Real Estate in IndiaJanuary 2, 2007 at 6:33 pm | Posted in India | 3 Comments
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.
Who are the major players in this segment? What’s the latest news?
Several IPOs are expected in the coming months. In May, DLF had announced what was supposed to be the largest equity issue (about $3 billion). That offer has however been delayed several times due to certain regulatory issues and investor complaints.
Other listing hopefuls include Sobha Developers, which is expected to bring an IPO of about $100 million, and Akruti Nirman, which is targeting around $75 million.
What about foreign investments?
Morgan Stanley has reportedly invested $68 million in Mantri Developers, a mid-sized construction firm in Bangalore, while Merrill Lynch has invested $50 million in Panchsheel Developers, a regional builder.
Tishman Speyer Properties, owner of the New York Times building and Rockefeller Center in New York, formed a joint venture last year with the private-equity arm of ICICI Bank to fund new commercial properties. The joint venture, called TSI Venture Fund, plans to invest about $1 billion in India within the next five years.
Foreign companies have also poured money into funds that invest in Indian developers. GE‘s real estate arm has invested $63 million in an $800 million fund focused on building IT parks. Other private equity funds that have entered the market include 3i, Apax, Blackstone, and Carlyle