LITERATURE REVIEW

Literature Review

The real estate sector has become a major contributor of an economy’s growth. To understand
the significance of the sector and its implications there have been various research on real estate
industry both in India and abroad. The research are being conducted to gain more knowledge
about the various factors contributing to the growth of the industry and also to analyze the
factors which effect the decision of investment in the sector. I have tried to study few such
research papers to get a better idea about the current scenario of the real estate sector.

Graeme Newell and Rajeev Kamineni in their research paper assessed the risk-adjusted
performance and portfolio diversification benefits for the real estate markets (office, retail and
residential) of New Delhi and Mumbai. The real estate markets were found to under-perform the
stock market in India over 1998– 2005, with most markets improving their performance in more
recent years, although there was some loss of portfolio diversification benefits for office and
residential real estate with stocks. Deregulation of the capital markets and international
investment in India is also likely to have a significant impact on future FDI levels and the growth
of real estate funds for real estate investment in India. They also studied that offshoring in the
cities like Delhi and Mumbai has created huge demand for better infrastructure. This area of
offshoring has significant real estate investment issues; particularly concerning technology parks,
access to Grade A office space.
They have also concluded that deregulation of the Indian capital markets since 2004, and less
restrictive guidelines for foreign direct investment in real estate in India since February 2005 have
seen significant improvements in the real estate investment environment in India for both local
and international players. This has taken on increased importance as India significantly expands
its economic growth to potentially be the world’s third largest economy by 2020, and
international real estate investors seek global investment opportunities; particularly in the
emerging Asian real estate markets. The expected development of REITs in India in the next few
years will also expand the real estate investment opportunities available in India.
Vandna Singh and Komal (2009) in their research paper found that as the GDP increases the real
estate prices also increases because there is a high degree of Positive correlation between the
real estate prices and GDP. The Real estate prices also increases with increase in the per capita
income as there is high degree of positive correlation between these two. The FDI into the
country affects the real estate FDI and real estate having a positive correlation leads to the boom
in this sector. Increase in FDI from 2006 to march 2007 is 10%. Earlier it was 16% and now in 2008
it is 25%.
The interest rate also affects the real estate prices because it affects the lending and borrowing
by the investors. In residential segment, availability of easy home finance and rising purchasing
power has driven the growth. Builders are launching high-end, life style residential products to
cater to the growing bunch of high net worth individuals.

They suggested that due to high prices the lower income group is not able to purchase the land,
so govt. should take measures to protect the lower income group. The investors should analyze
the type of land in which they are going to invest and the potential
Returns from it. Due to lot of investment avenues in real estate in India, fraud cases are also
increasing day by day like in Delhi deconstruction of buildings. Thus careful measures and laws
should be enacted to deal with these types of situations.

Natalija stated that Advantage India: Real estate is one of the fastest growing sectors in India.
Market analysis pegs returns from realty in India at an average of 14% annually with a
tremendous upsurge in commercial real estate on account of the Indian BPO boom. Lease rentals
have been picking up steadily and there is a gaping demand for quality infrastructure. A
significant demand is also likely to be generated as the outsourcing boom moves into the
manufacturing sector. Further, the housing sector has been growing at an average of 34%
annually, while the hospitality industry witnessed a growth of 10-15% last year.
Jim Berry stated that the highest and best use analysis is another component of property
investment analysis, especially in the case of vacant land or deteriorated property that needs to
be redeveloped. Highest and best use is defined as the most profitable use at which a site can be
developed. Thus, highest and best use analysis is usually carried out for land sites that are
acquired for development purposes. A site’s highest and best use will depend on a number of
factors including site physical characteristics, its location, make up and purchasing power of the
population in its area of influence, competitive projects in its area of influence, market conditions
and prospects at the time of analysis, and other factors. If the land site is zoned in an urban use,
the highest and best use analysis will focus on the feasibility and profitability of developing the
alternative allowable uses.

Future of Real estate in Indian Economy

Analyzing the current scenario there has been various researches forecasting the future of the
real estate industry. According to them the Real Estate potential in India is vast. The market is
expected to grow at 33% through 2005-2010 to US 50 billion as per Negandhi’s (2007) estimates.
Tremendous potential demand along with an improving regulatory landscape, robust economic
growth and gradually improving 27 corporate governance standards of developers makes the
real estate market in India over the next five years highly sustainable. This strong potential
demand is expected to result in an exponential growth in development plans of real estate
companies. According to Negandhi (2007), development is expected to reach 16 billion square
feet across all segments of the real estate market by 2010 The plan ahead seems sustainable;
however it would be unwise to forget the experience of the 1985-93 boom/bust in real estate
that has left industry players nervous about when it might happen again. A paper by Kaiser (1997)
examines the possible causes and the periodicity of such major real estate cycles. The evidence
suggests that both periods of negative returns, (early 1930’s and early 1990’s) were caused by
excessive levels of new construction which caused an inflation spike in the general level of prices,
suggesting a 50- 60 year real estate bust cycle. The paper safely concludes that India is not likely
to witness another bust period for real estate in the
Next four decades.
The conclusions of Kaiser can be witnessed with the bullishness underlying in the development
proposed by the cumulative strength of the Indian developers. Historically, Indian real estate
companies have undertaken development of 1million- 3million square feet of real estate
annually. With strong growth in demand expected across segments of real estate over the next
few years, Desai & Rane (2006) estimate development plans of real estate companies to rise to
20million- 30million square feet annually. To sustain these growth levels, the flow of capital into
the sector will be carried out through REITs. REITs is the future of the Indian real estate market.
It is expected to lend the much needed liquidity to developers and allow them to take out their
capital value off ompleted projects for deployment in newer projects. REITs also serve as an
effective vehicle for broader participation by investors in the market.

However, without demand and latent capital adequacy, none of these plans will materialize
effectively for the players in this segment and a good chunk of their demand and capital is
expected in the form of Foreign Direct Investments. The paper by Henley (2004) compares the
performance of India and China in attracting foreign direct investment (FDI). FDI statistics suggest
that India's performance has been significantly understated but India still falls behind for several
reasons such as high tariff structure, poor physical infrastructure, a regulatory system that is too
often not business friendly etc. Nonetheless, India has displaced USA as the second-most favored
destination for FDI in the world. ASSOCHAM’s (The Associated Chambers of Commerce and
Industry of India) study on Future of Real Estate Investment in India forecasts that of estimated
US$ 60 billion future market size of real estate business in India, the share of foreign investments
will be within the range of US$ 25-28 billion by 2010. The overseas
investments will also be finding larger space in Indian SEZs and increasing number of shopping
malls that will naturally fatten their share in real estate market. Indian real estate sector is on
boom and this is the right time to invest in property in India to reap the highest rewards.
In the research paper on Real estate investment trust by KASB securities limited in Dec 2005 it
came to light that since REIT allows indirect investment in real estate for small investors who
otherwise could have not had this opportunity. And that it is one of the vehicles that have single
taxation and it also offer low volatility and ease of liquidity.it was suggested that REITs listed
under NBFC should be allowed to invest in real estate development and acquisition. Exposure
limits needed redefinition with respect to a REIT, REITs should be allowed to borrow.
Regarding Modifications to Income Tax Ordinance it was suggested that
· Gains from sale proceeds of land and or building to a REIT should be tax free;
· REITs should be granted a status of investment scheme formed under NBFC Rules as a result of
which it would be tax exempted.
Changes in Voluntary Pension Rules suggested that Under Voluntary Pension Rules, pension
funds should be allowed to invest in REITs.
Various other recommendations included
 The Land Record System should be computerized
 Tenancy Laws should be strengthened and should be classified as criminal law for
settlement of disputes efficiently for property formed under REIT structure
 Transaction costs should be reduced
 Buyers of property from REITs should not be asked source of income;
Though the above recommendations were made however, it was concluded that the markets
will not function smoothly unless the rental yields improve, tenancy laws are strengthened,
official and unofficial pricing issue is settled, paghri system is abolished, and the time consumed
in legal proceedings is reduced.

The ups and down of Real Estate Markets

Dirk Brounen in Dec 2008 said that the Real estate markets around the world have earned a
complicated reputation. On the one hand, real estate markets offer investors a wide spectrum of
profitable investments opportunities, investments that nowadays can be executed by simply
buying shares of stock listed by real estate investment companies. In the first half of this inaugural
address, the boom of these real estate stocks is discussed. In less than three decades, the listed
real estate market developed into a sector with almost 400 listed firms worldwide, representing
a sum aggregate market capitalization of around one trillion dollars by the end of 2007. Three
relevant lessons regarding these international real estate stocks are discussed in the first fifteen
pages of this booklet, lessons offered by real estate research from the Rotterdam School of
Management. On the other hand, real estate markets are notorious for attracting entrepreneurs
with bad intentions, seeking for opportunities to circumvent the strong arm of the law. These
activities have yielded many headlines in the daily press and have given real estate a gloomy
reputation. The dynamics of foreclosure auction of homes is an example of a source of negative
headlines, stressing that the suboptimal organization of these auctions prohibits distressed
sellers from earning a fair price for their home. In the second part of this address, I focus on an
empirical test of the matter. By analyzing over 700 auctioned homes the dynamics of the auction
system is discussed objectively. This offers a fair view on the problems at hand and searches for
way to improve the system in the near future.