Realty: Analysis

THE INDIAN REAL ESTATE

CONUNDRUM
The Indian real estate industry has grown considerably over the past few years. Brands with a
single city focus have moved into multi-city projects. The financing schemes in the industry
have also turned more corporate with private equity and public offerings. Indian real estate will
stay attractive due to its strong economic fundamentals. There is no doubt that the sector
holds huge potential to attract FDI in its various segments. However, progress is possible only
with the joint efforts of both the industry and the Government.
Bhavani Balakrishna

he real estate sector is a critical

sector of our economy. It has a huge
multiplier effect on the economy
and therefore, is a big driver of economic
growth. It is the second-largest employment-generating sector after agriculture. The Indian real estate industry has
been on a roller-coaster ride since 2005.

154

Consequent to the government's policy

to allow Foreign Direct Investment (FDI)
in this sector, there was a boom in
investment and developmental activities.
The sector not only witnessed the entry
of many new domestic realty players but
also the arrival of many foreign real estate
investment companies, including private

The Masterbuilder - November 2013 www.masterbuilder.co.in

equity funds, pension funds and development companies entered the sector
lured by the high returns on investments.
The real estate sector has since then been
riding through many highs and lows since
then. The industry achieved new heights
characterized by a growth in demand,
substantial development and increased

Realty: Analysis

Decelerating sales, hardening interest rates and weakening cash flow

have severely impacted the real estate industry

foreign investments. However, recently

the effects of the global economic slowdown were evident here too, and the
industry took a 'U' turn. However, industry experts look upon this as just a passing phase.
According to the Merrill Lynch forecast, the real estate business in India
will grow to $US 90 billion by 2015 and
touch USD 180 billion by the year 2020.
Demand is expected to grow at a compound annual growth rate of 19% between
2010 and 2014 with tier 1 metropolitan
cities projected to account for about 40%
of this.
As per Cushman & Wakefield, based
on the estimated growth of population
across India, the total new housing
demand across India will be nearly 12
million units in the next five years (201317). The top eight cities will constitute
about 23 per cent out of the total demand.
These cities are National Capital region
(NCR), Mumbai, Kolkata, Chennai,

D.S. Rawat
Secretary General,
ASSOCHAM

The total new housing demand across India will be nearly 12 million units in the
next five years (2013-17).

Hyderabad, Bangalore, Pune and

Ahmedabad. Of the total demand in top
eight cities, middle income group (MIG)
and higher income group (HIG) categories constitute a majority of the demand
at 2.5 million units. The demand for lower
income group (LIG) will be a mere 3,
00,000 units in these eight cities, due to
expected increase in the housing and
income standards in these key economic
centres. The gap between cumulative
supply and demand in HIG and MIG
segments during 2013- 2017 is estimated
to be about 45 per cent in the top eight
cities.
State of the Market
Decelerating sales, hardening interest rates and weakening cash flow have
severely impacted the real estate industry. Construction activity constrained by
approval delays and tight liquidity further inhibited recovery of the sector. All
across the micro-markets in India the

Rapid urbanization, positive demographics, growing nuclear

families' trend, rural-urban migration, infrastructure development, rising income levels and growing housing demand
are driving real estate growth and development in India as the
sector contributes about 6.3 per cent to India's gross domestic product (GDP) and annually generates about eight million
direct and indirect jobs. While so far, mostly tier I centres
accounted for major chunk of real estate development there
is a need to take it to smaller cities to negate the growing housing demand-supply gap across India.

investor sentiments seemed to have

impacted because of the inflationary
pressures and increasing interest rates.
The recent move by Reserve Bank to raise
the repo rate by 0.25 per cent disappointed the industry further as this could
make funds costlier for both developers
as well as consumers. Also, with the Real
Estate Regulation Bill and the Land Bill
coming into force in the next few quarters, this may add further burden to the
developers as it will stagger supply and
lead to more delays in approvals.
Rising Inventory Levels
The real estate sector is saddled
with huge inventories. Unaffordability
continues to be reason for decline in
home sales in the city with developers
refusing to lower prices in a stagnant
real estate market. Despite the prevalent
economic uncertainty, residential supply in key markets across the country
witnessed an increase in the first half of
2013 according to CBRE's latest report
on the residential segment, 'India Residential Market View H1 2013'. According to the report, more than 65,000 units
were launched across India's leading
cities during the period under review, as
compared to about 48,000 units launched
during the second half of 2012. About
88% of this supply was concentrated in
the Delhi-NCR, Mumbai and Bangalore
markets indicating their prominence as
residential investment destinations. Most
new launches across these cities were

www.masterbuilder.co.in The Masterbuilder - November 2013

155

Realty: Analysis

Unaffordable land prices have resulted in leapfrogging of residential

development to even suburbs of suburbs or exburbs

in peripheral areas, and in the mid-end

segment to cater to the rising demand
for affordable housing in view of the current economic situation.
As buyers faced a scenario of high
price points amidst sticky borrowing
costs, demand remained largely sluggish across most markets. Buyers
remained cautious of making investments as current price points in most
leading cities (especially Mumbai and
the NCR) seemed inflated.
In spite of slowing demand, developers are unfazed and continue to launch
project after project. Developers are not
oblivious to the high demand for affordable houses. Many are re-aligning
offerings to attract those looking for a
reasonable price tag.Due to lack of
available land parcels within the cities,
suburbanization has accelerated in several metropolitan cities during the past
decade. Unaffordable land prices have
resulted in leapfrogging of residential
development to even suburbs of suburbs or exburbs. The introduction of
metros and general improvement in
infrastructural connectivity to these suburbs is increasing their acceptability as
residential destinations.
Potential of Tier II and Tier III cities
Since metros are seeing less traction due to high prices, developers are

156

Since metros are seeing less traction due to high prices, developers are seeing great
potential in the real estate markets in Tier I & II cities

seeing great potential in the real estate

markets in Tier I & II cities. These cities
have seen immense growth in both
industrial and service sectors. Thus, the
purchasing power of the people has been
on the rise. Also, these places are not
affected by global factors unlike the metros, which are heavily dependent on
global economic developments. Further, land prices in Tier II and Tier III cities have not become as expensive as in
metros and super-metros. Cities like
Ahmedabad, Surat, Vadodara, Kochi,
Coimbatore, Tiruvananthapuram, Jaipur,
Jodhpur, Vishakapatnam, Vijaywada,
Chandigarh and Ludhiana are the new
hot-spots for real estate.
However, it is believed that local
developers will have a better stronghold
over these markets vis--vis outsiders
as they understand their geographies

Anshuman Magazine
Chairman &
Managing Director,
CBRE, South Asia Pvt.

The Masterbuilder - November 2013 www.masterbuilder.co.in

better than any players who arrive from

the outside to experiment on the Tier II /
Tier III story. Also, each local market has
its own development control regulations,
own municipal byelaws and regulations
and it is difficult, tedious and time consuming.
Affordable Housing
Affordable housing industry has
emerged as the most vibrant and dynamic segment of the Indian housing sector. As per reports, the Indian affordable
housing industry is expected to surge at
a CAGR of around 40% during 20122014.
While most developers have shied
away from this segment previously, an
increasing number have been entering
into the affordable housing space. There
is a gradual realization that affordable

India's economic growth prospects continued to face strong

challenges from a depreciating currency, weak industrial output and a stagnating policy environment, thereby hurting
investor sentiment in the real estate sector. RBI's latest ruling
on disbursement of loans on special schemes will further
impact the residential market across most micro markets. I
expect the market to remain sluggish in the short to medium
term. NRI investments, however, might witness an increase
owing to the depreciating value of the rupee.

Realty: Analysis

During 2009-2012, real estate developers have launched projects in the affor-dable segment across
Indian cities, with units priced between ` 5-10 Lakhs

housing calls for a different mindset from

developers. Whilst price of premium
residential projects are largely guided
by land costs, construction costs have
a significant share in the price of affordable housing. This is due to the fact that
whilst land prices fall exponentially from
city centre to peripheral locations of the
city, construction costs generally follow
a gradual trend from premium luxury,
mid-income to low-income housing.

Hence, it becomes important that costs

are minimized for construction of lowincome housing whilst balancing the
amenities provided as well as ensuring
the safety and serviceability of the built
structure during its lifecycle.
Emergence of microfinance institutions focused on low income housing
has helped in improving buyers' access
to housing finance.The Government's
introduction of policy initiatives such as

Affordable Housing in Partnership

(AHIP) focused on transition of public
sector role as `facilitator', increased role
of the private sector, decentralization,
development of fiscal incentives and
concessions, accelerated flow of housing finance and promotion of environment-friendly, cost-effective and propoor technology has to some extent
encouraged the private players to enter
this space.Under the Union Budget
2012-13, External Commercial Borrowing (ECB) has been allowed for affordable and low-cost housing.
During 2009-2012, real estate developers have launched projects in the affordable segment across Indian cities, with
units priced between ` 5-10 Lakhs (USD
10,000-20,000). Several of these projects have been sold on an application
model due to huge demand, with multiple takers for the same unit. Developers
have successfully executed affordable
housing projects of nearly 15-35 acres
having 1,500-3,500 units at locations
beyond 2025 km from the city centre.
There have been several affordable
housing projects that were sold out
within days or weeks of launch. Whilst a
short period of construction results in
an accelerated construction-linked payment from buyers, assured sales and
reduced cash-flow risks. However,
despite the high rate of returns achieved
by undertaking the measures mentioned
above, unavailability of land at suitable
prices and locations, low absolute value
of returns and lack of financing to undertake large-scale mass housing projects
could prevent several developers to
enter the segment. For higher absolute
value of returns, the scale of the project
needs to be significantly higher, where
large volumes can ensure a larger profit
to the developer.
Investments

Lack of financing to under-take large-scale mass housing projects could prevent several
developers to enter the segment

158

The Masterbuilder - November 2013 www.masterbuilder.co.in

Approximately ` 118.54 billion is

available with private equity (PE) firms
ready to be deployed in real estate
despite a drop in the PE investment in
the first half of 2013. While PE investments in the real estate was recorded at
INR 16.38 billion in H1 2013, which is

Realty: Analysis

Sanjay Dutt
Executive Managing
Director, South Asia,
Cushman & Wakefield

While demand for housing units will grow proportionate to the

rise in population, supply is expected to be less aggressive in the
short to medium term. New regulations like LARR Bill and Real
Estate regulatory bill which are expected to come into force in
the next few quarters will stagger supply. Additionally, there
may also be a rise in construction cost which may affect pricing
and therefore adversely affect end user demand. The key issue
of financing real estate projects remains critical especially in
the wake of recent announcements where apex bank RBI has
been cynical of financial institutions lending upfront money to
developers. As expected, the demand will be higher in MIG segment rather than in the HIG however, developers are unable to
meet this demand due to aspects such as high land costs,
development costs and escalating inflation which also affects
the cost of construction.

46% lower when compared to H1 2012

(` 30 billion). This decline in the quantum of PE investments was primarily
due to fewer deals as the average ticket
size remained the same.
The total value of investments in the
residential segment recorded at INR
9.3 billion in H1 2013 witnessed a drop
of 48% over the last year. The total value
of investments in the office segment
was also lower in H1 2013 at INR 7 billion. However, there is a strong growing
trend towards investments in ready
office space. The growing stability of the
market is reflected by the continuous
growth of the core investors (number
and value) with over INR 77.05 billion
invested in ready office space during
the last years.
India's construction sector comprising of townships, housing, built-up
infrastructure and construction devel-

opment projects has attracted a cumulative foreign direct investment (FDI)

worth over US $22 billion (bn) during
April 2000-June 2013, highlighted an
ASSOCHAM paper.
Evolving Standards
Real estate, which was earlier an
unorganized, family-driven practice,
has been slowly and steadily driven to
becoming more organized. Opportunities for tie-ups with international real
estate organizations and access to
funding from international firms have
seen some Indian players getting out of
their comfort zone and adopting international practices. This move was propelled by the unified effort of stakeholders, including the government, to
regulate the practice and increase credibility of the real estate industry.
Today, the industry is levitating

The key challenges that the Indian real estate industry is facing today are
lack of adequate sources of finance, shortage of labour, rising manpower
and material costs

toward adopting professional practices

that have traditionally been characteristic of the service industry. This transformation, however, is bringing in operational hurdles for the industry. Some of
the numerous challenges include finding and retaining trained human
resources, dealing with aware customers, enhancing customer experience,
employing technology to enhance product offering, cutting down on construction cost and time, or just being an environmentally responsible company.
As India continues to attract international attention with multinationals
entering the country and penning their
expansion further, real estate needs to
step up and offer more professionally
managed service offerings.
Challenges
The key challenges that the Indian
real estate industry is facing today are
lack of adequate sources of finance,
shortage of labour, rising manpower
and material costs, approvals and procedural difficulties.
Delay in Approvals
The real estate industry has been
continuously emphasizing on the need
for a single- window clearance for
approvals of realty projects since the
cost goes up by 40 per cent due to
delay in approvals, which generally
takes 12-24 months.
The government has recently
announced it will soon appoint real
experts and consultants in 15 major

India's construction sector comprising of townships, housing, built-up infrastructure

and construction development projects has attracted a cumulative foreign direct
investment (FDI) worth over US $22 billion (bn) during April 2000-June 2013

www.masterbuilder.co.in The Masterbuilder - November 2013

159

Realty: Analysis

Conversion of land use 8-12(Months)

Project letter of intent and license /
Intimation of disapproval (IOD)
Pre-construction approvals from
state level bodies*
Pre-construction approvals
from central bodies*

4-6
6-8
5-7

Approvals for construction plan sanction

5-7

Approvals for commencement of construction

2-3

Construction period

24-30

Inspection and approval

procedure for building completion
Occupancy certificate receipt
from data of completion of above

2-3
2-3
Approval Process after Land Acquisition Till
Commencement of Construction (24-32 months)

Months 0

12

24

32

60 65

Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011

Note: The stages - Pre-construction approvals from state level bodies and bodies and central bodies can happen simultaneously

states for helping them to prepare

affordable housing policy and streamline the rules for approving realty projects. These consultants will help the
states to develop a housing policy with
special emphasis on the affordable
housing and also study the various
laws, rules and regulations which are
involved in getting a clearance of building activities. They would also develop
software that will help the states in expediting the approval process. The process of engaging consultants has
already started and the same would be
completed in the next two months.
Funding
The weak economy has affected the
demand for residential units. Inflationary pressures and high interest
ratehave affected buyer sentiments. On
the other hand, a lot of projects have
been launched and inventory levels are
running high.Banks are cautious in lending to the real estate developers because
there is a huge mismatch in price and
demand. Real estate developers have
been expressing concern that many
projects are stalled due to lack of funds.
In order to boost fund flows to the
cash-strapped sector, the government
is mulling on introducing changes to
the current foreign direct investment
(FDI) norms for the real estate sector.
Foreign direct investment (FDI) of 100

160

per cent is allowed in real estate through

the automatic route, subject to conditions, including a minimum built-up
area for projects.There are talks about
bringing down the minimum built-up
area to 20,000 square meters from the
existing 50,000 square meters.
Also, an investment of INR 40,000
crores has been earmarked to mobilize
money by the government and institutional sectors to develop 2 million houses
in next four years.
To facilitate private sector participation in the affordable housing segment,
the government has redesigned affordable housing in partnership scheme in
which it would give a subsidy of 10-15
per cent of housing cost to build a house
and make it available for the poor sections.
The Securities and Exchange Board
of India (SEBI) has re-initiated the process of introducing real estate investment trusts (REITs) in the country. REITs
will bring the muchneeded respite to
the commercial real estate sector and
enable developers sitting on assets to
both unlock value and create liquidity.
REITs, which will raise funds through
initial offers, will have to list their units on
exchanges for trade. They will be allowed
to raise additional funds through followon offers as well.
To ensure that only established players launch REITs, the minimum size of

The Masterbuilder - November 2013 www.masterbuilder.co.in

assets under management has been

proposed as ` 1,000 crore. Initially, the
minimum investment size will be ` 2
lakh, which may keep retail investors
away from this new market. At least
90% value of REIT assets should be in
ready properties generating revenue.
The remaining 10% can be in other
specified assets. REITs will have to distribute at least 90% of their net distributable income after tax to investors.
According to Cushman & Wakefield,
around 57 million square feet of office
space is vacant in India and over 200
million square feet of investible 'Grade
A' leased offices are unsold. These
properties can be used by REITs to generate rental incomes. The residential
segment, where annual rental yield is
low (2-5%), will be better suited for capital appreciation.
Future Outlook
The Indian real estate industry has
grown considerably over the past few
years. Brands with a single city focus have
moved into multi-city projects. The financing schemes in the industry have
also turned more corporate with private
equity and public offerings. Indian real
estate will stay attractive due to its
strong economic fundamentals. There
is no doubt that the sector holds huge
potential to attract FDI in its various segments. However, progress is possible
only with the joint efforts of both the
industry and the Government. On the
one hand, the industry should work
towards increased transparency, clear
land titles, improved delivery and project execution while on the other hand,
the Government must provide fiscal
incentives to developers to build low
cost and affordable housing for the
masses and also review the existing
FDI guidelines for investment and
development in Indian real estate in
order to increase the flow of foreign capital into the sector. In the coming years,
the opportunities in the real estate sector will attract more global players to
India and hence will help the industry to
mature, become more transparent, improve management and adopt advanced construction techniques.