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Real Estate

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Real Estate

August, 2012

Introduction

The Indian economy has experienced robust growth in the past decade and is expected to be one of the fastest growing economies in the coming years. The real estate sector in India assumed greater prominence with the liberalisation of the economy, as the consequent increase in business opportunities and labour migration led to rising demand for commercial and housing space. At present, the real estate and construction sectors are playing a crucial role in the overall development of India’s core infrastructure. It is the second largest employer after agriculture. Over the next decade, the real estate sector is expected to grow by 30 per cent.

The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy, according to a study done by ICRA.The industry’s growth is linked to developments in the retail, hospitality and entertainment (hotels, resorts, cinema theatres) sectors, economic services (hospitals, schools) and information technology (IT)-enabled services (like call centres) etc and vice-versa.

The sector is divided into four sub-sectors:

  • Housing
  • Retail
  • Hospitality
  • Commercial

The housing sub-sector contributes five-six per cent to the country's gross domestic product (GDP). Meanwhile, retail, hospitality and commercial real estate are also growing significantly, catering to India's growing needs of infrastructure.

Market Size

The Indian real estate market size is expected to touch US$ 180 billion by 2020.

Demand for residential, commercial and retail real estate is rising throughout India, accompanied by increased demand for hotel accommodation and improved infrastructure. Demand is expected to grow at a compound annual growth rate (CAGR) of 19 per cent between 2010 and 2014 and Tier 1 metropolitan cities are expected to account for about 40 per cent of this.

Growth prospects and price stability of smaller cities are attracting large real-estate developers in such cities in the recent past, according to a report titled 'Real(i)ty Next: Beyond the Top 10 Cities of India', released by Crisil Research in June 2011. The report estimates that the sale of new residential apartments in 10 such smaller cities are at around US$ 4 billion in 2012.

India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space.

Presence of a large number of Fortune 500 and other reputed companies and expertise in sectors such as auto-components, chemicals, apparels, pharmaceuticals and jewellery where India can match the best in the world will definitely attract more foreign investors in the near future.

Investments

The sector in India is being recognised as an infrastructure service that is driving the economic growth engine of the country, according to industry experts. In fact, foreign direct investment (FDI) in the sector is expected to increase to US$ 25 billion in the next 10 years, as per a latest industry body report.

FDI inflows in real estate in 2011-12 (April-January) stood at Rs 2,750 crore (US$ 493.80 million). In May 2012, FDI inflows in real estate were Rs419.87crore (US$ 75.39 million) as compared to Rs 321.35 crore (US$ 57.70 million) during the corresponding month in 2011.

Indian real estate emerged as the popular sector for private equity (PE) funds investing around US$ 1,700 million in this sector during 2011. PE in real estate projects will fetch considerable returns by next year-end or early 2013, according to Vikram Hosangady, Partner, KPMG.

India needs to invest US$ 1.2 trillion over next 20 years to modernise urban infrastructure and keep pace with the growing urbanisation, as per a report released by McKinsey Global Institute (MGI)–India's urban awakening.