Trends in the Indian Real Estate Market

By M H Ahssan

When Ram Kumar, a Non-Resident Indian brought a 1000 sq feet flat in Delhi, India for Rs 30 Lakhs in 2004, he thought he was over-paying for it. Today, not only has the value of the flat more than doubled, but Ram, who is based in Austin, Texas, is truly estatic, that for the first time, his real estate investments are giving him such a return. He has not only brought into upcoming projects but is also scouting for more. Says Ram “ This market have not even reached 20% of it’s potential. Any investment in real estate here is bound to be profitable.” That statement clearly sums up the Indian Real Estate Market. Going by recent trends the India properties market, is not only booming, but growing by leaps and bounds. Research data estimates that the Indian Real Estate Market is expected to grow from the current 14 billion dollars to a whopping 102 billion dollars in the next 10 years.

Since the September 11th attack in the US, investments in Indian markets have gathered pace. India has encouraged Non Resident Indians (NRIs) and Foreign Investors with tax incentives and relaxation of foreign direct investments (FDI) rules. The dramatic change in sentiments is clearly visible in India’s bulging foreign exchange reserves, which are at a record high of over 120 billion US dollars. And the Reserve bank of India has further relaxed the rules for NRIs with respect to repatriation of foreign exchange on real estate investments. Besides being a safe destination, India offers 15 to 25 per cent returns, perhaps the highest in the world. 30 per cent of all high major real estate transactions in Mumbai are accounted by NRIs.

Moreover, with increasing volatility in stock markets and falling interest rates, many investors have started considering investment in commercial and residential properties. The bottom-line is that this is the time to go shopping for property; as the market has started firming up already. As the organised market develops, real estate as an investment is one of the better options available today. In fact the main growth thrust is happening due to faourable demographics, increasing purchasing power, existence of customer friendly banks and housing finance companies, professionalism in real estate and favourable reforms initiated by government to attract global investors.

So which would be the potential growth areas to look for? The main growth sectors include residential real estate, commercial real estate, retail sector, industrial sector hospitality and healthcare sectors. The commercial real estate sector is led by the booming information technology and information technology enabled services industry. Estimated demand from this sector alone is estimated to be 150 million sq feet of space in cities throughout India by 2010.

In residential real estate there is a shortage of almost 20 million units, of which 7 million are in urban India. The increasingly organized retail sector is also a magnet for growth. With Mukesh Ambani controlled Reliance Industries and many other top industrial houses entering into organized retail in a big way, the growth potential is enormous. There has been a mushrooming of retail projects all over the country. The real estate investment sector has never had it so good. But it was not always like this.

Ever since India started liberalizing its economy, the international property investors' refrain has been that though the country opened up its most crucial infrastructure sectors to foreign investments, it is still reluctant to allow FDI in the property market. The government justified this by citing political and security compulsions. However, realizing the huge investment potential in India, Chesterton Meghraj estimates that the country will require investments of $24 billion over the next five years and that development of the real estate segment is crucial for its economic growth. The same belief led the erstwhile National Democratic Alliance government to permit as a part of the budget proposal, FDI in township development, information technology parks, special economic zones and hospitality sectors.

But many feel the liberalization was half-hearted. For instance, though the new policy allows a 100% FDI stake in a venture - which, incidentally, is allowed in few sectors - there are stumbling blocks in the form of clauses, such as a minimum lock-in period of three years before original investment can be repatriated, and a project completion mandate that a minimum of 50% must be completed within five years of possession of land. This is why there were few proposals in the initial years. But over the last six months, a slew of foreign construction groups have been seeking government clearance to invest in the country. A few major FDI proposals that have taken place include :

• Dubai-based Emaar Group has invested $100 million in a township project in Hyderabad that includes a hotel and a golf course.

• Jakarta-based Salim Group is to invest over $100 million in a 309-acre (124 hectares) township project in Kolkata. This Rs500 million ($11 million) project will be developed as a joint venture between Salim Group and the Kolkata Municipal Development Authority.

• High Point Rendel of UK, US-Based Edaw Ltd and Kikken Sekkel of Tokyo have teamed up to work on a township development project in Jharkhand.

• Canada-based Royal Indian Raj International Corporation is coming up with $791 million for Royal Garden City, a fully integrated township in Bangalore. The total development will include 35,000 residential units with an investment of approximately $2.9 billion and is scheduled to be completed by 2015 in various phases. This is the highest FDI investment till date.

• CESMA International Pvt Ltd, a subsidiary of the Singapore government's housing agency, along with the Andhra Pradesh state government, is promoting a township in Hyderabad.

• Lee Kim Tah Holdings (a Singapore-based company) with an investment of $115 million is developing a 100-acre mega township along with commercial complex and related social infrastructure near Mumbai.

• The Andhra Pradesh Housing Board has approved a 50-acre township in Vijaywada. CESMA International will construct houses and apartment blocks here.

• Malaysian developer IJM is working on a township spread across 35 acres in Hyderabad near Hi-tech City.

• Ho-Hup Construction Company Berhad is coming up with a 125-acre development project at Shamshabad in Hyderabad along with the Andhra Pradesh Housing Board.

• SembCorp Engineers and Constructors Pte Ltd, Singapore, is working on eight projects in Mumbai, Pune and Bangalore. The company has invested $50 million.

• Universal Success Enterprise Limited of Indonesia has signed a memorandum with Delhi-based developer Unitech Ltd for a $155-million information technology park and housing project in Kolkata.

• Singapore's fifth-biggest property group, Keppel Land Ltd, made its first foray into India after buying land in India's software capital Bangalore for $13 million. Keppel Land, which is partnering Puravankara Projects Ltd, is developing the first phase of a condominium project located in an area known for high-tech campuses. It will be launched in early 2006.

• Singapore-based Evan Lim & Co Pte Ltd is associated with a township development project in Visakhapatnam, Andhra Pradesh.

More over, land in India is mostly freehold land. In fact certain important markets like Mumbai in Maharashtra are seeing a dramatic increase in land availability as textile mills lands in the heart of the city are opened up to redevelopment.

The other big opportunity, say industry sources, is the involvement of state governments in large-scale government projects like development of the surplus land of Mumbai Port Trust or that of sick public sector firms. State governments have realized that they can make more money if they get into joint ventures with private developers than just selling the land. This is an ideal opportunity for foreign investors because such arrangements reduce entry-level costs.

But not all real estate investments are so easy. In India, it is very difficult to find large plots near big cities. Foreign investors prefer to stick to larger cities because returns there are more lucrative.

Moreover, a minimum lock-in period of three years from completion of a project is mandated, which nullifies an investor's flexibility to play around with the time frame or phasing the project when circumstances get beyond control. The other problem that acts as a dampener for foreign investors is the insistence of local financial institutions on a personal guarantee from property developers over and above the land as collateral. Another problem is that local banks and financial institutions also tend to loosen their purse strings when property prices are rising because that raises the value of their collateral, but when prices fall, they pull out, triggering a bust.

Still, all agree that the potential of India's real estate sector is huge. It is one of the most attractive markets for two reasons. One, with a billion-plus population, the opportunity is huge; no other market is going to witness this kind of growth both in commercial as well as residential and retail markets. Two, the industry has an average rate of return on capital in excess of 30% and it is not unusual for local developers to achieve IRR of as much as 50%. Clearly, India rocks in real estate. You cannot disagree.