Over the next few years, driven by various factors such as a booming economy and foreign investment, real estate is expected to emerge as one of the fastest growing sectors in India. This phenomenal growth has raised the brows of analysts who are worried that this spurt may just turn out to be a bubble. However, experts say that this growth is here to stay!
What are the kinds of real estate?
Real estate is usually classified into Office, Commercial and Residential Real estate. Office real estate is driven usually by the same factors that improve business outlook. Commercial and Residential markets grow due to reasons such as increased income levels and increase in disposable income. All three also depend on fundamental economic growth and the availability of credit.
How big is the market?
§ Represented 2% of the GDP in 1995 (compare to China’s 4.8%). Grew to 2.7% in 2004.
§ Current size of the market : $12 billion
How much is it expected to grow?
§ Expected size : $50 billion in 2010; $90 billion in 2015 (Source : Merrill Lynch research, India Infoline research)
§ Industry grew at 30% in 2005. It is expected to grow at 33% for the next 4-5 years.
Important reasons include the fact that the Indian real estate industry witnessing a transformation into an organized industry with global standards. The credit for this metamorphosis must go to the significant rise in investment, not only from within India but from offshore as well. The last couple of years have witnessed the increasing interest of international property consultants, developers and commercial banks in investing in real estate in India.
What are the characteristics of Real estate market in India?
§ Traditionally a highly fragmented industry with poor governance.
§ In April 2004, venture funds were allowed to invest in local real estate
§ In 2005, FDI was allowed in Greenfield projects
What is driving demand in each segment?
§ Driven by economy’s strong fundamentals and growth
§ Office market : Creation of demand for office real estate is driven by the following factors
o High Foreign Direct Investment (FDI) inflows
o Explosive growth in the service sector (IT/ITES)
o Creation of new business districts outside of traditional Central Business Districts (CBDs) in metros
o Setting up of Special Economic Zones (SEZs)
§ Commercial market :
Growth due to:-
o Growth in Bangalore, Chennai, Hyderabad and Tier 1 cities
o Growth in retail – explosion of malls (A report on real estate trends by Merrill Lynch has stated that the number of malls in Mumbai, Bangalore, New Delhi, Hyderabad and Pune is expected to grow to about 250 by 2010 as against 40 now.)
§ Residential real estate : Residences usually constitute 60% to 70% of the overall investment in real estate in a country.
The biggest drivers of growth in this market are :
o Higher disposable income and propensity to invest the same
§ 52% of household savings in the past 5 years have gone into physical assets (as opposed to financial assets)
§ Savings rate in India is also high (about 22% compared to China’s 16%)
§ Government planning to spend on urban development schemes.
o Easy availability of bank credit and home finance
o Tax incentives
§ Regulatory encouragement that could propel growth further
o REITs if allowed will boost market growth significantly
o FDI in retail will also boost demand for retail real estate
o Infrastructure development
o Development of a mature mortgage market will further deepen liquidity in the mortgage lending business.
One of the most controversial business deals ever- the acquisition of Arcelor Steel by Mittal Steel led to the creation of Arcelor-Mittal, the largest steel maker in the world.
Mittal Steel– the largest producer of steel in terms of volume. Despite the fact that Mittal steel is based in Netherlands, it is perceived that the company is non-European because its CEO Lakshmi Mittal is Indian.
Arcelor– Headquartered in Luxembourg, the merger of three steel companies- Aceralia, Arbed and Usinor led to the creation of Arcelor. In 2005, Arcelor had revenues of 32 billion Euros.
2. The original bid
In January 2006, Mittal Steel launched a $22.7 billion offer to Arcelor’s shareholders. The deal was split between Mittal Shares (75 percent) and cash (25 percent). Under the offer, Arcelor shareholders would have received 4 Mittal Steel shares and 35 euros for every 5 Arcelor shares they held. (Ultimately the power to buy or sell the shares rests with the shareholder and the company management can at best advice its shareholders whether to accept or reject the bid)
3. Consolidation in the steel industry- inevitable:
- The steel industry is highly fragmented, the top 5 manufacturers in the steel industry account for less than 25 percent of the market (to put that in perspective, the corresponding figure for the automotive industry is 73 percent). LN Mittal believes that the consolidation will end with three of four major companies dominating the industry around 2010.
- Bigger steel manufacturers have better bargaining powers against customers (such as as auto manufacturers) and against suppliers (iron ore).
- Consolidation helps in comapnies improving their sourcing of raw materials; access to more markets, better utilization, more flexibility in production scheduling and better efficiency.
4. The Controversy
Arcelor Management: The management believed that Arcelor itself would have been doing the acquisitions and not the other way around. The management was extremely hostile to Mittal Steel’s bid from the beginning. Arcelor repeatedly played the patriotic card in order for shareholders to reject the bid. The CEO of Arcelor dismissed Mittal Steel as a “company of Indians” and unworthy of taking over a European company. (all this despite the fact that most industry analysts and investment banks pointing out that the deal was in Arcelor‘s best interests)
The French government (despite not being a shareholder) was against the deal because of worries over its 28000 Arcelor employees. Despite repeated assurances from Mittal that the deal would not lead to layoffs the government of France was never convinced. The government of Luxembourg (a stakeholder) was against the deal as well for a variety of reasons. The European Union approved of the Mittal-Arcelor deal.
A simple search for Kyoto Protocol results in Google listing over 3 million results. Now, somebody who is just looking to find out the most relevant information about the protocol, its impact and also the controversy is going to have a tough time in sorting through all these pages. And also the chance of all these aspects being addressed in one article is low. The probability of finding this article right away is lower. Excessive word counts and often-extraneous details make it nearly impossible for us to extract useful information. Even the basic information can be hard to glean when one is staring at an article that has over 100 lines.
This website aims to address this issue. Various topics will be taken up and explained in a very simple question and answer format. These questions will address every aspect of the issue. Also, every entry will be followed by a series of links to articles for better insight into the topic.
Initially, the topics will be chosen on the basis of importance for the dreaded group discussions (GD) used for admission into India’s premier business schools such as the various Indian Institutes of Management (IIMs). Topics will be chosen from three broad areas- politics, business and economics. In the long run, topics will be chosen depending on the demand and also the contributors.