. Land reforms has become an important issue from 1991
liberalization period. Current Land Acquisition law for Government
: Allows the government to take over land for a public purpose
sometimes without compensation leading to public acrimony. This
Scenario is causing difficulties in acquiring the lands and many
multibillion dollar projects have been held up for years.
Policy Initiatives by the Govt. Land Acquisition
,Rehabilitation and Resettlement bill (2011) Aimed at giving
farmers better deal while helping fast track industrialization.
Model Real Estate (Regulation and Development Act) Seeks to
regulate realty sector by casting detailed obligation and duties on
the builders to bring transparency. National Real Estate
Development Council (NREDCO) Formed to induce transparency and
ethics in Indian real estate to transform it into a matured and
globally competitive business sector. National Land Recordisation
and Modernisation Program (NLRMP) Based on computerization,
updating and maintenance of land records and the validation of
titles. Direct Tax Code The income from all properties held for
earning rentals shall be computed under the head income from house
property.
Risks Faced by Real Estate Sector: Liquidity Risk The time
required for liquidity of real estate property can vary depending
on the quality and location of the property. Regulatory Risks : The
rules, regulations and legalities, demonstration of frequent
changes make real estate sector a cumbersome investment option in
India. Property Marketing Transparency Risks : Being a market with
less than 100% transparency, a strong professional valuation and
regulatory institutions are needed. Macroeconomic Risks : Interest
rates, inflation and exchange rate risks are amongst the important
macroeconomic indicators. Land Ownership and Title Issues : Lack of
information and old property related issues also add to the risks
faced by the investors.
Foreign Investments
FDI in Real Estate India is the second most attractive
destination for the Foreign Direct Investments for the years
20082010.(world Investment Report). However, FDI in real estate is
only 1% of the total GDP in India. (US$ 4billion) Can be improved
by liberalizing the restrictive laws ensuring transparency in
operations and by confidence building measures in the foreign
investors.
Policy Changes by Govt. to facilitate foreign investments
Before 2012 Foreign investors other than NRIs were allowed to
invest only in development of integrated townships and settlements
either through a wholly-owned subsidiary or through a joint
venture. After 2012 India fully opened FDI in real estate. However,
a minimum capitalization of $10 million for whollyowned
subsidiaries and $5 million for joint ventures was mandatory.
Policy Changes Cont. The department of industrial policy and
promotion ,in March 2012, allowed FDI in real estate in projects in
a minimum area of 25 acres. The finance ministry has allowed
external commercial borrowing (ECB) in realty projects involving
integrated townships of 25 acres or 50,000 sq m In the Union budget
2011-12, FII limit for investment in corporate bonds having a
residual maturity of over five years has been increased by
$20billion, taking the over all limit to $40billion. Foreign
Venture Capital Investors (FVCIs) may invest in real estate assets,
within the framework of SEBI. This has paved the way for capital
infusion into the market and a significant weight of foreign
capital is now chasing Indian real estate
FUTURE COURSE
A China Model Second largest economy in the world and also the
most attractive FDI destination in the world. The graph shows the
real estate growth statistics in comparison to the GDP growth and
population growth for China and India. India holds many
similarities with China in terms of the size of the population,
size of the economy, FDI investments etc. The contribution to GDP
by the real estate sector in China is 11% where as in India it is
approximately 6%.
Lessons from China Attracted foreign investors. Brought
accountability and transparency in the operations. Licenses and
approvals for construction projects were granted easily. The
Policies and regulations have been framed in order to create
encouraging and effective business environment in the construction
and real estate sectors. The new Policies have more substantive
implications & are expected to reshape the real estate sector
for positive long-term growth. Stress Laid on regulation of real
estate investment demand, improving the land supply policy & to
strengthen the market order regulation.
Opportunities Vs Impediments Opportunities High domestic demand
for housing Increase in income levels of the public. Strong
economic growth and promising future. Availability of both
technically skilled and unskilled labor. Impediments Several
procedural complexities for a foreign individual or an entity to
invest. Serious discrepancies in urban planning. The opaque nature
of business in India. The bureaucratic processes in the
legislation, archaic rules, complexities and ambiguities in the
laws.
Can India Open up? India requires large amount of capital in
real estate industry. FDI can be encouraged and permissions may be
given to foreign real estate firms to operate in India. The sector
is currently dominated by a very small no of players & entry of
foreign companies will affect the opportunities of the small and
medium real estate firms. Indian Govt. can permit foreign companies
to enter into lease agreements with the Indian companies or
builders for a specific project for a particular period of time.
The decisions should be taken in after seriously considering the
impact on not just real estate sector, but also on other sectors
and on the Indian economy as a whole.