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The Real Estate Industry in India

The Real Estate sector in India has observed a quite revolution over the past decade thanks to India’s booming economy which has led to an increased demand for both commercial and residential space. According to a study by a leading industry chamber, the Indian Real Estate sector is expected to grow at 30 per cent over the next decade, attracting foreign investments worth US$ 30 billion.

The double-digit growth is mainly attributed to India’s booming off-shore business, including high-end technology consulting, call centres and software businesses. The IT and ITES sector alone is estimated to require 150 million sq ft of office space across urban India by 2010. Organised retail is also responsible for the growth in commercial office space requirement. The organised retail industry is likely to require an additional 220 million sq ft by 2010. Moreover, growth is not restricted to a few towns and cities but is pan-India, covering nearly all tier-I and tier-II cities.

Apart from the huge demand, India also scores on the construction front. A McKinsey report reveals that the average profit from construction in India is 18 per cent, which is double the profitability for a construction project undertaken in the US.

Realty Funds

The boom in the Real Estate industry has attracted a large number of realty funds to tap into this market. Recently, IL&FS Investment Managers (IIML), the private equity investment arm of Infrastructure Leasing & Financial Services (IL&FS), announced the closure of a Real Estate fund at about US$ 895 million, exceeding its target of US$ 750 million.

Real Estate has been responsible for India emerging as one of the top destinations in Asia for attracting private equity investments. According to a report by global realty consultants, Cushman & Wakefield, titled ‘The Metamorphosis – Changing dynamics of the Indian Realty Sector’, PE funds struck 79 deals in the country during August 2007–August 2008 amounting to US$ 6 billion, a rise of 100 per cent over the same period a year ago.

Global Majors

Foreign direct investment (FDI) in Real Estate has also been rising over the years. The Real Estate sector, thrown open in 2004–05, saw the FDI picking up significantly between FY 2004–05 and FY 2007–08; it was US$ 38. 71 million in 2005–06 surging to US$ 470.18 million in 2006–07 and rising to US$ 2.18 billion in 2007–08.

Moreover, the Indian Real Estate sector is expected to receive US$ 25 billion as foreign direct investment in the next 10 years, according to an Assocham study.

The Real Estate sector is also likely to get a boost from Real Estate Mutual Funds (REMFs) and Real Estate Investment Trusts (REITs). In fact, according to a Crisil paper, the REITs would have the potential to hold at least 5 per cent share of the total global Real Estate market by 2010, the size of which would turn to US$ 1400 billion in the next 3 years. The paper titled, ‘Indian REITs; Are We Prepared', says that by 2010, REITs alone would hold a market size of US$ 70 billion of the total Real Estate market as its concept is gaining ground in countries like India and other developing nations.
India’s image as an investment destination has also steadily moved up the value chain over the last six years with increasing transparency in the Real Estate sector. According to the Jones Lang LaSalle 2008 Real Estate Transparency Index, India scores highest among BRIC (Brazil, Russia, India and China) nations with a large number of listed Real Estate players that adhere to the stringent guidelines by the Securities and Exchange Board of India (SEBI).

The transparency index helps the investor to assess the risk that can be associated against the expected returns across developing nations.

The Index not only details the reasons between the historic improvement in transparency from 3.9 in 2004 to 3.34 in 2008, but also looks well into the future to showcase further improvement identifying the key reasons for the same.

Goldman Sachs and CalPERS – the largest pension fund, with around US$ 208 billion in assets under management – are major global investors looking at opportunities in India's Real Estate sector. Some other big players include J P Morgan, Warburg Pincus, Morgan Stanley Real Estate Funds, Warren Buffett's Berkshire Hathaway, the Blackstone Group, Colony Capital, Starwood Capital, GE Capital and HSBC, Government of Singapore Investment Corporation, and others.

  • With falling Real Estate values in the US and the downturn in Indian property market making local valuations more attractive, Real Estate fund Millennium Spire — part of the UK-based Millennium Group — is looking to invest US$ 300 million into realty projects in India in the next 12–18 months.

  • Morgan Stanley Real Estate is planning to invest an additional US$ 1 billion over the next five years. The company had earlier invested about US$ 750 million in India.
  • A unit of Deutsche Bank aims to invest more than US$ 1 billion over three years in Indian construction and Real Estate projects.
  • Dawnay Day International, a London-headquartered group with gross assets to the tune of US$ 4 billion, is setting up a chain of four-star hotels in India, starting with one in Jaipur.
  • India Land Ventures (ILVL), a part of the Madrid-headquartered Americorp Group, will invest US$ 585.48 million in eight infrastructure projects across the country over the next two years.
  • Jones Lang LaSalle (JLL), the world's leading integrated global Real Estate services firm, plans to invest around US$ 1 billion in the country's burgeoning property market.
  • Landmark is likely to invest US$ 993.38 million in 12 projects across the northern region in the next three–four years.
  • Israel-based Real Estate developer, Elbit Imaging (EI), has tied up with the UK property firm, Plaza Centres NV, a leading emerging markets property firm, to develop the former's three mixed-use Real Estate projects in India—at Bangalore, Chennai and Cochin—worth US$ 3.4 billion.
  • Private investment company, Berggruen Holdings (BH), has forayed into the realty space in India, pumping in US$ 30 million so far and a likely addition of another US$ 20 million. Its first commercial project in Hyderabad, for US$ 76.79 million, will kick off at the end of the year. The other locations include Nagpur, Coimbatore, Mysore, Raipur and Vizag.

On Home Turf

There is major activity happening on the domestic front as well.

  • Engineering and construction major, Larsen and Toubro, has bagged orders totalling about US$ 302. 35 million in the third quarter of 2008–09 for building offices.
  • Real Estate developer, DLF Ltd, has announced plans to invest US$ 838. 22 million over a period of five years in various parts of Kerala. Moreover, buoyed by the success of organised retail in the country, DLF plans to invest US$ 3.35 billion over four years to develop about 20 large shopping malls across the country.
  • The Chennai-based, Consolidated Constructions Consortium Ltd (CCCL) has bagged construction contracts estimated at over US$ 313.54 million covering airports, power and automotive sectors.
  • Real Estate company, Ansal API, will invest US$ 752.04 million in developing six IT Special Economic Zones and Parks, spread over 270 acres.
  • Realty major, Unitech Ltd, plans to invest US$ 522.25 million to develop 35 hotels across the country over the next seven years.
  • Realty firm, Sahara Prime City, is planning to raise US$ 417.79 million in the next 12–18 months to part-fund development of 217 integrated townships across the country.

Government Initiatives

The government has introduced many progressive reform measures to unlock the potential of the sector and also meet increasing demand levels. The government's recently announced stimulus package, coupled with the Reserve Bank of India's (RBI) move allowing banks to provide special treatment to the Real Estate sector, is likely to impact the Indian Real Estate sector in a positive way. RBI has decided to extend exceptional concessional treatment to the commercial Real Estate exposure and restructured it to June 30, 2009.

Enactment of Special Economic Zones Act

Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million, respectively. Full repatriation of original investment after three years. 51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-and-carry through the automatic route.