The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade.
The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations.
The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.
It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.
The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP).
In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.
Private Equity (PE) investments by domestic and international investors in the Indian realty market declined 30 per cent year-on-year to US$ 2.5 billion across 48 deals during January-September 2016.
Over April-June 2016, India's office space absorption grew 46 per cent year-on-year to over 10.2 million sqft, primarily led by Delhi National Capital Region (NCR) and Bangalore, which accounted for almost 50 per cent of the total space take-up. On the supply front, over 7 million sqft of fresh office space was added during April-June 2016, led by Hyderabad and Mumbai, accounting for more than 65 per cent of the total supply of fresh office space across leading cities during the quarter.@
Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR). Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times.
The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.19 billion in the period April 2000-March 2016.
Some of the major investments in this sector are as follows:
- Fosun International Limited, a Chinese international conglomerate and investment company, plans to enter the Indian real estate market by investing US$ 1 billion through real estate private equity platform.
- Indiabulls Housing Finance has raised over Rs 1,300 crore (US$ 193.85 million) by selling masala bonds to foreign investors, which would be used partly for its affordable housing segment.
- Altico Capital, the non-banking finance company (NBFC) backed by Clearwater Capital, has invested Rs 200 crore (US$ 29.82 million) in Bengaluru-based real estate developer Legacy Group, which will be used to fund the ongoing construction as well as to refinance the developer’s existing loans.
- Ivanhoe Cambridge, the real estate arm of Canada’s second largest pension fund manager Caisse de dépôt et placement du Québec (CDPQ), plans to enter into a Joint Venture (JV) agreement with Piramal Fund Management to set up a US$ 250 million venture, which will provide equity capital to developers of residential projects in the country.
- Apollo Asia RE Singapore Private Limited and realty firm Salarpuria Sattva Group have entered into a JV to acquire 100 per cent stake in two real estate projects at Bangalore and Vadodara from a consortium of offshore investors in a deal worth Rs 275 crores (US$ 41 million).
- Mr NandanNilekani, co-founder of Infosys Limited, has invested around US$ 25 million in a real estate NBFC unit of KKR India, one of the local arms of the US-based private equity firm KKR & Co LP.
- Piramal Fund Management, one of India's largest real estate investors, has invested Rs 425 crore (US$ 63.4million) in realty firm Lodha Group’s residential project in central Mumbai through the structured debt route.
- NestAway Technologies Pvt Ltd, a home rental company, has raised US$ 30 million in Series C round of funding from US-based Tiger Global, Russian billionaire Yuri Milner, and IDG Ventures India, which will be used to scale up operations and build technology.
- Real estate private equity fund of the Kotak group, Kotak Realty Fund, has raised US$ 250 million from institutional investors for equity investments in realty projects across India's top six property markets including Mumbai, Delhi, Pune, Bengaluru, Hyderabad and Chennai over the next 24 to 36 months.
- Indospace, a developer of industrial realty and logistics parks, plans to invest US$ 1 billion in India over the next five years, increasing its development pipeline in the country from 20 million square feet to 50 million square feet.
- Peninsula Brookfield Investment Managers Private Limited, a joint venture of real estate firm Peninsula Land Ltd and global alternative asset management firm Brookfield Asset Management, hasinvested Rs 100 crore (US$ 14.91 million) in mid-income housing projects of Bengaluru-based property developer Mahaveer Group.
- Quikr, an online classifieds platform, has acquired real estate portal Commonfloor.com for US$ 200 million in a stock-cum-cash deal.
- Goldman Sachs bought shares worth Rs 255 crore (US$ 38.02 million) in Vatika Hotels Private Limited, a company owned by real estate and hospitality firm Vatika Group.
- SoftBank, Falcon Edge Capital and a few others invested US$ 90 million in Locon Solutions Private Limited, which runs Housing.com - a realty website.
- PE firm Warburg Pincus invested Rs 1,800 crore (US$ 268.4 million) in Piramal Realty for a minority stake in the company.
The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:
- The Cabinet Committee on Economic Affairs (CCEA) has approved various measures to revive the construction sector, putting in place a mechanism to release funds stuck in arbitration awards to revive stalled projects.
- The Make in India initiative has helped to accelerate leasing of commercial property by the manufacturing sector, which has outpaced the Information Technology (IT) sector by registering two-fold increase in office transacted space in the first six months of 2016.%
- Brihanmumbai Municipal Corporation (BMC) has introduced a single-window clearance for construction which will cut the time taken for getting approvals for a building project and lead to correction in prices of residential property, thereby giving a fillip to Mumbai realty.
- The Securities and Exchange Board of India (Sebi) has proposed easier regulations for real estate investment trusts (REITs), such as raising the cap of investment of REITs’ assets in under-construction projects from 10 per cent to 20 per cent, in order to attract the interest of developers, and also plans to relax the rules for foreign fund managers to relocate to India.
- The Government of India has brought into force the Real Estate (Regulation and Development) Act, 2016 on May 01, 2016, which is aimed at making necessary operational rules and creating an institutional infrastructure for protecting the interests of consumers and promoting growth of the real estate sector in India.
- The Securities and Exchange Board of India (SEBI) has allowed Foreign Portfolio Investors (FPI) to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III alternative investment funds (AIFs), and also permitted them to acquire corporate bonds under default.
- The Rajya Sabha or the upper house of the Parliament has passed the Real Estate (Regulation and Development) Bill, 2013, which aims to protect consumer interest, ensure efficiency in all property related transactions, improve accountability of real estate developers, increase transparency and attract more investments into the realty sector in India.
- The Securities and Exchange Board of India (SEBI) has issued the consultation paper for public issue of Real Estate Investment Trusts (REITs), which include provisions such as capping of allocation to qualified institutional buyers (QIBs) at 75 per cent, among other topics.
- India’s Prime Minister Mr Narendra Modi approved the launch of Housing for All by 2022. Under the Sardar Patel Urban Housing Mission, 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy.
- The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). This move will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors.
- The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of software called 'Sanketham'. This will ensure a more standardised procedure, more transparency, and less corruption and bribery.
Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering.
The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards.
Exchange Rate Used: INR 1 = US$ 0.0149 as on September 21, 2016
References: Media Reports, Press releases
Notes: !- ‘Emerging Trends in Real Estate Asia Pacific 2016’ report by PricewaterhouseCoopers (PwC) India, # – ‘Global Market Perspective (Q4, 2015)’ report by JLL India, *- report by property advisory firm Cushman &Wakefield; @- according to CBRE; %- as per a report by property consultant Knight Frank India; $- according to Venture Intelligence