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Real Estate

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Real Estate

February, 2012

Introduction

The Indian economy has witnessed robust growth in the last few years and is expected to be one of the fastest growing economies in the coming years. Demand for commercial property is being driven by India's economic growth. Real estate in India contributes about 5 per cent to India's gross domestic product (GDP). The total revenue generated in 2010-11 stood at US$ 66.8 billion.

Demand is expected to grow at a compound annual growth rate (CAGR) of 19 per cent between 2010 and 2014—Tier 1 metropolitan cities are projected to account for about 40 per cent of this. Growing requirements of space from sectors such as education, healthcare and tourism provide opportunities in the real estate sector. FDI of more than US$ 9 billion was infused in real estate in the last decade.

In 2010, over 11 per cent of total FDI in India was in the real estate sector. There have been 110 deals in this sector during the period 2001 to the first half of 2011.

Urban population has been increasing and is expected to cross 590 million by 2030. Urbanisation and growing household income are some of the major factors that influence demand for residential real estate and growth in the retail sector.

Investments

Real estate emerged as the popular sector for private equity funds who invested US$1,700 million in this sector during 2011. Private equity in real estate projects will fetch considerable returns by next year-end or early 2013, as per Vikram Hosangady, Partner, KPMG.

Some of the recent investments in this sector are mentioned below:

  • Sahara India has joined hands with the US-based Turner Construction Company. The JV, Sahara Turner Construction, will build integrated townships called Sahara City Homes and other Sahara India projects in India worth US$ 25 billion over the next 20 years
  • DLF acquired the additional 26 per cent stake in its joint venture company—DLF Hotels & Hospitality Ltd (DHHL)—from Aro Participation Ltd and Splendid Property Company Ltd, affiliates of Hilton International. At present, the company holds 74 per cent equity in DHHL
  • Pride Group of Hotels, which owns a chain of upscale mid-market and business hotels is planning to set up a series of new properties and this will involve an investment of Rs 1,000 crore (US$ 203.18 million) over the next few years. The company plans to have a mix of owned and managed properties having 3,500 rooms by 2015-16

Government Initiatives

  • The foreign direct investment (FDI) up to 100 per cent is allowed with Government's permission for developing townships and settlements
  • New home loan borrowers of up to Rs 1.5 million (US$ 30,477) will get Rs 14,865 (US$ 302) as interest subsidy from the Government, on the condition that the cost of the house should not exceed Rs 2.5 million (US$ 50,798)
  • Allowing 100 per cent FDI under the automatic route in development of Special Economic Zones (SEZ), subject to the provisions of Special Economic Zones Act 2005 and the SEZ Policy of the Department of Commerce

In the Union Budget 2011-12, Mr Pranab Mukherjee, Union Finance Minister presented various initiatives for the real estate sector, especially focussing on affordable housing. Some of these initiatives are listed below:

  • Increasing the limit on housing loans eligible for a 1 per cent subsidy in interest rates
  • Widening the scope for housing under "priority-sector lending" for banks, making interest rates cheaper on them
  • Allocating substantial amount to the Urban Development Ministry for spending on extension of Metro networks in Delhi, Bengaluru and Chennai
  • Earmarking US$ 20.03 million for the urban infrastructure development project. The Urban Development Ministry received US$ 1.5 billion, an increase of US$ 68.53 million from the last fiscal 2010-11

Road Ahead

Real estate plays an important role in the Indian economy. This sector happens to be the second largest employer after agriculture and is expected to grow at the rate of 30 per cent over the next decade. The size of the Indian real estate market is expected to touch US$ 180 billion by 2020.

The housing sector alone contributes to 5-6 per cent of the India's GDP. Retail, hospitality and commercial real estate are also growing considerably, providing the much-awaited infrastructure towards India's growing needs.

According to a study by ICRA, the construction industry in India ranks 3rd among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. A unit rise in construction spending generates five times the income, having a multiplier effect across the board. With backward and forward linkages to over 250 ancillary industries, the positive effects of real estate growth spread far and wide. Therefore, real estate acts as a catalyst for adding momentum to growth of the Indian economy.

Exchange rate used: 1 INR = 0.02032 as on February 22, 2012

References: CREDAI, Media reports