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This doc about Indian Real Estate scenario & Investment Pattern in NCR by studying Unprecedented Expansion, Key Facts & figures , Foreign Players, Entry of Realty Funds, Private Equity in Indian Real Estate, particulars, Government Initiatives,
Indian Real Estate Scenario & Investment Pattern in NCR
Contents
Part I: Decrypting Real Estate 09
Foreword Definitions & Explanations Types of Real Estate Investments Characteristics of Real Estate Assets 16 Advantages & Disadvantages of Real Estate Investments 18 10 12 13
Part II: First Look of the Indian Real Estate Sector 22
Introduction 23 Unprecedented Expansion Key Facts & Figures Foreign Players Entry of Realty Funds Private Equity in Indian Real Estate 24 25 27 28 28
Particulars Page No.
Going Local Going Global Government Initiatives
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29 32 32
Factors Driving Growth in Real Estate Sector Drivers of Profitability Why Invest in Indian Real Estate The Other Side of the Coin Issues Plaguing the Real Estate Sector 36
33 34 35 36
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Legislative Issues Land Market Issues Financial Issues Infrastructural Issues
36 39 41 42 44 45 47
Other Risks associated The Big Question REIT’s & REMF’s
Part III: City Wise Breakdown of Indian Real Estate Sector 50
Cities Covered 51 52 58 68 76
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Chennai National Capital Region Kolkata Mumbai
Particulars Page No.
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Part IV: Emerging Investment Patters in NCR 82
Research Group Questionnaire Analysis Conclusion 83 84 90
Part V: References & Annexure 92
Annexure I: Investors Questionnaire 93 Annexure II: Bibliography Annexure III: Sources for Primary Research (Emails) Annexure IV: Sources for Primary Research (Visiting Cards) 95 96 103
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Report Objectives
This report aims to:
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Provide layman explanations of Real Estate, types of investments and their characteristics Provide an in-depth independent and unbiased overview of the real estate scenario based on inputs from ? Primary sources like developers, banks and financial institutions, brokers and secondary sources like information and research available on the internet. Provide vital information as to whether this boom in the real estate market is sustainable or is it a bubble waiting to burst. Provide validated consistent information across parameters that influence real estate activity like ? Infrastructure developments in the city ? Residential Demand, Supply, prices, drivers, key characteristics ? Commercial Supply, prices, drivers and key characteristics ? Retail supply (malls) proposed Provide a critical analysis of the various factors that are fuelling and feeding the consistent growth of the real estate sector. Provide a breakdown of the investments in the real estate sector based on ? Income ? Age Group
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? Type of Investment ? Location
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Provide a detailed understanding of the investment pattern that is emerging in the real estate markets prevailing in the National Capital Region. A schematic locational dispersion on the map
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Methodology & Approach
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The research encompasses extensive (personal & phone) interviews of ? Local developers ? Real estate agents
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Emails were sent and phone calls were made to prominent Real Estate agents in Chennai, Kolkata, Mumbai and New Delhi. The information received thereafter was used as a base for the analysis conducted. Also questionnaire were filled by a group of 100 Private Investors who were randomly chosen from the Nation Capital Region (NCR) so as to discern the emerging investment pattern in these areas. It also involves desk search covering surveys of news, developer websites, property websites, property magazines, rating rationales, and research reports. Urban Agglomeration concept (used later in the report): The UA concept has been used in this study as in many cases it was discovered that the pace of development in the outskirts was at a faster pace than that of the main city itself. One such case was that of Noida and Gurgaon and Ghaziabad. These cities have grown at a faster pace than New Delhi.
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Part I- Decrypting Real Estate
Foreword
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n India today, one cannot pick up a newspaper without reading about a
real estate company IPO or a new high being set in a land auction. The
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optimistic mood driving the country is reflected not just in the booming stock market but in property prices. Put the two forces together and you have the mother of all IPOs – the listing of DLF, believed to be the largest developer in India. With the listing, the family which owns the company will become one of the richest families in the world. Having seen this happen in Hong Kong and the rest of Asia over the last 30 years, one cannot help but getting a feeling of déjà vu. A generation of Indian Kwoks, Lees and Lis is being created. The traditional super-rich list of families with an industrial background, of late overtaken by the technology billionaires, is now being joined by the property tycoons. The difference between India and most other countries in Southeast Asia is that the playground is much larger with a lot of scrub and forest still to be cleared, not to mention obstacles to be overcome. Real estate in India has traditionally been an investment area where the well-off parked their “surplus” and recycled “tax free” funds. The official price was considerably lower than the transacted price and payments were made in cash, with little need for bank financing. While this meant that there was little volatility, it also ensured that the various real estate markets remained localised, and the costs of entry were often prohibitive. Also as a result there were very few listed property counters. But all that is changing and the market is becoming much more transparent. DLF’s development of Gurgaon, the satellite city next door to Delhi, began the shift from horizontal to vertical living. The professionally-managed developments were aimed at younger, doubleincome, professional couples. The banks then entered the arena and demand for mortgage financing has since grown exponentially. While this has resulted in increased affordability, it has also introduced an element of speculativeness, especially in new developments where buyers are booking three or four apartments with the intention of flipping them upon completion. The overseas Indian Diaspora (foreigners cannot buy, but persons of Indian origin can), has also jumped and is in some cases even arbitraging on interest rates by borrowing in low interest rate currencies. Finally the government has also liberalized foreign direct investments in this sector. This combination of factors means that, for the first time, the property boom is not a regionalized tidal wave, but a perfect storm, sweeping the country. While the initial growth in demand was driven by booms in selected cities
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(Gurgaon, Bangalore, Hyderabad and Chennai), lack of infrastructure to support infinite expansion and inter-state competition in attracting investment is pushing growth into the smaller cities. The impact is across the board, influencing residential, office, retail and even industrial parks/special economic zones. With Delhi (and Kolkata) now building a subway system, commuting to work from outlying suburbs will no longer be uncommon. Bangalore and Chennai, among other cities, are also expected to soon develop their own metro systems; the opportunities for development along the routes will be huge, and this is just the start. In addition to the economic growth trends, what is working in the market’s favour are the broad macro trends: the shift of population from rural to urban areas (from 40-60%), combined with the demographic shift mentioned in my article last month will result in further pressure on a situation which is already aggravated by a shortage of supply. With a population base of 1.1 billion, a 20% move means another 220 million will need accommodation, and that is assuming that the population levels off, which is not the case. With prices continuing their upward trend, the city and state governments will have to come up with public-private development schemes to provide housing to low income families (though many low income families working for the government already occupy some of the choicest urban locations in old public housing complexes). The current growth in demand does not mean that the market will be immune to the corrections or cycles other countries experience. At the moment euphoria and liquidity is keeping the market afloat – but it will correct, although ultimately the correction might not be too long-lived.
Definitions & Explanations
According to Wikipedia Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary or fixed in location. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property. However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property," referring to ownership rights of the land itself.
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But the most basic definition real estate is "an interest in land". Broadening that definition somewhat, the word "interest" can mean either an ownership interest (also known as a fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If one rents out an apartment, then he/she has a leasehold interest in real estate. If one owns a home, then he/she has an ownership interest in that home. Some jurisdictions recognize other interests beyond these two, such as a life estate, but those interests are less common in the investment arena. As a real estate investor, one will most likely be purchasing ownership interests and then earning a return on that investment by issuing leasehold interests to tenants, who will in turn pay rent. It is also not uncommon for an investor to acquire a long-term leasehold interest in land, which then has a building constructed upon it. At the end of the land lease, the land and building become the property of the original land-owner.
Types of Real Estate Investments
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing. Non-income-producing investments, such as houses, vacation properties or
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vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-incomeproducing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office Property
Offices are the "flagship" investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks. At its most fundamental level, the demand for office space is tied to companies' requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these "white-collar" jobs grow, there is greater demand for office spaces. Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents. Retail Property There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Centre format is in favour, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways. Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the centre. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such
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anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail centre has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU). The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high. Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
Industrial Property Industrials are often considered the "staple" of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts. There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs. Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential Property Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
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For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.
Characteristics of Real Estate Assets
Some of the characteristics that make real estate unique are as follows:
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No fixed maturity Unlike a bond which has a fixed maturity date, an equity real estate investment does not normally mature. In Europe, it is not uncommon for investors to hold property for over 100 years. This attribute of real estate allows an owner to buy a property, execute a business plan, then dispose of the property whenever appropriate. An exception to this characteristic is an investment in fixed-term debt; by definition a mortgage would have a fixed maturity.
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Tangible Real estate is, well, real! You can visit your investment, speak with your tenants, and show it off to your family and friends. You can see it and touch it. A result of this attribute is that you have a certain degree of physical control over the investment - if something is wrong with it, you can try fixing it. You can't do that with a stock or bond.
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Requires Management Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant complaints must be addressed. Landscaping must be handled. And, when the building starts to age, it needs to be renovated.
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Inefficient Markets An inefficient market is not necessarily a bad thing. It just means that information asymmetry exists among participants in the market, allowing greater profits to be made by those with special information, expertise or resources. In contrast, public stock markets are much more efficient - information is efficiently disseminated among market participants, and those with material non-public information are not permitted to trade upon the information. In the real estate markets, information is king, and can allow an investor to see profit opportunities that might otherwise not have presented themselves.
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High Transaction Costs Private market real estate has high purchase costs and sale costs. On purchases, there are real-estate-agent-related commissions, lawyers' fees, engineers' fees and many other costs that can raise the effective purchase price well beyond the price the seller will actually receive. On sales, a substantial brokerage fee is usually required for the property to be properly exposed to the market. Because of the high costs of “trading” real estate, longer holding periods are common and speculative trading is rarer than for stocks.
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Lower Liquidity With the exception of real estate securities, no public exchange exists for the trading of real estate. This makes real estate more difficult to sell because deals must be privately brokered. There can be a substantial lag between the time you decide to sell a property and when it actually is sold - usually a couple months at least.
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Underlying Tenant Quality When assessing an income-producing property, an important consideration is the quality of the underlying tenancy. This is important because when you purchase the property, you're buying two things: the physical real estate, and the income stream from the tenants. If the tenants are likely to default on their monthly obligation, the risk of the investment is greater.
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Variability among Regions While it sounds cliché, location is one of the important aspects of real estate investments; a piece of real estate can perform very differently among countries, regions, cities and even within the same city. These regional differences need to be considered when making an investment, because your selection of which market to invest in has as
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large an impact on your eventual returns as your choice of property within the market.
Advantages & Disadvantages of Real Estate Benefits
Some of the benefits of having real estate in your portfolio are as follows:
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Cash flow Cash flow is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you'll feel a lot better if the cash flow is positive. My advice on cash flow is this: Never use all of your positive cash flow for rapid debt reduction. You will be walking a thin line. By keeping a strong positive cash flow, you will have more options and space to manoeuvre. Appreciation Appreciation is the increase in value of a property. There are two kinds of appreciation. The first is from economic conditions beyond your control, such as inflation. But you won't gain much from this type of appreciation since the gain is offset by the higher cost of living. The second kind is market appreciation, which you can control. When you improve a property (through renovations), you force its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighbourhood standards or slightly higher; this will give you a property that is much higher in value. Leverage Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases, a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money. What other investments offer such a high degree of leverage?
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Amortization With leverage, or the use of other people's money, comes a repayment schedule. Your outstanding balance is reduced with every payment you make. Part of each payment goes to interest (applied first) and the rest goes to pay off the principal. The principal reduction is called amortization -reducing debt. Hence, amortization can make you wealthy, slowly and steadily. Tax advantages Owning real estate with the goal of making a profit allows you to deduct interest payments and other expenses come tax time. But don't be fooled into buying real estate for the tax advantages; rather, purchase it because it makes economic sense to do so. Diversification Value The positive aspects of diversifying your portfolio in terms of asset allocation are well documented. Real estate returns have relatively low correlations with other asset classes (traditional investment vehicles such as stocks and bonds), which adds to the diversification of your portfolio. (To read more about diversifying, see Allocation, Introduction, The Importance of Diversification and A Guide to Portfolio Construction.)
• Yield Enhancement
As part of a portfolio, real estate allows you to achieve higher returns for a given level of portfolio risk. Similarly, by adding real estate to a portfolio you could maintain your portfolio returns while decreasing risk.
• Inflation Hedge
Real estate returns are directly linked to the rents that are received from tenants. Some leases contain provisions for rent increases to be indexed to inflation. In other cases, rental rates are increased whenever a lease term expires and the tenant is renewed. Either way,
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real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
Shortcomings
Real estate also has some characteristics that require special consideration when making an investment decision:
• Costly to Buy, Sell and Operate
For transactions in the private real estate market, transaction costs are significant when compared to other investment classes. It is usually more efficient to purchase larger real estate assets because you can spread the transaction costs over a larger asset base. Real estate is also costly to operate because it is tangible and requires ongoing maintenance.
• Requires Management
With some exceptions, real estate requires ongoing management at two levels. First, you require property management to deal with the day-to-day operation of the property. Second, you need strategic management of the property to consider the longer term market position of the investment. Sometimes the management functions are combined and handled by one group. Management comes at a cost; even if it is handled by the owner, it will require time and resources.
• Difficult to Acquire
It can be a challenge to build a meaningful, diversified real estate portfolio. Purchases need to be made in a variety of geographical locations and across asset classes, which can be out of reach for
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many investors. You can, however, purchase units in a private pool or a public security, and these units are typically backed by a diverse portfolio.
• Cyclical (Leasing Market)
Not unlike other asset classes, real estate is cyclical. Real estate has two cycles: the leasing market cycle and the investment market cycle. The leasing market consists of the market for space in real estate properties. As with most markets, conditions of the leasing market are dictated by the supply side, which is the amount of space available (or, vacancies), and the demand side, which is the amount of space required by tenants. If demand for space increases, then vacancies will decrease, and the resulting scarcity of space will cause an increase in market rents. Once rents reach economic levels, it becomes profitable for developers to construct additional space so that supply can meet demand.
• Cyclical (Investment Market)
The real estate investment market moves in a different cycle than the leasing market. On the demand side of the investment market are investors who have capital to invest in real estate. The supply side consists of properties that are brought to market by their owners. If the supply of capital seeking real estate investments is plentiful, then property prices increase. As prices increase, additional properties are brought to market to meet demand. Although the leasing and investment market have independent cycles, one does tend to influence the other. For instance, if the leasing market is in decline, then growth in rents should decrease. Faced with decreasing rental growth, real estate investors might view real estate prices as being too high and might therefore stop making additional purchases. If capital seeking real estate decreases, then prices decrease to force equilibrium.
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• Performance Measurement
In the private market there is no high quality benchmark to which you can compare your portfolio results. Similarly, it is difficult to measure risk relative to the market. Risk and return are easy to determine in the stock market but measuring real estate performance is much more challenging.
Part II: First Look of the Indian Real Estate Sector
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Introduction
With property boom spreading in all directions, real estate in India is touching new heights. Growing at a scorching 30 per cent, it has emerged as one of the most appealing investment areas for domestic as well as foreign investors. However, the growth also depends on the policies adopted by the government to facilitate investments mainly in the economic and industrial sector. The new stand adopted by Indian government regarding foreign direct investment (FDI) policies has encouraged an increasing number of countries to invest in Indian Properties. India has displaced US as the second-most favoured destination for FDI in the world. As the investment scenario in India changes, India which has attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05, making India amongst the "dominant host countries" for FDI in Asia and the Pacific (APAC).
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The positive outlook of Indian government is the key factor behind the sudden rise of the Indian Real Estate sector. The second largest employing sector in India (including construction and facilities management), real estate is linked to about 250 ancillary industries like cement, brick and steel through backward and forward linkages. Consequently, a unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. This budding sector is today witnessing development in all area such as residential, retail and commercial in metros of India such as Mumbai, Delhi & NCR, Kolkata and Chennai. Easier access to bank loans and higher earnings are some of the pivotal reasons behind the sudden jump in Indian real estate.
Unprecedented Expansion
Rising income levels of a growing middle class along with increase in nuclear families, low interest rates, modern attitudes to home ownership (the average age of a new homeowner in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young working population from that of 'save and buy' to 'buy and repay' have all combined to boost housing demand. According to 'Housing Skyline of India 2007-08', a study by research firm, Indicus Analytics, there will be demand for over 24.3 million new dwellings for self-living in urban India alone by 2015. Consequently, this segment is likely to throw huge investment opportunities. In fact, an estimated US$ 25 billion investment will be required over the next five years in urban housing, says a report by Merrill Lynch.
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Simultaneously, the rapid growth of the Indian economy has had a cascading effect on demand for commercial property to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centres. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organized retail. For example, IT and ITES alone are estimated to require 150 million Sq.ft. across urban India by 2010. Similarly, the organized retail industry is likely to require an additional 220 million Sq.ft by 2010. With the economy surging ahead, the demand for all segments of the real estate sector is likely to continue to grow. The Indian real estate industry is likely to grow from US$ 12 billion in 2005 to US$ 90 billion in by 2015. Given the boom in residential housing, IT, ITeS, organized retail and hospitality industries, this industry is likely to see increased investment activity. Foreign direct investment alone might see a close to six-fold jump to US$ 30 billion over the next 10 years.
Key Facts & Figures
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Foreign Players
With the significant investment opportunities emerging in this industry, a large number of international real estate players have entered the country. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.
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Jones Lang LaSalle (JLL), the world's leading integrated global real estate services and money management firm, plans to invest around US$ 1 billion in the country's burgeoning property market. Dubai-based DAMAC Properties would invest up to US$ 4.5 billion to develop properties in India. Merrill Lynch & Co bought 49 per cent equity in seven mid-income housing projects of India's largest real estate developer DLF in Chennai, Bangalore, Kochi and Indore for US$ 375.98 million. UAE-based real estate company Rakeen and Chennai-based mineral firm Trimex Group have formed joint venture company - Rakindo Developers - which would invest over US$ 5 billion over the next five years. Dubai-based Nakheel and Hines of the US have tied up with DLF to develop properties in India. DLF has also formed a joint venture with Limitless Holding, a part of Dubai World, to develop a US$ 15.23 billion township project in Karnataka. Gulf Finance House (GFH) has decided to invest over US$ 2 billion in a Greenfield site close to Navi Mumbai.
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Global real estate majors such as Dubai World, Trump Organization of US, Smart City of Dubai, Kishimoto Gordon Dalaya, Khuyool Investments, Bonyan Holding, Plus Properties, ABG Group and Al Fara's Properties among others have all firmed up their plans for the Indian real estate market with an investment of around US$ 20-25 billion in the next 12-18 months.
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Entry of Realty Funds
The boom in the real estate industry has attracted a large number of realty funds to tap into this market. According to Cushman & Wakefield, foreign investors have raised nearly US$ 30 billion since March 2005 for investing in Indian real estate. Prominent global players like Carlyle, Blackstone, Morgan Stanley, Trikona, Warbus Pincus, HSBC Financial Services, Americorp Ventures, Barclays and Citigroup among others have all already checked into the Indian realty market. In fact, real estate has been instrumental in India emerging as the top destination in Asia (excluding Japan) in attracting private equity investments during the first ten months of this year. Real estate accounted for 26 per cent of total value of private equity investments, with 32 deals valued at US$ 2.6 billion. And according to industry estimates, another US$ 10-20 billion would pour into the sector in the next three years.
Private equity in Indian real estate
There have been 150 overseas private equity funds who have lined up their chests to invest in Indian real estate sector, report agency sources. According to independent estimates, a total of USD 10 billion has already been raised through this route and is expected to be invested in the next two years. On an average, each of these funds has a minimum corpus of at least USD 150 million running up to a billion Dollars, said property consultants. Indian and multinational institutions such as J P Morgan, Falcon, 3i, Blackstone, Carlyle, Kotak Real Estate, IL&FS, ICICI, and HDFC besides a host of others are storming into this sector. Private investors are starting to play an important role in the Indian real estate investment market. At the end of 2005, the total Indian private equity volume was roughly USD 1.6 billion, accounting for 40 per cent of the Indian real estate capital market. This market is rapidly growing. In 2005, private property companies and individuals holdings of real estate grew by 40 per cent year-on-year and are growing at double-digit rates.
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During the April-June 2006 quarter the PE firms launched funds targeting over USD 8.7 billion for investing in India. A majority, over USD 5 billion, of the new fund raising activity was aimed at real estate investments, said official of Venture Intelligence. The funds are talking about their plans but real estate companies such as Mantri Developers, GCorp, IDEB, and Sobha Developers who have received funds are upbeat on these investments. Detailing a few recent investments and funds, an industry analyst highlighted that Morgan Stanley invested Rs 3 billion in Mantri Developers in Bangalore, Merrill Lynch invested around Rs 2.5 billion in Panchsheel Developers while Siachen Capital, a New-York based fund reportedly invested close to Rs 5 billion in Nitesh Estates. Tishman Speyer Properties has formed a joint venture with ICICI Ventures and plans to invest about USD 1 billion in India within the next five years, the analyst highlighted. In 2005 nearly USD 850 million additional capital was invested into Indian real estate sector. Strong growth in private equity was driven by unlisted property funds and companies, which added around USD 82 million to the market, as well as by private individuals. However, even more significant growth came from private debt (i.e. bank lending for commercial real estate), with commercial banks lending USD 545 million during 2005.
Going Local
Indian real estate market permeates to smaller towns and cities
According to leading global property consultancy firm Knight Frank, the real estate action is no longer limited to the large metropolises of India but has now permeated to the burgeoning smaller towns and cities. According to Knight Frank Research, the upswing of the Indian real estate sector has been an outcome of a number of positive micro and macro factors. Consistent and sustaining GDP growth, expanding service sector, rising purchasing power and affluence, proactive and changing government policies have all lent momentum to this rapidly growing sector.
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Accounting for almost 80% of the total office space absorption, the Indian IT/ITES sector has been the primary demand driver. India's low cost-high quality and productivity model has given it a leadership position in the outsourcing arena. In a bid to scale up their operations and to remain globally competitive, the Indian IT/ITES companies are exploring the smaller towns and cities. Rising manpower and real estate costs, plaguing attrition levels and very often risk mitigation have been the key reasons for this movement. Positive economic growth has also translated in rising disposable incomes and growing aspiration levels across India. Rising consumerism has created a demand for new retailing and entertainment avenues. Realizing that consumers across cities have similar needs, albeit the scale may vary, new age retailers are vying to cash in on the first mover advantage and are expanding into hitherto unexplored smaller cities. Advent of organized retailing has also translated into real estate growth in these emerging locations. Growth of the Indian 'Rich' (annual income>USD 4,700) and 'Consuming' (annual income USD 1,000-4,700) class coupled with falling interest rates and other fiscal incentives on home loans has increased the affordability and the risk appetite of the average Indian consumer thereby leading to a substantial rise in demand for housing. This has been further fueled by the increase in the size of 25-55 age group of earning population and the emergence of double income, nuclear families. Over the last decade the average age of Indian home loan borrower has reduced by 10 years. Another variable facilitating real estate growth in India is the growing urbanization. According to United Nations Population Division, the urban population in India will continue to grow at a rate of 2.5% per annum for the next two and a half decade. As per the Census of India 2001, 41% of the total population of India will be living in urban areas by 2011. The number of cities with a population of one million or more is also is expected to double from 35 recorded in 2001 to 70 by 2005. This increase in population will generate incremental demand for housing and other real estate components. All these factors together with increased liquidity in the real estate sector through the international real estate funds and private equity funds will result in radically transforming the real estate landscape over the next 3-5 years.
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However, to support this growth and to make it more expansive, a lot needs to be done. Foremost is the thrust on infrastructure. According to a World Bank estimate, India needs to invest an additional 3-4% of its GDP on infrastructure to sustain its current levels of growth and to spread the benefits of growth more widely. Some positive steps have already been taken in this direction. Huge investments in infrastructure to the tune of $350 billion have been envisaged over the next five years. Connectivity may get a boost with the completion of ~13,000 kms of roads under the Golden Quadrilateral, North-South-East-West (NSEW) corridor and with 4-laning of all the major national highways. This will further facilitate the economic development of smaller towns and cities in the country. Major real estate destinations of the country and some other emerging towns can be classified into three broad categories depending upon the stage of real estate development that each one of them is undergoing. Tier I Cities: Bangalore, Mumbai and NCR Characteristics: Fairly well established real estate market. Demand drivers quite pronounced. Tier II Cities: Hyderabad, Chennai, Pune and Kolkata Characteristics: Growing real estate markets. Experiencing heightened demand and investments. Tier III Cities: Chandigarh, Ludhiana, Lucknow, Guwahati, Bhubaneswar, Jaipur, Ahmedabad, Surat, Nagpur, Indore, Goa, Visakapatinam, Mysore, Coimbatore, Kochi, Vijayawada, Mangalore, Trivandrum and Baroda Characteristics: Real estate markets yet to establish. Perceived to have substantial potential demand. As the Indian real estate sector moves higher on the growth curve, a number of state capitals and smaller cities which have relatively better infrastructure and are able to support higher economic growth have come into limelight. These emerging growth centers are characterized by low real estate costs, availability of land for development, untapped manpower pool and rising quality of life. Many of these towns have industrial and tourism driven economic base that can be leveraged for growth. Anticipating the latent demand in these markets, a number of real estate developers and retailers have chalked out expansive plans to harness the opportunity.
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Going Global
Simultaneously, many Indian realtors are making a name for themselves in the international market through significant investments in foreign markets.
• • • • • • •
Prudential Real Estate Investors has acquired Round Hill Capital Partners Kabushiki Kaisha, a Japanese asset management firm. Embassy Group has inked a deal with the Serbian government to construct a US$ 600 million IT park in Serbia. Parsvnath Developers has tied up with the Al-Hasan Group in Oman. Puravankara Group is doing a project in Sri Lanka - a high-end residential complex, comprising 100 villas. The Hiranandanis are constructing 5000 5-star hotel rooms, which will come up between Abu Dhabi and Dubai. Ansals API tied up with Malaysia's UEM Group to form a joint venture company, Ansal API-UEM Contracts Pvt Ltd, which plans to bid for government projects in Malaysia. Kolkata's South City Projects is working on two projects in Dubai.
Government Initiatives
The Government has introduced many progressive reform measures to unlock the potential of the sector and also meet increasing demand levels.
• • • • •
100 per cent FDI allowed in realty projects through the automatic route. In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres. Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly larger number of states. 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.
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•
Full repatriation of original investment after three years.
Factors driving the growth in the Real Estate Sector
One has to understand why the Indian real estate sector has presented itself as an asset class for international and institutional investors. All the factors driving growth and investment in this sector are driven by three key fundamentals.
• Strong Economic Growth:
The world’s fourth largest economy, growing at over 8% the last two years and forecast to grow at over 7% over the next five; Growth measures supported across the political spectrum; a boom in the services sector with a strong revival of industry; powerful internal consumption and demand. 300 million and growing with higher disposable incomes and even higher aspirations; educated, professional workforce driving urbanization beyond the traditional metro cities.
• The Rise of the Middle-Class:
• Enviable Demographics:
The world’s second most populous nation of 1.09 billion with 75% below the age of 50!
These fundamentals in turn have created a huge demand supply gap in all sectors of the real estate market - commercial, residential, retail, healthcare, hospitality to name a few. According to research conducted by ENAM Securities (a leading financial services firm) in late 2006, the market is expected to touch USD 50 billion by 2010 at a CAGR of 33% over five years. A requirement of 20 million new housing units; a five-fold increase in office space; 200 million square feet of organized retail and 50,000 new hotel rooms will drive this growth.
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Drivers of profitability • Knowledge of the business:
Though the principles of doing business are simple, over the many years of unregulated development, dealing in real estate in India has its own peculiarities, often at a local level and particularly in the area of transparency and legal documentation, and a thorough knowledge of these remains vital.
• A wide network:
There are developers and there are developers, and in a boom market everybody has got into the act. It is important to quickly sift the wheat from the chaff when forming JVs and SPVs for specific projects.
• The longer-term approach:
Real value to investors will accrue only on the sale of the end product in terms of its multiplier effect. Also longer-term investments are more likely to weather the hiccups of short term breaking news. Regulatory efforts to keep out hedge funds and such short term profiteers will go a long way in ensuring that this practice is sustained.
• Focus on quality:
This, more than anything, will derive the best value for investors, not just in monetary terms but also lasting goodwill. This entails not just the final product but also the totality of the environment where the development is located. Governments efforts to ensure that resettlement and social development of the displaced form part and parcel of all large projects is the most encouraging news of all.
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Why Invest In Indian Real Estate?
Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:
•
It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector. India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. Presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space. Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even. Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.
• • • •
The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate in India is seemingly the most lucrative ground at present. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden change in investment policies, the overseas firms can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space. Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards.
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The Other Side of the Coin
The Indian real estate market is still in its infancy, largely unorganized and dominated by large number of small players, with very few corporate or large players having national presence. The Indian real estate market, as compared to the other more developed Asian and Western markets is characterized by smaller size, lower availability of good quality space and higher prices. Supply of urban land is largely controlled by state-owned development bodies like the Delhi Development Authority (DDA) and Housing Boards leaving very limited developed space free, which is controlled by a few major players in each city. Restrictive legislations and lack of transparency in transactions are other main impediments to the growth of this sector. Limited investment from organized sector has also hindered the growth of this sector. There is a thriving parallel economy in real estate, involving large amounts of undeclared transactions, mainly due to high stamp duty rates. The current legislative framework also leads to substantial losses to the Government.
Issues plaguing the real estate sector Legislative Issues
Much of the over 100 laws governing various aspects of real estate date back to the 19th century. Despite the plethora of laws, the situation appears to be far from satisfactory and major amendments to existing laws are required to make them relevant to modern day requirements. The Central laws governing real estate include:
Urban Land (Ceiling and Regulation) Act (ULCRA), 1976
This legislation fixed a ceiling on the vacant urban land that a ‘person’ in urban agglomerations can acquire and hold. A person is defined to include an individual, a family, a firm, a company, or an association or body of individuals, whether incorporated or not. This ceiling limit ranges from 5002,000 square meters (sq. m). Excess vacant land is either to be surrendered to the Competent Authority appointed under the Act for a small compensation, or to be developed by its holder only for specified purposes.
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The Act provides for appropriate documents to show that the provisions of this Act are not attracted or should be produced to the Registering officer before registering instruments compulsorily registrable under the Registration Act. The objective of acquiring the excess vacant land could not be achieved because of intrinsic deficiencies in the legislation itself. The provisions under Sections 19, 20 and 21 of the Act have together proved counter-productive to the objectives of the legislation. So far, only 19,020 hectares could be taken possession of by State Governments and Union Territories and the remaining land was locked up in various litigations. This has only helped push up land prices to unconscionable levels and practically brought the housing industry to a stop.
Land Acquisition Act, 1894
This Act authorizes governments to acquire land for public purposes such as planned development, provisions for town or rural planning, provision for residential purpose to the poor or landless and for carrying out any education, housing or health scheme of the Government. In its present form, the Act hinders speedy acquisition of land at reasonable prices, resulting in cost overruns.
Rent Control Act
Rent legislation in India has been in existence for a very long time. Rent control by the government initially came as a temporary measure to protect the exploitation of tenants by landlords after the Second World War. However these rent control acts became almost a permanent feature. Rent legislation provides payment of fair rent to landlords and protection of tenants against eviction. Besides, it effectively allows the tenant to alienate rented property. Tenants occupying properties since 1947 continue to pay rents fixed then, regardless of inflation and the realty boom. Some of the adverse impacts of the Rent Control Act are:
• • •
Negative effect on investment in housing for rental purposes. Withdrawal of existing housing stock from the rental market. Accelerated deterioration of the physical condition of the housing stock.
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• • •
Stagnation of municipal property tax revenue, as it is based on the rent. Resultant deterioration in the provision of civic services. Increase in litigation between landlords and tenants.
The Rent Control Act, in fact, is the single most important reason for the proliferation of slums in India by creating a serious shortage of affordable housing for the low income families. Low and middle-income families typically live in rented accommodation all over the world and the need for such accommodation in our cities will only increase as the economy modernizes, labour mobility increases and urbanization takes place. It is, therefore, necessary to increase the stock of rental housing. Promotion of rental housing can have a significant impact on the economy in many ways:
• • • • •
It reduces shortage of housing for a large section of the population who cannot afford ownership. Housing construction being a labour-intensive activity, investment in housing generates employment for both skilled and unskilled labour. Housing has backward and forward linkages with many other industries. Rental housing helps in stabilizing real estate prices and checking speculation and, thus, makes housing affordable for the weaker sections. It helps check proliferation of slums.
Needed Legislative Reforms
a. Revise the number of legislations governing property transactions and merge them into one comprehensive law. b. The repeal of the Urban Land (Ceiling & Regulation) Act by various states which have not done so is necessary. This is expected to facilitate the release of 2.2 lakh hectares of urban land, which remains frozen. c. Amend the Rent Control Act so as to remove the absolute authority of the rent controller over the disposition of the rented property. This allows the rent controller to virtually divest the owners of the natural right to his property and transfer it to the tenant. The Rent Control Act must limit itself to ensuring a level playing field in terms of rent (adjustment) negotiations
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and a reasonable period for vacation of property. Market rates must be allowed to prevail in the medium term. Instilling confidence in the owners would lead to release of vacant houses into the market within the levels of affordability of the tenants.
LAND MARKET ISSUES
It is estimated that removing land market barriers can contribute an additional 1 per cent to India’s GDP growth rate.
Titles and Records
Another important issue in real estate development is that of title to property. In India, the State does not certify a title to housing or land property. The revenue records are not documents of title, and ownership is established only by the sequence of earlier transfers. Thus, the fundamental question of title has often led to enormous litigation. At present there are three legislations which have a bearing on property transactions involving transfer of ownership of proprietary interest. These are the Transfer of Property Act, the Indian Registration Act and the Indian Evidence Act. An examination of the provisions of these Acts reveals a number of inadequacies. Most of the sale transactions are done through the power of attorney route to evade transaction costs like registration, stamp duties, property tax etc. The system, as it exists, imposes a responsibility on the part of the purchaser with regard to the inspection of the title. The result is tenuous titles to land and non-transparency in property transactions, thereby hampering large-scale real estate development. Titles to land have become necessary for more efficient handling of land title documents, to provide greater security of tenure for those in occupation of land, to keep pace with the greater demand for re-conveyancing, for better support for mortgaging and investment, to face the steady increase in the number of private and public users who make routine enquiries about land ownership. There is an urgent need to ensure compulsory registration of land deeds and also to computerize such records so as to create a database. The Andhra
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Pradesh experience is a good example to begin with where registration of sale of land/property is achieved within a month. The Tenth Plan Working Group on Information Technology for Masses has recommended computerization of land records all over the country with computerized land/property documents being available to the public at all levels, including in villages, by 2005. Through online documentation of land records, hyper links with court registries of the district or the State can be developed, so that the unwary buyer can get immediate information of any pending litigations.
Urban Land Monopoly
Many cities have created development agencies (like the DDA in Delhi) and handed over control of all urban land within the municipal jurisdiction to them in the belief that they would act in the interests of the public. However, such agencies tend to behave like the monopolies that they are. It is in the interests of the monopolist to restrict the development and sale of new land and keep prices high, so as to maximize its own returns. Introduction of a competitive construction boom requires abolishing the monopoly of such agencies over urban land by completely separating control of land from its development.
Conversion of Rural Land to Urban Use
Conversion of rural land at market prices should be completely de-controlled and left to the market. At present, in Delhi, historical village land situated within the city limits cannot be converted to develop urban colonies. The presence of ‘urbanized villages’ in the middle of the capital city is an anachronism and a testament to bad policy. The curbs on the expansion of urban limits into surrounding village areas should be removed.
Needed Land Related Reforms
a. Simplify and modernize the current registration system for land/property titles. The Registration and Other Related Laws (Amendment) Act 2001 must be notified at the earliest. b. A time-bound programme for auctioning of all vacant government land should be drawn up and implemented. State owned development bodies like DDA can bid along with others for the land they want to develop.
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c. Promote public-private partnerships in housing based on the HUDA model in order to increase the housing stock. d. Freedom to convert rural land for urban use would increase the supply of land and stimulate real estate development. e. Set up a regulatory commission for continuously reviewing zoning regulations.
Financial Issues
Credit Restrictions
Financing options are presently skewed in favour of personal loans vis-à-vis developer financing. Most housing finance companies cater mainly to individuals in the higher income group, who have reasonably assured credit worthiness. Only 5-7 per cent of the loans disbursed by these housing finance companies go to builders and institutional developers. The high default rate among the developers is one of the factors dissuading housing finance companies from investing in this sector. The legal recovery mechanism is time consuming. Lack of a code of conduct for the industry is the other factor that keeps investors away. Even now, developers need to become corporatized to avail funding from financial institutions. All this leads to builders and developers approaching private sources of finance at high interest rates, which ultimately leads to higher real estate prices. To attract investment into this sector, it is imperative that the government increases the comfort level of the existing fund providers through appropriate legal measures and corporatization of real estate, besides maintaining industry discipline. Developing a grading system among the developers will make investors aware of the risks associated with the projects of each developer. Grading would facilitate the overall growth of the real estate sector by providing the developers with incentives to conform to
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fair trade practices and legal requirements. This is expected to enhance the confidence of the end users and augment the interest of the lenders in these projects, thereby facilitating the flow of institutional funds to the project/project owner.
Sources of Funds
Real estate mutual funds, pension funds and insurance companies are the major investor in the housing sector in developed countries. In the United States, pension funds invest 5 per cent of their reserves in real estate equity and mortgages, whereas in India developers’ ability to get financial help from these sources is limited. Housing finance companies in India also need to be given access to pension, provident and insurance funds. As the gestation period of real estate projects is more than five years, on an average, it is necessary that developers have access to such long term funding sources.
Needed Financial Reforms
a. Allow the pension funds, provident fund and insurance sector to invest in real estate. Provident and pension funds must be allowed to invest in deposits/bonds of housing finance companies. b. Encourage creation of real estate mutual funds/real estate investment trusts. c. Promote trading in mortgage-backed securities. The introduction of foreclosure norms and establishment of recovery tribunals is essential. Though securitization of mortgage debt has just started in India it has not succeeded due to the high incidence of stamp duty on documents. d. The present stipulation that FDI will only be allowed for the development of integrated townships of a minimum area of 100 acres needs to be relaxed to 50 acres or less, as such vast expanse of land may not be available in urban areas. FDI in the rest of the real estate sector may be permitted up to 74 per cent with a lock-in period of three years and there should be no repatriation of dividend during the construction period. Repatriation thereafter may be allowed. e. Develop a grading system among real estate developers to keep fly-bynight operators out and control default rates among developers. This will help investors (end user/buyer of property) be aware of the risks regarding
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the developer’s ability to deliver as per specified terms and quality parameters and transfer of ownership on time.
Infrastructural Issues
Road Networks
According to a study conducted by the real estate management company, C.B. Richard Ellis, the returns on commercial property in India are among the highest in the world. Mumbai prime property fetches returns of 13 per cent, New Delhi 12 per cent and Bangalore 11 per cent. In contrast, returns in London are 5.3 per cent and in Singapore 4.8 per cent. Lack of space is not the reason for these high returns because India is a huge country while Singapore is just a tiny city. Various reasons have been put forward to explain the curious phenomenon of astronomical real estate values in a poor country. The real reason however is the distorted market for real estate combined with the under-supply of roads. Absurd land ceiling and rental laws combined with high stamp duties have skewed the real estate market towards a situation of perennial shortage. Roads add to the supply of land by connecting villages to towns and this makes land available to the urban economy. This keeps land prices down. It also reduces the rural-urban migration, easing the pressure on cities.
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Unfortunately, roads have long been neglected by our policy makers. Roads are a ‘public good’ and, therefore, an area where State investment is required. However, the ‘planned economy’ has failed to invest sufficiently in roads even as it has been investing in cars and running hotels. This has put pressure on land in cities, causing urban land prices to soar. It is now time to usher in a free market in real estate development. With roads, tramways and rail connections to the surrounding areas, a lot of rural land will be ‘developed’. All these parcels of land will add to the total supply of real estate and this will work to keep prices down.
Other Risks Associated • Liquidity risk:
The investment market is still in its infant stage. Investors face serious challenges in finding appropriate investment product.
• Regulatory risks:
In terms of property ownership, permission from the Reserve Bank of India is required for foreign investors. For capital repatriation, investors need to apply for approval from the RBI, and foreign direct investment is limited to a limited set of opportunities (e.g. townships).38
• Property market transparency risk:
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Jones Lang LaSalle rates the Indian property market transparency as low in its international transparency survey from 2004. Although market transparency has obviously improved, it is still hard to get reliable and consistent information on the Indian property market. There are also more professional due diligence and valuation institutions needed. This holds even for the Tier I cities.
• Overall market transparency risk:
Transparency International ranks India 88 out of 150 countries with regard to the perceived corruption level.
• Macroeconomic risks:
Interest rates, inflation and exchange rate risks remain important, although volatility in these indicators has decreased significantly in recent years. The provision of public goods is in many regions still inadequate (education, transport infrastructure).
The Big Question…….
Is the Real Estate Market a bubble waiting to burst???
Investing in real estate in India is becoming more expensive with each passing day. A study conducted by Donald Trump Jr. shows that the Indian real estate market is worth US $12 billion, with an average annual growth rate of 30%. Property prices have appreciated by over 50% in cities like Bangalore, Pune, and Mumbai. Why has real property become “out of reach” in India?
•
The Indian economy, especially the information technology and BPO sectors, has been on a fast growth track. These industries offer high paying jobs. Also, people are more aware of the luxurious lifestyle of the West. With money in their hands, IT and call centre employees can afford to buy these luxuries in India. All put together, this has led to rise in property prices!
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•
Real returns in real estate caught the NRIs’ attention! The inflow of NRI funds in India’s real estate has also contributed to the price hype. There is also a rise in the trend of NRIs returning to India for good. This has put pressure on India’s real estate. India’s commercial and retail real estate has also been on a rise. There has been a mushrooming of shopping malls and entertainment centres throughout the country. Multi-national companies are also entering the Indian market regularly. Naturally, there is an increase in demand for office space. As the real estate investments gave high returns to investors, foreign investors have also started taking interest in India’s real estate. For example, Morgan Stanley invested US$ 68 million in Mantri developers and Merrill Lynch has invested US$ 50 million in Panchsheel Developers. Foreign companies like GE Commercial Finance Real Estate has invested US$ 63 million in IT parks in India. According to the Merrill Lynch forecast, the real estate business in India will grow to $US 90 billion by 2015.
•
•
•
In a highly opinionated society where everybody has an opinion on everything, it is generally the growth story that is targeted. No wonder, in the Indian context today, the largest economic activity post agriculture, Real Estate seems to be under the scanner of every prophet of doomsday. It is made to believe that a bubble is waiting to be burst. In the absence of any sound logic, the critics have now got the Fitch Ratings' outlook for the Indian real estate which suggests a price correction this year. The report suggests property prices are likely to undergo a correction in 2008; partly as home buyers, deterred by increasing property prices and high interest rates over the last three years, may wait for the prices to moderate. Therefore, debate rages today about whether or not a housing bubble exists in the country in general and the NCR in particular. The fact that there is even any controversy about the bubble's existence testifies to the power of the forces of misinformation. This also proves that the long habit of wishful thinking among the millions of victims of the so-called New Economy has yet to start to dissipate. What the critics fail to see here is that even Fitch notes that price corrections may not follow a uniform pattern geographically. I
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would like to add here that with the kind of retail growth that is forecasted, it won't affect the commercial real estate, too. There may be a price correction in the residential real estate, but it won't be a bubble burst by any stretch of imagination. Growth in the country over the last three years has been supported by sound economic fundamentals, with increased demand on the one hand and increasing supply supported by equity raising on the other. Real estate Companies here have produced strong topline growth in 2007, and even Fitch expects revenue growth to continue in 2008, as Companies would continue to launch several new projects. Moreover, real estate Companies have expanded to cities in a big way outside their principal area of operation, and we all expect this geographical diversification to continue through 2008. We live in a consumption Economy that is financed by debt, which in turn largely rests upon our home foundations. Thus if there was a real shift downward in housing demand, it would have a dramatic impact across the entire Economy. This goes true for any Economy, and India is no exception
REITs and REMFs: impact on the real estate boom
The Securities and Exchange board of India (SEBI) has been actively screening proposals to structure an investment instrument known as Real Estate Investment Trust (REIT). This comes in conjunction with the Real estate Mutual Funds (REMF), for which norms are expected to be finalized soon. Mutual Fund houses, such as Kotak Group, ICICI and HDFC have already expressed interest in floating these funds. While both these investment instruments are widely popular in the developed economies, India is yet to witness the introduction of such an investment option. Designed for a small investor, these instruments enable you to benefit from the booming real estate industry. In a normal scenario,
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you would need a lot of money to invest in real estate projects but REITs and REMFs will enable you to invest even your little surplus savings and reap substantial returns. These instruments will attract investments from the small investor and invest in projects, construction companies and commercial malls. The valuation mechanism of these instruments is still a question because the duration of projects may vary and so would the risk. While valuation norms of such instruments need to be considered carefully, you cannot ignore the benefits that these instruments will provide to the small investors as well as to the real estate industry. Some such benefits are:
• • •
The money that these instruments raise will help structure the entire financial system supporting the real estate industry. These could potentially become instruments for long term savings for small investors and help in diversification of individual portfolios. An increased transparency in data pertaining to the real estate industry will help the consumer, the developer as well as administrative authorities to take well informed decisions. These instruments will definitely enhance liquidity for housing finance companies as they would be able to invest in secondary mortgage markets.
•
Why REITs?
REITs have become the preferred "Brand Name" public property investment vehicle around the world. Some of the more salient reasons why nations have reformed their tax and other laws to create REITs are listed below. These are also important credit factors Moody's and ICRA review in rating analysis.’ • REITs boost and help to stabilize capital access, and reduce capital costs. REITs have proved successful in helping the commercial property business efficiently access the four quadrants of capital: debt and equity, public and private. Capital, especially long-term capital, is a vital resource for the property business, and REITs have proved effective in attracting it. This is in part a reflection of their public status and partly of their tax efficiency.
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Unsecured debt — the most flexible debt type — has been a hallmark of REITs, and has aided them in boosting both their strategic and financial flexibility. • REITs create conditions for building integrated property businesses. Most REITs in the leading national markets are internally managed, and have diverse skill bases in property development, redevelopment, acquisitions, divestitures, leasing and management. As such, they can create long-term, value-added ongoing enterprises, and not just assemblages of assets or "deals". • REITs can help attract foreign capital. There is a substantial amount of global capital seeking commercial property opportunities in India and elsewhere. Transparent, liquid entities such as REITs can help tap into this pool. This can also add to a REIT's financial flexibility. • REITs can help develop the broader economy. With the introduction of REIT’s allows better transparency and efficiency, and access to stable, global and more competitively priced capital, as well as stronger and more professional property businesses. As such, the commercial property sector can become better positioned to help develop the Indian economy.
But Legal and Governance Issues Remain To Be Resolved…
However, several issues would likely need to be addressed for REITs to find a footing in India. For instance, India has one of the highest levels of Property Taxes and Stamp Duty among the major countries in Asia – stamp duty is running at 5-7% for example. This has lead to high levels of non-registration of property transactions as well as transfers through the 'Power of Attorney' route. Moreover, high stamp duties, registration charges and capital gains tax leads to high incidence of cash transactions. These cash-based transactions are typically routed through various shell companies. A multitude of Approving Agencies for planning permission also boosts costs, and adds time to development. A creaky Land Title monitoring system also means that ownership problems are all too common. These factors have led
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to corporate governance issues within real estate companies regarding transparency and disclosure. Common areas where there is a lack of clarity include the number and size of projects being executed by any given property group, the end use of customer advances, and the nature of consolidated indebtedness and fund flows within the group. The mushrooming of property players without a track record in the real estate sector has exacerbated these issues.
Part III: City Wise Breakdown of India’s Real Estate Scenario
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Cities Covered:
• Chennai • Delhi • Kolkata • Mumbai
Areas Explored (for each city):
• Urban Agglomeration • Residential real estate scenario • Commercial/office space scenario • Retail real estate (malls) scenario
[An Urban Agglomeration, as per Census definition, is a continuous urban spread constituting a town and its adjoining urban outgrowths or two or more physically continuous towns together and any adjoining urban outgrowths of such towns.]
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Chennai
Chennai Urban Agglomeration – Real Estate Perspective
Chennai Urban Agglomeration (CUA): Overview
CUA comprises of: ? Area under Chennai Municipal Corporation
? Part of Thiruvallur district (Ambattur, Thiruvallur, Ponneri and
Poonamallee ) ? Part of Kancheepuram district (Tambaram, Sriperumbudur and Chengalpattu
Infrastructure initiatives
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Roads TN Govt has started a decongestion drive Chennai Metro Rail Project 10 mini flyovers within the city In 1999-2000 it proposed the construction of 10 mini flyovers by Chennai Corporation. ? The project cost is estimated at Rs 3.7 billion. ? ? ? ?
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Outer Ring Road ? Chennai Metropolitan Development Authority is planning the development of Outer Ring ? Road (ORR) along the periphery of Chennai Metropolitan Area CMA to decongest the city.
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? ORR connects NH45 at Vandalur, NH4 at Nazarathpet, NH 205 at
Nemilichery. NH5 at Nallur and TPP road at Minjur and is of length 62.3 km.
•
Railways ? Chennai Metro Rail Project ? The Tamil Nadu Government has implemented the metro rail project to ease traffic congestion and improve the public transport system. ? The project consists of 3 corridors, 2 of which will be completed in the first phase at an estimated cost of Rs 58 billion. ? The first phase will carry 10.5 lakh passengers a day.
Residential apartments: Key characteristics
• •
Houses with lawns converted to buildings in late 90’s. G+4 floors storey structures – “ordinary buildings” - prevalent ? As multi storey apartments are not allowed according to prevailing developmental norms ? Specific areas notified by the municipal corporation for “multi storey” apartments ? Lack of futuristic vision among local developers
•
Concept of 2BHK+study in vogue Average size ? 2BHK is 770-1,000 sq. ft. ? 3BHK is 1100-1,500 sq. ft. Stamp duty=8% and registration charges=1% of the total property value About 400 small developers/builders representing approximately 65% of the total builders.
• •
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•
Such players built structures of only 4-30 flats.
Residential Supply
•
Within the City ? Around 42 mn sq. ft. of residential construction is expected for the period 2007-2008. ? The nucleus of the city comprising the old residential areas of George Town, Chintadripet, Triplicane and Purasawalkam, are now decaying and in need of an urban renewal. ? Residential development has now shifted to the south and west of Chennai city, which are the most preferred locations among IT/ITES employees and the expats. ? Around 20 residential projects in Velacherry and Perangudi owing to proximity to the IT Corridor situated to the South of Chennai. ? Residential construction in Besant Nagar, Anna Nagar, Mylappore, and Adyar is targeted towards the income category of Rs 400,000 and above. ? T Nagar, Poes Garden, Boat Club, Nungambakkam are the premium areas.
•
On the Outskirts ? Townships in Tambaram and Pallavaram (near Airport) ? Upcoming Electronic SEZ at Sriperumbadur – although 20 kms away from the city huge residential supply expected in the form of townships.
Property Pricing
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Residential: Key conclusions
•
IT/ITES, followed by auto industry employment is key demand driver.
Chennai Residential Prices (Rs./Sq.ft)
Area Adyar Alwarpet Anna Nagar Besent Nagar Boat Club Nungambakkam T. Nagar Vellecherry (all values are approximate) Source: Bhuwalka Estates Pvt. Ltd Purchase(Rs./Sq.ft) 3200 4500 3300 3400 4600 2900 2900 2500
• • • •
Total incremental demand across income categories of around 175,000 units for the period 2007-09 Supply of 52,000 units targeting 5 lakh income categories For the income segment of 2-4 lakh – substantial un-catered demand Demand slowly shifting outside – around the city outskirts. Local players losing hold as new non local developers cashing in on opportunities.
Strengths as a Commercial Destination
•
Major IT players like Infosys, Tata Consultancy, Wipro, Ascendas, and Polaris etc have settled base in Chennai.
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• • •
With Ford, Hyundai, Hindustan Motors, TVS, Ashok Leyland, MRF, etc., Chennai city is known as Detroit of India Has the 5th largest resource pool of graduating students ensuring a steady supply of qualified personnel for IT/ITES Has the highest upcoming supply of relatively cheap real estate (as compared to Mumbai and Bangalore) in the country – mainly along the borders of Chennai city, i.e., Kancheepuram and Thiruvallur Old Mahabalipuram road has been successfully established as an IT Corridor. The government is now promoting the area between Tidel Park and Kelambakkam as a software corridor.
• •
Commercial Market Features
•
IT/ITES Demand ? At present IT/ITES drives around 65-75% of the total office demand. ? Total commercial space supply of around 7 msf is expected in 200709
•
In the past, lack of quality commercial space - in terms of structure and outlay was the major hindrance to commercial development in Chennai – commercial construction was not of much interest to local players. Change in scenario - entry of national builders and increased corporate interest due to IT boom – major commercial construction along the south west of Chennai.
•
Office Space: Price Trend
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Chennai Commercial Rental Values
Area Guidy Mount Road Nungambakkam OMR R K Salai (all values are approximate) Source: Bhuwalka Estates Pvt. Ltd Rent(Rs./Sq.ft per month) 55 52 40 33 39
Malls and Multiplexes: Supply Addition
•
Foreground: ? The concept of organized retailing had its origin in Chennai with the establishment of Spencer Plaza ? The Mall, which started with a super built up area of 300,000 sq. ft., has now become the Mega Mall of city with a total of 1.05 million sq. ft. ? In high street retailing, Chennai has major retail chains like Shopper's Stop, Lifestyles, West side, Pantaloons, Landmark, and Globus etc.
Mall Space : Major Projects under development
Projects Ansal Plaza DLF IT Park Mall Matrix Metropolis Mall Source: Internet Developer Ansal DLF Parsavnath Polo Group Location Mohali Manimajra Mohali Panchkula
National Capital Region
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NCR comprises
• • • • • •
National Capital Territory of Delhi 8 districts, Haryana 5 districts, Uttar Pradesh Alwar district, Rajasthan NCR: Total population: 12,877, 470 Due to the faster growth of Delhi, the National Capital Region Plan 2001 was formulated and it aimed at increasing the growth potential of the region thereby redirecting the migrants from the metropolis
Infrastructure problems and initiatives
•
Flyovers
? Two new flyovers opened on Delhi - Gurgaon section of NH-8 ? Opening of these two flyovers has eased traffic congestion
between Km 15 to Km 28 of NH-8, in Gurgaon.
? Length ? The •
of Mahipalpur (Delhi)-1800 m and Udyog Vihar (Gurgaon)length 1500m entire project, from Rao Tula Ram Marg Junction till Km 42 in Haryana, is likely to be completed by September 2007.
Railways ? Noida-Delhi metro from New Ashok Nagar to Noida City Centre (7.1 km) ? Total project cost Rs 7.36 billion ? The metro is expected to begin operations in 2009.
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Major infrastructure developments
•
Roads ? Implementation of Peripheral Expressways comprising Eastern and Western Peripheral Expressway.
? The length comprising both Peripheral Expressways (Eastern and
Western) is about 269 km
? The cost of the project including cost of land acquisition is
estimated at Rs 41.20 billion ? The project is likely to be completed by 2010
•
Railways ? Delhi Metro Rail project ? Phase-I is completed. The overall progress of Phase-II Project is 8.96 %. ? The estimated project cost Rs 1,057 billion
Residential Apartments: Key Trends
•
The NCRPB has been drafting the Regional Master Plan 2021 for the last few years. The Delhi Development Authority Master Plan 2021 has also been coordinated with the Regional Master Plan. But both are awaiting clearances and notification. Currently, the laws of individual states are applicable to the towns and cities in the region. Delhi is dominated by the business community, bureaucrats and politicians with huge disposable incomes. The large multi-storey societies in east Delhi (Mayur Vihar, Patparganj etc) have found preference with the service class, the blue-collar segment. The business and trader class still largely dominate old residential areas in west and northwest Delhi and the newly developed suburb called Rohini.
• •
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•
Gurgaon has been the forerunner in the development, attracting a number of multinational companies in the service sector followed by Noida, Ghaziabad and Faridabad. Gurgaon: Driven by IT/ITeS companies and Corporate offices of many companies Noida: Driven by IT/ITeS and presence of many SSI units Ghaziabad: One of the major industrial zones of North India –railway coaches, steel industries, pharmaceutical units etc. Some of the important industrial units present in Ghaziabad include Bhushan Steel, Dabur India, Ghaziabad Ispat Ltd, Rathi Ispat etc Faridabad: Eicher, Escorts, Lakhani and Thompson Press
• • •
•
Demand pattern for residential units
• •
Delhi: Demand for houses is more or less saturated - It is mainly consumption driven Gurgaon: According to industry sources, around 5 years ago, demand was substantially investor driven. Currently, it’s in favour of consumption demand Noida and Ghaziabad: Consumption demand (70-80%): Investor (2030%) Faridabad: Consumption demand (60-70%): Investor (30-40%)
• •
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Demand mix: Framework
Residential: Supply
• •
Around 20 million sq. ft. of residential construction expected during 2007-2008 Supply coming up in ? Delhi: High end residential projects, particularly bungalows, are still in great demand in central and south Delhi. ? Ghaziabad: Driven by improved connectivity-Delhi Metro Railway System is being extended to Ghaziabad in the second phase ? Noida: The prime residential areas in Noida are located in Sector 14, 15, 27, 28, 29, 37 and 44. All these sectors predominantly consist of plot housing, while Sector 44 predominantly consists of Group housing.
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Residential: Major Projects under development
Projects Ansals Year Developer Ansals Central East
NCR Residential Real Estate Prices (Rs./Sq.ft)
West DLF Park Place DLF 02-03 (Approx) 5000 2000 03-04 (Approx) 5800 2900 Habitat Unitech 04-05 (Approx) 7000 3500 05-06 (Approx) 8000 Horizon Unitech 5000 06-07 (Approx) 10000 6700 Parsavnath Prestige Parsavnath Growth (%) (in 25.00 34.00 06-07) Parsavnath Parsavnath 0.4 Source: Phone Interviews with Leading Real Estate Agents Privilegde Parsavnath Sterling The Summit Uniworld Spa Source: Internet Parsavnath DLF Unitech 0.2 0.2 1.7 Ghaziabad Ghaziab ad 0.5 DLF City 1500 2000 1100 2000 2500 1500 3.0 Gurgaon 2600 2900 2000 3500 3400 Greater Noida 2900 2.3 4500 4500 3500 0.1 Noida 28.57 32.35 20.69 Noida Ghaziabad DLF City Gurgaon 0.6 Noida
Area (mn. Sq. ft.)
Location
Residential Property Prices Residential: Key Conclusions
• • • •
Huge demand for houses in the middle income group (annual income range Rs 2-5 lakh per annum) Around 20 million sq. ft. of residential construction is expected for 2007-2008 Growth driven by IT/ITeS in Gurgaon and Noida Major action in Gurgaon, Ghaziabad, Faridabad and Noida
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•
Delhi is now more or less saturated and the high demand for residential properties has increased rates beyond the reach of the middle class. As a result, the suburban towns within the NCR have become destinations for new residential projects. As these suburbs are now also increasingly generating employment, they will decide the future growth pattern of the National Capital Region.
Office Space: Market Features
• • • •
NCR, next to Bangalore as the IT hub of the country NCR has a significant share of FDI inflows Hub to several large companies (such as GE, Daksh), besides home to several IT/ITeS companies Supply: The commercial districts of the city can be classified into two categories: ? The historical commercial districts being that of the walled city of Shahjehanabad ? The modern ones: Connaught Place (Central Business District), the District Centres (planned by the Delhi Development Authority DDA) and the government districts of Central Government Office (CGO) complex, R.K. Puram and around the Rashtrapati Bhavan zone (Presidential House Zone) Around 15 million sq. ft of office space in the coming 2 years. Supply mainly in Gurgaon, Noida. Majority of the demand for commercial space is coming from IT/ITES.
• • •
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Office Space: Major Projects under development NCR Residential Real Estate Prices (Rs./Sq.ft)
Projects Year
Developer Area (mn. Sq. Location Connaught Nehru Bhikaji Cama Saket ft.) Place Place Place 02-03 (Approx) 9000 3800 5300 4500 DLF IT Park DLF 1.2 Noida 03-04 (Approx) 9500 5000 6400 6100 Infospace Unitech 4.9 Noida 04-05 (Approx) 12500 7400 8000 7500 Infospace Unitech 3.2 Gurgaon 05-06 (Approx) 17500 8500 9500 10000 06-07 (Approx) 24000 11000 10900 13500 Infospace Dundehra Unitech 3.1 Gurgaon Growth (%) (in 37.14 29.41 14.74 35.00 06-07) Net City Ansal 1.0 Gurgaon Source: Phone Interviews with Leading Real Estate Agents The Campus Ansal 3.3 Gurgaon Source: Internet
Commercial Property Prices Malls and Multiplexes: Existing Malls
•
Traditional markets include old markets of Delhi, like ? Chandini Chowk, ? Sadar Bazaar ? Daryaganj
•
Contemporary markets are ? Connaught Place, South Extension I & II, Defence Colony, Greater Kailash I & II, ? Basant Lok, Noida (Sector 18), ? Khan Market, Saket, Karol Bagh, etc.
•
The past couple of years have seen a surge in the number of retail malls in the suburban location of Gurgaon (Mall Road), closely followed by Noida
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•
Existing mall space in NCR ~ 19.25 msf
•
Some of the malls include, ? Gurgaon ? DLF City Centre Mall ? DLF Grand Mall ? DLF Mega Mall ? Gold Souk Mall ? MGF Mega City Mall ? MGF Metropolitan Mall ? The Wedding Mall Gurgaon ? Ansal Plaza, Delhi
? Centre Stage Mall, Noida
? Lifestyle, Rajauri Garden ? North Square Mall, Pitampura ? The Great India Place, Noida
• •
Gurgaon Mall road has witnessed oversupply. Few malls are reported to be financially stressed. Substantial Supply still expected in NCR region. Industry sources indicate around 60 new malls to be constructed in the next 2-3 years.
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Major projects
Mall Space : Major Projects under development
Projects
Apparel International Mart Concept Mall Project Delhi Gold & Wedding Souk Project 'Empario Mall' Project Gurgaon "Gold Souk" Jewellery Mart Gurgaon Imax Mall Project Gurgaon Shopping Mall House Of Home Mall Project Indirapuram Park Plaza North Square Mall Project Office Complex Project Parsvnath City Mall Project Pearls Omaxe Mall Project 'Promenade Mall' Project Retail Outlet Projects Scottish Hi-Life Mall Project Vasant Kunj Shopping Mall Vasant Square Mall Project Wedding Mall Project
Developer
Apparel Export Promotion Council Aerens Developers Ltd. Aerens Goldsouk Intl. Ltd. Regency Park Pvt. Ltd. Aerens Infrastructure Ltd. Aerens Infrastructure Ltd. Ansal Properties Ltd. Omaxe Ltd. Omaxe Ltd. Suncity Projects Ltd. National Construction. Ltd. Parsvnath Developers Ltd. Omaxe Ltd. Beverly Park Maintenance Ltd. Trendsmith (India) Ltd. Niho Construction Ltd. Ambience Infrastructure Pvt. Ltd. Suncity Projects Ltd. Omaxe Ltd.
Location
Gurgaon Gurgaon Delhi Vasant Kunj Gurgaon Gurgaon Gurgaon Gurgaon Indirapuram Pitampura Saket Faridabad Pitampura Vasant Kunj New Delhi Sohna Road Vasant Vihar South Delhi Gurgaon
Source: Internet
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Kolkata
Kolkata Urban Agglomeration (UA)
•
KUA comprises areas under Kolkata Municipal Corp, Howrah Municipal Corp and the outskirts
Infrastructure initiatives
Traffic & Transportation
•
Kolkata Metropolitan Development Authority has established major connectivity over the last 5 years including major projects like, Lake Gardens Flyover, Dum Dum Expressway, Sonarpur Flyover, EMBP widening etc at a cost of Rs 20 billion Work on projects worth Rs 1.38 billion is in progress including Bondel Gate Flyover, Prince Anwarshah Road connector to EMBP, Roads in Sector-V of Salt Lake etc. KMDA has proposed major projects worth Rs 6.04 billion including ? ? ? ? ? ? Flyover between EMBP and VIP Road Flyover from Park Circus to Parama Island Vivekananda Road Flyover Extension of EMBP from Garia to Baruipur, Widening and extension of Kalyani Dum Dum Expressway, Modernisation of traffic dispersal system at Howrah and Sealdah stations.
•
•
Water supply
•
Kolkata Metropolitan Development Authority has completed 13 major water supply projects in the last 5 years at a cost of Rs 1.63 billion.
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•
Kolkata Metropolitan Development Authority has implemented 8 major water supply projects benefiting the residents of Nadia, Hooghly and North & South 24 Parganas. The project cost is estimated at Rs 1.35 billion.
Sewerage, Drainage and Sanitation
•
KMDA has completed projects worth Rs 0.44 billion in the last 5 years for providing sewerage network, sewage treatment plant and solid waste disposal system. KDMA has implemented project worth Rs 0.37 billion mainly in 24 Parganas.
•
•
Trans-municipal solid waste disposal project for 6 municipal towns at a cost of Rs 1.70 billion being taken up under Japanese Bank for International Cooperation funding. Projects worth Rs 1.28 billion to be taken up under JN-NURM.
•
Residential apartments: Key trends
• • •
Shift from plot based houses to flats: Substantial in the main city Shift from G+5 to high rise apartments Increase in demand for larger floor space: For instance more demand for 2-3 bedroom-hall-kitchen (BHK) flats with larger rooms, as compared with 1 BHK flats Many companies unlocking the value of their land assets Major action happening in Rajarhat
• •
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? Rajarhat, also called New Town, is the latest township being
developed on the north-eastern fringes of Kolkata city.
? The state government has acquired thousands of acres of land to
develop a mega city, with one of the largest IT parks, mega housing projects, multiplexes, hospitals, golf clubs, the works.
? The master plan envisions a township that is thrice the size of
neighbouring Salt Lake City. Still under development, this area was till recently a big swamp and full of fisheries.
? Rajarhat is also close to the airport and is thus another favourable
location for industry to set up shop.
Buyers- A mix of consumption demand
60:40
in
favour
of
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Residential: Supply addition
• •
Around 47.36 million sq. ft. of residential construction is expected for 2007 & 2008 Following areas are witnessing increase in supply of residential units: ? ? ? ? ? Bata Nagar Howrah Prince Anwar Shah Road Rajarhat-New Town South Kolkata- Ballygung and Alipore (catering to high income group)
•
Trend of townships and high-rise buildings on the rise. Some examples of such townships are given below: ? Dankuni Township, ? Rajarhat Township, ? West Howrah Township
Residential: Property prices
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Residential: Key conclusions
Kolkata Residential Property Rates
Area Alipore Ballygunje Behala EM Bypass Narendrapur Park Street Rajarhat Tollygunje VIP Road (all values are approximate) Source: Champalall Properties Pvt Ltd Purchase(Rs./Sq.ft) 5800 4700 1400 2700 1300 4400 2500 1700 1900
• • • • •
Huge demand for houses in the middle income group (annual income range Rs 2-5 lakh per annum) Around 47.36 million sq. ft. of residential construction is expected for 2007-2008 Growth driven by IT/ITeS Major action in Rajarhat South Kolkata- Ballygung and Alipore- Continue to be favourite locations, especially for high income groups
Office space: Supply addition
•
~ 12 msf expected to be added from 2007-2009
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• •
~ 80 % of office space is expected to be for IT/ITES Many foreign players keen to enter
? Singapore’s Keppel Land plans to develop an IT park in Rajarhat
with hotelier Shiv Jatia ? Ascendas planning to develop an Rs 4.30 billion IT park spread over 2 million Sq.ft. ? Nanjing New & Hi-Tech Industry Development Zone in JV with Bengal Peerless Housing Development Company to develop a high technology industrial investment zone with an initial investment of $6 million (Rs 0.30 billion) ? The Union Cabinet has approved Indonesia-based Salim Group's proposal for a $500 million investment in development projects in West Bengal. The company is looking at developing integrated infrastructure including townships, housing, SEZ, and industrial parks.
•
Non-locals also showing interest
? The Godrej group has lined up real estate projects (includes two IT
parks comprising 3.5 million Sq.ft and a retail mall of 400,000 sq. ft.) worth Rs 3 to Rs 4 billion in and around Kolkata ? DLF has entered into an agreement with the Kolkata Metropolitan Development Authority (KMDA) to build a new township in Dankuni, Hooghly district with an investment of Rs.330 billion ? Unitech
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Office space: Major projects
Office Space: Major Projects under development
Projects DLF Info City Globsyl Crystal Godrej Waterside Infinity Benchmark South City Pinnacle Unitech Source: Internet Developer
DLF Bengal Sharchi Group Godrej Infinity Group
Location Rajarhat Salt Lake Sector V Salt Lake Sector V Salt Lake Sector V Salt Lake Sector V Rajarhat
Southcity Projects
Bengal Unitech
Commercial prices
Kolkata Commercial Property Rates
Area AJC Bose Road Chowrungee Gariahat Park Street Rajarhat Salt Lake (all values are approximate) Source: Champalall Properties Pvt Ltd Purchase(Rs./Sq.ft) 5200 4500 4000 5000 3900 4300
Malls: Supply addition
•
Currently 4 major malls- Forum, Metropolis, Gariahaat Mall and City Centre
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• • • •
Current mall development focus is in Rajarhat, Prince Anwar Road, Howrah and Jessore road. Around 7-8 new malls are expected to come up in the city in the coming 2 years. Total built-up area of upcoming or under construction malls/ shopping centres is close to 5.8 million sq ft Reliance Industries has secured 150,000 Sq.ft for its hypermart in the 262 acre Batanagar Township.
Major projects
Malls : Major Projects under development
Projects South City Mall Manisquare Unitech Axis Mall City Centre II River Side Mall Ozone 2 Source: Internet Developer Southcity Projects
Manigroup Unitech Bengal Peerless Bengal Ambuja Avni Group Astor Group
Location Prince Anwarshah Road E M Bypass Rajarhat Rajarhat Rajarhat Howrah B T Road
Mumbai
Mumbai urban agglomeration (UA)
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• • • •
Mumbai UA comprises the area of Mumbai Municipal Corporation, Thane, Kalyan, Dombivili, Navi Mumbai, and the outskirts Total area: 1,334.5 square kilometers (km) Total population in 2001: 16.77 million Key industries affecting real estate: ? Financial services ? IT/ITES ? Entertainment industry capital
•
Financial capital of India
Infrastructure initiatives
•
Mumbai is one of the five cities included in the centre sponsored Mega City Scheme launched by the Government of India in the Eighth Five Year Plan. The scheme for Mumbai is being implemented by the BMC, BEST, CIDCO, TMC, KMC and NMMC. North-South arterial corridors are being developed through building flyovers, road widening etc. Current projects are concentrated more around arterial roads: ? Flyover on Western express highway (airport) ? Bandra-Worli sea link ? New Link road
• •
•
Mumbai Urban Transport Project (MUTP) and Mumbai Urban Infrastructure Project ( MUIP) envisages investment in suburban railway projects, local bus transport, new roads, bridges, pedestrian subways, and traffic management activities.
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•
Development of East-West corridors (road and rail) to ease traffic flow between eastern, central, and western suburbs ? Jogeshwari–Vikhroli link road ? Santacruz–Chembur link road ? Goregaon–Mulund link road Mumbai Metro Rail Project also envisages connectivity ? Versova–Andheri–Ghatkopar link (West–East) ? Bandra–Kurla–Mankhurd (West–East) ? Colaba–Bandra–Charkop (South–North) East-West corridor
•
•
Development of Mumbai Metropolitan Region (as shown alongside) as part of long-term development initiatives ? Development of international airport and railway terminus near Panvel ? Development of Sewri–Nhava Sheva sea link (planned)
Residential apartments: Key characteristics
•
Land availability is limited; hence, ? High-rise buildings form up to 80 per cent of the supply ? Limited township concepts developed in centrally located areas ? Aggressive development in accessible proximity to Bandra-Kurla Complex
•
CBD and premium areas ? Growth is limited (Marine Drive, Napean Sea Prabhadevi) — led by reconstruction of old buildings Road, Worli,
•
Average area of apartment is smaller than that in other cities ? Typically, 1BHK measures around 600 sq feet; 2BHK, around 800 sq feet ? Better amenities and quality of construction are demanded as price points are rising ? Accessibility through road/rail of paramount importance
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Residential apartments: New growth areas
•
Higher growth in suburbs
? Western suburbs such as Andheri, Kandivali, Borivali, Malad along
the Western Express highway ? Central suburbs such as Thane, Ghatkopar, Mulund closer to Eastern Express highway ? Mill land to drive development in Parel, Mahalakshmi, Wadala and areas along the Tulsi-Pipe Road ? IT/ITES to drive development in Navi Mumbai
•
Navi Mumbai development also to be dependent on SEZ and transport connectivity with island
Buyers:
A
mix
of
local demand investment demand
•
and
Consumption demand ? Salaried: 90–95 per cent ? Nearly 40 per cent of demand is investment demand
Residential: Major projects
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Residential : Major Projects under development
Projects Zahara Estate Meadows Acropolis Royal Palms Estate Oberoi Woods Source: Internet Developer Lokandwala
Hiranandani Raheja Royal Palms Oberoi
Location Worli Thane Chembur Goregaon Goregaon
Residential: Key conclusions
•
Demand driven by ? IT/ITES ? Financial services ? Entertainment industry
•
Supply ? Substantial supply in high-income group with typical price points upwards of Rs 4 million in western, central, and southern parts of the city ? Huge demand-supply in LIG/MIG segments gap — this gap needs to be addressed through rental housing or lower cost suburban development ? SRA is key for LIG supply — excessive land prices have made housing unaffordable for lower income groups
•
Key characteristics ? Supply across the city in small projects ? Supply mainly in the form of high rises.
Office space: Key growth drivers
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•
Strong growth driving demand in IT / ITES ? IT/ITES was the initial demand driver for Mumbai office space. However, higher cost of commercial real estate has pushed IT / ITES companies towards distant suburbs. ? However, Mumbai STPI continues to clock export growth. ? Development of Navi Mumbai technology parks is central to IT/ITES demand.
•
Financial services gaining prominence ? Financial services outsourcing is gaining prominence due to availability of trained professionals. ? Typically, financial services are able to afford higher commercial rentals than IT / ITES companies.
Malls and multiplexes: Key drivers
• • •
Mumbai has substantial purchasing power; yet higher land costs raise rents for tenants. Malls and multiplexes are in a mature phase, in response to the growth in premium residential areas in the city. Growth led by IT/ITES and financial services has resulted in demand for retail growth.
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Property Rates: Mumbai
Property rates : Mumbai
Location Andheri Bandra (W) Bhandup / Mulund Churchgate/ Marine Lines Cuffe Parade Dadar Jogeshwari to Borivali Juhu / Vile Parle Khar (W) / Santacruz (W) Mira Road to Virar Parel Powai Prabhadevi Thane Nepeansea Road Worli / Worli Seaface 2008 Rs. 6,500 - 16,000 Rs. 13,000-30,000 Rs. 3,000-6,000 Rs. 18,000 – 32,000* Rs. 22000-65000* Rs. 8500-15000 Rs. 3,000-6,500 Rs. 11,000 18,000 Rs. 13,000 – 22,000 Rs. 1,650-2,500 Rs. 10,000-14000 Rs. 4,500 -11,000 Rs. 13,000 24,000 Rs. 3,500-5,000 Rs. 22,000 70,000* Rs. 18,000 50,000*
(Per Sq.ft.)
2007 Rs.5000-9000 Rs.9000-22000 Rs.2500-4500 Rs. 12000-18000 Rs. 15000-40000 Rs.7000-15000 Rs.3000-6500 Rs.7000-16000 Rs.8000-16000 Rs.700-2000 Rs.8000-11000 Rs.4000-9000 Rs. 11000-22000 Rs.3000-4800 Rs. 15000-40000 Rs. 12000-35000
Source : 'Narains Corp' Property Consultants & REALTORS ® * Rates for "Carpet Area" based calculations. Rates are subject to amenities, upkeep & vary from apartment to apartment within the 81 | P abuilding depending on view, layout etc. same g e
Part IV: Emerging Investment Pattern in National Capital Region (NCR)
Research Group
The research group consisted of 100 people among whom questionnaires were distributed and the following findings are based on the analysis of the answers to those questionnaires.
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The above mentioned 100 people were equally distributed among the following four classes of income:
• • • •
Category A: Income Rs.2,00,000 : 25 people
Questionnaire Analysis
The first question that was asked from the respondents was:
“Have you ever invested in the Real Estate Sector?”
The answers given by each category are given below. Also some of the respondents had not as yet invested in any type of real estate asset so they
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were asked to provide the reason for same. Also graphically depicted are the type of investments made by the people who answered yes to the first question:
Category A: Income Rs.2, 00,000
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Investment in Real Estate
NO , 2, 8%
YES, 23, 92%
YES
NO
Out of the 25 respondents, 2 respondents answered NO & 23 answered YES. Resons for not investing in Real Estate
No. of People
2 0
1
1
Reasons Huge Capital Outlay Long Investment Period
For those who answered YES: Nature of Investment
No. of People 20 10 0 Investment Options
Flat Commercial Space Pre Built House Industrial Space Plot Farm House Premium Community (Flat/Bunglows) Other
6
10
7
13 3 5 0 2
Some of the respondents had invested in multiple properties. The next question that the respondents answered was:
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“According to you what are the three most attractive investments in the Real Estate Sector? (1-1st choice, 22nd choice, 3-3rd choice)”
The choices were then denoted points. For example 3 points for 1st choice, 2 points for 2nd choice and 1 point for 3rd choice. These points were then added up for all the investment options and the one with the highest sum total was chosen as the Most Attractive Investment Option. The results of the answer to the above question have been graphically depicted below:
Most Attractive Investment Options
120 105 100 Total No. of Points 80 60 40 20 0 Investme nt Options
Flat Commercial Space Pre Built House Industrial Space Plot Farm House Premium Community (Flat/Bunglows) Other
89 78
39 27 13 5 0
Commercial Space was found to be the most attractive investment option especially in Malls or so. Close on its heels were Ultra luxury Flats or bungalows in Premium Communities and Plots. The least attractive investment option was Industrial Space. The next question that the respondents answered was:
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“From the options given below, choose the reasons for the above selected choices: (write 1 in reasons for 1st choice and so on, same reasons for multiple choices can be marked)”
The answers to the above questions have been graphically depicted below. The graph shows the percentage of people that felt that the given reasons were apt for the each of the provided investment options.
Reasons for Attractive Investment
100% 90% 80% %of People 70% 60% 50% 40% 30% 20% 10% 0%
Fla t
10 5 5 40
5 15 20
10
10
20 10
20 H s F as le ree L iving 40 Eas y Aces ibility s S tandard of L iving S Occupation elf S ecurity R eturn Growth
60 20
50
10 10 20
10 30 30
60 20 15 5 5 5 20 10 10
As can be seen that Flats were mainly purchased for Self Occupation as was the case with Pre Built Houses, on the other hand Standard of Living was one of the primary reasons for purchasing assets like Farm houses and for investing in Premium Communities. Commercial Space was mainly purchased for return. Growth was also one of the main factors considered when going for investment options like Plot, Flat and Commercial Space.
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Co Pl ot m m er cia lS pa ce Fa rm Ho us Pr e e Bu Pr it em Ho iu us m e Co m m un iti es
Inves ent Options tm
The question next in line was specifically constructed for the purpose of finding the current most popular investment destination. The question asked for this purpose was:
“From the options given below, which is the best location to invest in at the moment?”
The graph given below depicts the answers received for the above question.
Most Attractive Investment Destinations
40 No. of Votes 30 20 10 0 Location
Central Delhi East Delhi Gurgaon North Delhi West Delhi Ghaziabad South Delhi Noida & Greater Noida Faridabad
37
33
2
1
1
4
9 2
11
Noida and Greater Noida were found to be the most attractive investment options in light of the extreme pace at which these cities are growing as seen by the fact they are now host to some the most important projects in the country. The new International Airport and the Formula One track are both set to be constructed just alongside Greater Noida. Noida is also the starting point of the Taj Expressway which will drastically reduce the time need to travel to Jaipur. Gurgaon was the next favourite keeping in mind the fact that not only was it titled one of the Fastest Growing Cities in the world but it’s also home offices of almost all the reputed firms in India as well as a Mecca for all the shopping enthusiasts as far as its innumerable shopping malls are concerned.
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Lastly people were asked whether they had heard about “REITS”.
REITS Awareness
80 70 No. of People 60 50 40 30 20 10 0
Answer
69
21
YES
NO
Out of 100 respondents 21 people answered Yes & 69 people answered NO. This clearly shows that REIT’s is still part of a largely unexplored territory as still not many people heard of it. Thus for this concept to kick off, it must be sold to the masses in such a manner so as to guarantee their participation.
Conclusion
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•
More than 95 % of the respondents having incomes of less than Rs. 50,000 per month couldn’t afford to invest in real estate as most of the Investments now a day’s require huge capital outlay.
•
Long Investment period and slow returns were also considered as reasons for not entering into real estate investments.
•
This trend did not change significantly with people having incomes between RS. 50,000 – Rs. 1,00,000 (per month) as here too only about 25% of the respondents had invested in real estate. Huge capital outlay, slow returns and long investment period were still popular reasons given by most respondents.
•
Also investments among the people having incomes between RS. 50,000 – Rs. 1,00,000 (per month) mainly consisted to relatively low capital consuming investments like Flats.
•
Significant deviations from the above trend were noticed among people having incomes between RS. 1,00,000 – Rs. 2,00,000 (per month) as about 70% of the respondents had actually invested in real estate.
•
Investments in this category mainly consisted of investments in Flats, Plots, Commercial Space and investments in premium communities. But still investments in flats were clearly leading the pack, indicating that investments in other properties were still not very popular option with people existing in the middle class.
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•
As far as people having incomes between RS. 1,00,000 – Rs. 2,00,000 (per month) are concerned almost all the respondents (90%) had invested in real estate.
•
In the above mentioned category investments in Premium Communities, Commercial Space and Plots were found to be most popular. Indicating that such high capital outlay investments were gaining popularity very fast.
•
As far as the Most Attractive Investment option was concerned, Commercial Space was a clear winner. Close behind it were investments in Premium Communities and Plots.
•
Investments in Commercial Space were popular mainly for Return and Growth.
•
Investments in Premium Communities were popular mainly for reasons like Standard of Living, Hassle Free Living and mainly for Self Occupation by the respondents.
•
Investments in Plots were entered into mainly with a view point of occupying them later on by constructing houses on them. Still Growth, Return, Financial Security and Hassle Free Living were popular reasons for buying Plots.
•
Noida and Greater Noida were clearly the most popular investment destinations due to the emergence of popular investments opportunities like Premium Communities, Prime Commercial Space in these areas, with Gurgaon, Faridabad and Ghaziabad hot on their heels.
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•
Delhi is fast losing its shine and is not a preferred destination for real estate investments mainly due to existing sky high prices and extremely low chances to substantial growth.
•
Last but not the least it was found that still most of the people were unaware of the foray of Real Estate Investments Trusts (REITS). Out of the 100 people that responded to the questionnaires, about 70 % had no clue as to what were “REITS”.
Part V: References & Annexure
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Annexure I: Investor’s Questionnaire
Potential Sector)
Investors
Questionnaire
(Real
Estate
Name: ___________________________________________________ Age: __________________ yrs Sex: M F
Tel/Mobile No: _____________________________________________ ? Income Bracket: (Monthly)
Rs.2,00,000
? Have you ever invested in the Real Estate Sector?
Yes
No
If yes, then if possible kindly describe nature of investment: ______________ If no, then reason for the same: __________________________________
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? According to you what are the three most attractive investments in the real estate sector?(1-1st choice, 2-2nd choice, 3-3rd choice)
Flats Plot Commercial Space Farm House Industrial Any other: Pre Built House
Premium Communities (flats/bungalows)
___________
? From the options given below, choose the reasons for the above selected choices: (write 1 in reasons for 1st choice and so on, same reasons for multiple choices
can be marked) Growth Return Security Self Occupation Standard of living
Easy accessibility
Hassle free living
Any other:
________________
? From the options given below, which is the best location to invest in at the moment:
Central Delhi North Delhi South Delhi Gurgaon East Delhi Ghaziabad West Delhi Faridabad
Noida & Greater Noida
? Have you heard about “Real Estate Investment Trusts” (REITS)? Yes No ***THANK YOU FOR YOUR TIME***
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Annexure II: Bibliography
www.nrirealtynews.com www.realestateindiaconsultant.com www.realestateindiaconsultant.com www.indiaproperties.com www.kothi.com www.indiapropertyexpert.com www.indianpropertydevelopers.com www.indiahousing.com www.realtyplusmag.com www.propertybytes.com www.interactyve.com/knowledgecenter/realestate.htm www.isb.edu/WCED/IndianRealEstateScenario.Shtml
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www.indianground.com/indian-real-estate-watch.aspx www.indianrealestateforum.com www.thehindubusinessline.com www.niteshestates.com www.labnol.org www.therealtor.co.in/ www.indianrealtynews.com www.reubenestate.com
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doc_364386122.doc
This doc about Indian Real Estate scenario & Investment Pattern in NCR by studying Unprecedented Expansion, Key Facts & figures , Foreign Players, Entry of Realty Funds, Private Equity in Indian Real Estate, particulars, Government Initiatives,
Indian Real Estate Scenario & Investment Pattern in NCR
Contents
Part I: Decrypting Real Estate 09
Foreword Definitions & Explanations Types of Real Estate Investments Characteristics of Real Estate Assets 16 Advantages & Disadvantages of Real Estate Investments 18 10 12 13
Part II: First Look of the Indian Real Estate Sector 22
Introduction 23 Unprecedented Expansion Key Facts & Figures Foreign Players Entry of Realty Funds Private Equity in Indian Real Estate 24 25 27 28 28
Particulars Page No.
Going Local Going Global Government Initiatives
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29 32 32
Factors Driving Growth in Real Estate Sector Drivers of Profitability Why Invest in Indian Real Estate The Other Side of the Coin Issues Plaguing the Real Estate Sector 36
33 34 35 36
• • • •
Legislative Issues Land Market Issues Financial Issues Infrastructural Issues
36 39 41 42 44 45 47
Other Risks associated The Big Question REIT’s & REMF’s
Part III: City Wise Breakdown of Indian Real Estate Sector 50
Cities Covered 51 52 58 68 76
• • • •
Chennai National Capital Region Kolkata Mumbai
Particulars Page No.
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Part IV: Emerging Investment Patters in NCR 82
Research Group Questionnaire Analysis Conclusion 83 84 90
Part V: References & Annexure 92
Annexure I: Investors Questionnaire 93 Annexure II: Bibliography Annexure III: Sources for Primary Research (Emails) Annexure IV: Sources for Primary Research (Visiting Cards) 95 96 103
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Report Objectives
This report aims to:
• •
Provide layman explanations of Real Estate, types of investments and their characteristics Provide an in-depth independent and unbiased overview of the real estate scenario based on inputs from ? Primary sources like developers, banks and financial institutions, brokers and secondary sources like information and research available on the internet. Provide vital information as to whether this boom in the real estate market is sustainable or is it a bubble waiting to burst. Provide validated consistent information across parameters that influence real estate activity like ? Infrastructure developments in the city ? Residential Demand, Supply, prices, drivers, key characteristics ? Commercial Supply, prices, drivers and key characteristics ? Retail supply (malls) proposed Provide a critical analysis of the various factors that are fuelling and feeding the consistent growth of the real estate sector. Provide a breakdown of the investments in the real estate sector based on ? Income ? Age Group
• •
• •
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? Type of Investment ? Location
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Provide a detailed understanding of the investment pattern that is emerging in the real estate markets prevailing in the National Capital Region. A schematic locational dispersion on the map
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Methodology & Approach
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The research encompasses extensive (personal & phone) interviews of ? Local developers ? Real estate agents
•
Emails were sent and phone calls were made to prominent Real Estate agents in Chennai, Kolkata, Mumbai and New Delhi. The information received thereafter was used as a base for the analysis conducted. Also questionnaire were filled by a group of 100 Private Investors who were randomly chosen from the Nation Capital Region (NCR) so as to discern the emerging investment pattern in these areas. It also involves desk search covering surveys of news, developer websites, property websites, property magazines, rating rationales, and research reports. Urban Agglomeration concept (used later in the report): The UA concept has been used in this study as in many cases it was discovered that the pace of development in the outskirts was at a faster pace than that of the main city itself. One such case was that of Noida and Gurgaon and Ghaziabad. These cities have grown at a faster pace than New Delhi.
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Part I- Decrypting Real Estate
Foreword
I
n India today, one cannot pick up a newspaper without reading about a
real estate company IPO or a new high being set in a land auction. The
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optimistic mood driving the country is reflected not just in the booming stock market but in property prices. Put the two forces together and you have the mother of all IPOs – the listing of DLF, believed to be the largest developer in India. With the listing, the family which owns the company will become one of the richest families in the world. Having seen this happen in Hong Kong and the rest of Asia over the last 30 years, one cannot help but getting a feeling of déjà vu. A generation of Indian Kwoks, Lees and Lis is being created. The traditional super-rich list of families with an industrial background, of late overtaken by the technology billionaires, is now being joined by the property tycoons. The difference between India and most other countries in Southeast Asia is that the playground is much larger with a lot of scrub and forest still to be cleared, not to mention obstacles to be overcome. Real estate in India has traditionally been an investment area where the well-off parked their “surplus” and recycled “tax free” funds. The official price was considerably lower than the transacted price and payments were made in cash, with little need for bank financing. While this meant that there was little volatility, it also ensured that the various real estate markets remained localised, and the costs of entry were often prohibitive. Also as a result there were very few listed property counters. But all that is changing and the market is becoming much more transparent. DLF’s development of Gurgaon, the satellite city next door to Delhi, began the shift from horizontal to vertical living. The professionally-managed developments were aimed at younger, doubleincome, professional couples. The banks then entered the arena and demand for mortgage financing has since grown exponentially. While this has resulted in increased affordability, it has also introduced an element of speculativeness, especially in new developments where buyers are booking three or four apartments with the intention of flipping them upon completion. The overseas Indian Diaspora (foreigners cannot buy, but persons of Indian origin can), has also jumped and is in some cases even arbitraging on interest rates by borrowing in low interest rate currencies. Finally the government has also liberalized foreign direct investments in this sector. This combination of factors means that, for the first time, the property boom is not a regionalized tidal wave, but a perfect storm, sweeping the country. While the initial growth in demand was driven by booms in selected cities
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(Gurgaon, Bangalore, Hyderabad and Chennai), lack of infrastructure to support infinite expansion and inter-state competition in attracting investment is pushing growth into the smaller cities. The impact is across the board, influencing residential, office, retail and even industrial parks/special economic zones. With Delhi (and Kolkata) now building a subway system, commuting to work from outlying suburbs will no longer be uncommon. Bangalore and Chennai, among other cities, are also expected to soon develop their own metro systems; the opportunities for development along the routes will be huge, and this is just the start. In addition to the economic growth trends, what is working in the market’s favour are the broad macro trends: the shift of population from rural to urban areas (from 40-60%), combined with the demographic shift mentioned in my article last month will result in further pressure on a situation which is already aggravated by a shortage of supply. With a population base of 1.1 billion, a 20% move means another 220 million will need accommodation, and that is assuming that the population levels off, which is not the case. With prices continuing their upward trend, the city and state governments will have to come up with public-private development schemes to provide housing to low income families (though many low income families working for the government already occupy some of the choicest urban locations in old public housing complexes). The current growth in demand does not mean that the market will be immune to the corrections or cycles other countries experience. At the moment euphoria and liquidity is keeping the market afloat – but it will correct, although ultimately the correction might not be too long-lived.
Definitions & Explanations
According to Wikipedia Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary or fixed in location. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property. However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property," referring to ownership rights of the land itself.
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But the most basic definition real estate is "an interest in land". Broadening that definition somewhat, the word "interest" can mean either an ownership interest (also known as a fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If one rents out an apartment, then he/she has a leasehold interest in real estate. If one owns a home, then he/she has an ownership interest in that home. Some jurisdictions recognize other interests beyond these two, such as a life estate, but those interests are less common in the investment arena. As a real estate investor, one will most likely be purchasing ownership interests and then earning a return on that investment by issuing leasehold interests to tenants, who will in turn pay rent. It is also not uncommon for an investor to acquire a long-term leasehold interest in land, which then has a building constructed upon it. At the end of the land lease, the land and building become the property of the original land-owner.
Types of Real Estate Investments
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing. Non-income-producing investments, such as houses, vacation properties or
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vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-incomeproducing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office Property
Offices are the "flagship" investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks. At its most fundamental level, the demand for office space is tied to companies' requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these "white-collar" jobs grow, there is greater demand for office spaces. Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents. Retail Property There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Centre format is in favour, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways. Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the centre. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such
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anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail centre has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU). The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high. Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
Industrial Property Industrials are often considered the "staple" of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts. There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs. Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential Property Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
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For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.
Characteristics of Real Estate Assets
Some of the characteristics that make real estate unique are as follows:
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•
No fixed maturity Unlike a bond which has a fixed maturity date, an equity real estate investment does not normally mature. In Europe, it is not uncommon for investors to hold property for over 100 years. This attribute of real estate allows an owner to buy a property, execute a business plan, then dispose of the property whenever appropriate. An exception to this characteristic is an investment in fixed-term debt; by definition a mortgage would have a fixed maturity.
•
Tangible Real estate is, well, real! You can visit your investment, speak with your tenants, and show it off to your family and friends. You can see it and touch it. A result of this attribute is that you have a certain degree of physical control over the investment - if something is wrong with it, you can try fixing it. You can't do that with a stock or bond.
•
Requires Management Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant complaints must be addressed. Landscaping must be handled. And, when the building starts to age, it needs to be renovated.
•
Inefficient Markets An inefficient market is not necessarily a bad thing. It just means that information asymmetry exists among participants in the market, allowing greater profits to be made by those with special information, expertise or resources. In contrast, public stock markets are much more efficient - information is efficiently disseminated among market participants, and those with material non-public information are not permitted to trade upon the information. In the real estate markets, information is king, and can allow an investor to see profit opportunities that might otherwise not have presented themselves.
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•
High Transaction Costs Private market real estate has high purchase costs and sale costs. On purchases, there are real-estate-agent-related commissions, lawyers' fees, engineers' fees and many other costs that can raise the effective purchase price well beyond the price the seller will actually receive. On sales, a substantial brokerage fee is usually required for the property to be properly exposed to the market. Because of the high costs of “trading” real estate, longer holding periods are common and speculative trading is rarer than for stocks.
•
Lower Liquidity With the exception of real estate securities, no public exchange exists for the trading of real estate. This makes real estate more difficult to sell because deals must be privately brokered. There can be a substantial lag between the time you decide to sell a property and when it actually is sold - usually a couple months at least.
•
Underlying Tenant Quality When assessing an income-producing property, an important consideration is the quality of the underlying tenancy. This is important because when you purchase the property, you're buying two things: the physical real estate, and the income stream from the tenants. If the tenants are likely to default on their monthly obligation, the risk of the investment is greater.
•
Variability among Regions While it sounds cliché, location is one of the important aspects of real estate investments; a piece of real estate can perform very differently among countries, regions, cities and even within the same city. These regional differences need to be considered when making an investment, because your selection of which market to invest in has as
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large an impact on your eventual returns as your choice of property within the market.
Advantages & Disadvantages of Real Estate Benefits
Some of the benefits of having real estate in your portfolio are as follows:
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Cash flow Cash flow is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you'll feel a lot better if the cash flow is positive. My advice on cash flow is this: Never use all of your positive cash flow for rapid debt reduction. You will be walking a thin line. By keeping a strong positive cash flow, you will have more options and space to manoeuvre. Appreciation Appreciation is the increase in value of a property. There are two kinds of appreciation. The first is from economic conditions beyond your control, such as inflation. But you won't gain much from this type of appreciation since the gain is offset by the higher cost of living. The second kind is market appreciation, which you can control. When you improve a property (through renovations), you force its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighbourhood standards or slightly higher; this will give you a property that is much higher in value. Leverage Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases, a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money. What other investments offer such a high degree of leverage?
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Amortization With leverage, or the use of other people's money, comes a repayment schedule. Your outstanding balance is reduced with every payment you make. Part of each payment goes to interest (applied first) and the rest goes to pay off the principal. The principal reduction is called amortization -reducing debt. Hence, amortization can make you wealthy, slowly and steadily. Tax advantages Owning real estate with the goal of making a profit allows you to deduct interest payments and other expenses come tax time. But don't be fooled into buying real estate for the tax advantages; rather, purchase it because it makes economic sense to do so. Diversification Value The positive aspects of diversifying your portfolio in terms of asset allocation are well documented. Real estate returns have relatively low correlations with other asset classes (traditional investment vehicles such as stocks and bonds), which adds to the diversification of your portfolio. (To read more about diversifying, see Allocation, Introduction, The Importance of Diversification and A Guide to Portfolio Construction.)
• Yield Enhancement
As part of a portfolio, real estate allows you to achieve higher returns for a given level of portfolio risk. Similarly, by adding real estate to a portfolio you could maintain your portfolio returns while decreasing risk.
• Inflation Hedge
Real estate returns are directly linked to the rents that are received from tenants. Some leases contain provisions for rent increases to be indexed to inflation. In other cases, rental rates are increased whenever a lease term expires and the tenant is renewed. Either way,
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real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
Shortcomings
Real estate also has some characteristics that require special consideration when making an investment decision:
• Costly to Buy, Sell and Operate
For transactions in the private real estate market, transaction costs are significant when compared to other investment classes. It is usually more efficient to purchase larger real estate assets because you can spread the transaction costs over a larger asset base. Real estate is also costly to operate because it is tangible and requires ongoing maintenance.
• Requires Management
With some exceptions, real estate requires ongoing management at two levels. First, you require property management to deal with the day-to-day operation of the property. Second, you need strategic management of the property to consider the longer term market position of the investment. Sometimes the management functions are combined and handled by one group. Management comes at a cost; even if it is handled by the owner, it will require time and resources.
• Difficult to Acquire
It can be a challenge to build a meaningful, diversified real estate portfolio. Purchases need to be made in a variety of geographical locations and across asset classes, which can be out of reach for
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many investors. You can, however, purchase units in a private pool or a public security, and these units are typically backed by a diverse portfolio.
• Cyclical (Leasing Market)
Not unlike other asset classes, real estate is cyclical. Real estate has two cycles: the leasing market cycle and the investment market cycle. The leasing market consists of the market for space in real estate properties. As with most markets, conditions of the leasing market are dictated by the supply side, which is the amount of space available (or, vacancies), and the demand side, which is the amount of space required by tenants. If demand for space increases, then vacancies will decrease, and the resulting scarcity of space will cause an increase in market rents. Once rents reach economic levels, it becomes profitable for developers to construct additional space so that supply can meet demand.
• Cyclical (Investment Market)
The real estate investment market moves in a different cycle than the leasing market. On the demand side of the investment market are investors who have capital to invest in real estate. The supply side consists of properties that are brought to market by their owners. If the supply of capital seeking real estate investments is plentiful, then property prices increase. As prices increase, additional properties are brought to market to meet demand. Although the leasing and investment market have independent cycles, one does tend to influence the other. For instance, if the leasing market is in decline, then growth in rents should decrease. Faced with decreasing rental growth, real estate investors might view real estate prices as being too high and might therefore stop making additional purchases. If capital seeking real estate decreases, then prices decrease to force equilibrium.
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• Performance Measurement
In the private market there is no high quality benchmark to which you can compare your portfolio results. Similarly, it is difficult to measure risk relative to the market. Risk and return are easy to determine in the stock market but measuring real estate performance is much more challenging.
Part II: First Look of the Indian Real Estate Sector
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Introduction
With property boom spreading in all directions, real estate in India is touching new heights. Growing at a scorching 30 per cent, it has emerged as one of the most appealing investment areas for domestic as well as foreign investors. However, the growth also depends on the policies adopted by the government to facilitate investments mainly in the economic and industrial sector. The new stand adopted by Indian government regarding foreign direct investment (FDI) policies has encouraged an increasing number of countries to invest in Indian Properties. India has displaced US as the second-most favoured destination for FDI in the world. As the investment scenario in India changes, India which has attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05, making India amongst the "dominant host countries" for FDI in Asia and the Pacific (APAC).
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The positive outlook of Indian government is the key factor behind the sudden rise of the Indian Real Estate sector. The second largest employing sector in India (including construction and facilities management), real estate is linked to about 250 ancillary industries like cement, brick and steel through backward and forward linkages. Consequently, a unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. This budding sector is today witnessing development in all area such as residential, retail and commercial in metros of India such as Mumbai, Delhi & NCR, Kolkata and Chennai. Easier access to bank loans and higher earnings are some of the pivotal reasons behind the sudden jump in Indian real estate.
Unprecedented Expansion
Rising income levels of a growing middle class along with increase in nuclear families, low interest rates, modern attitudes to home ownership (the average age of a new homeowner in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young working population from that of 'save and buy' to 'buy and repay' have all combined to boost housing demand. According to 'Housing Skyline of India 2007-08', a study by research firm, Indicus Analytics, there will be demand for over 24.3 million new dwellings for self-living in urban India alone by 2015. Consequently, this segment is likely to throw huge investment opportunities. In fact, an estimated US$ 25 billion investment will be required over the next five years in urban housing, says a report by Merrill Lynch.
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Simultaneously, the rapid growth of the Indian economy has had a cascading effect on demand for commercial property to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centres. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organized retail. For example, IT and ITES alone are estimated to require 150 million Sq.ft. across urban India by 2010. Similarly, the organized retail industry is likely to require an additional 220 million Sq.ft by 2010. With the economy surging ahead, the demand for all segments of the real estate sector is likely to continue to grow. The Indian real estate industry is likely to grow from US$ 12 billion in 2005 to US$ 90 billion in by 2015. Given the boom in residential housing, IT, ITeS, organized retail and hospitality industries, this industry is likely to see increased investment activity. Foreign direct investment alone might see a close to six-fold jump to US$ 30 billion over the next 10 years.
Key Facts & Figures
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Foreign Players
With the significant investment opportunities emerging in this industry, a large number of international real estate players have entered the country. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.
• • • •
Jones Lang LaSalle (JLL), the world's leading integrated global real estate services and money management firm, plans to invest around US$ 1 billion in the country's burgeoning property market. Dubai-based DAMAC Properties would invest up to US$ 4.5 billion to develop properties in India. Merrill Lynch & Co bought 49 per cent equity in seven mid-income housing projects of India's largest real estate developer DLF in Chennai, Bangalore, Kochi and Indore for US$ 375.98 million. UAE-based real estate company Rakeen and Chennai-based mineral firm Trimex Group have formed joint venture company - Rakindo Developers - which would invest over US$ 5 billion over the next five years. Dubai-based Nakheel and Hines of the US have tied up with DLF to develop properties in India. DLF has also formed a joint venture with Limitless Holding, a part of Dubai World, to develop a US$ 15.23 billion township project in Karnataka. Gulf Finance House (GFH) has decided to invest over US$ 2 billion in a Greenfield site close to Navi Mumbai.
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Global real estate majors such as Dubai World, Trump Organization of US, Smart City of Dubai, Kishimoto Gordon Dalaya, Khuyool Investments, Bonyan Holding, Plus Properties, ABG Group and Al Fara's Properties among others have all firmed up their plans for the Indian real estate market with an investment of around US$ 20-25 billion in the next 12-18 months.
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Entry of Realty Funds
The boom in the real estate industry has attracted a large number of realty funds to tap into this market. According to Cushman & Wakefield, foreign investors have raised nearly US$ 30 billion since March 2005 for investing in Indian real estate. Prominent global players like Carlyle, Blackstone, Morgan Stanley, Trikona, Warbus Pincus, HSBC Financial Services, Americorp Ventures, Barclays and Citigroup among others have all already checked into the Indian realty market. In fact, real estate has been instrumental in India emerging as the top destination in Asia (excluding Japan) in attracting private equity investments during the first ten months of this year. Real estate accounted for 26 per cent of total value of private equity investments, with 32 deals valued at US$ 2.6 billion. And according to industry estimates, another US$ 10-20 billion would pour into the sector in the next three years.
Private equity in Indian real estate
There have been 150 overseas private equity funds who have lined up their chests to invest in Indian real estate sector, report agency sources. According to independent estimates, a total of USD 10 billion has already been raised through this route and is expected to be invested in the next two years. On an average, each of these funds has a minimum corpus of at least USD 150 million running up to a billion Dollars, said property consultants. Indian and multinational institutions such as J P Morgan, Falcon, 3i, Blackstone, Carlyle, Kotak Real Estate, IL&FS, ICICI, and HDFC besides a host of others are storming into this sector. Private investors are starting to play an important role in the Indian real estate investment market. At the end of 2005, the total Indian private equity volume was roughly USD 1.6 billion, accounting for 40 per cent of the Indian real estate capital market. This market is rapidly growing. In 2005, private property companies and individuals holdings of real estate grew by 40 per cent year-on-year and are growing at double-digit rates.
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During the April-June 2006 quarter the PE firms launched funds targeting over USD 8.7 billion for investing in India. A majority, over USD 5 billion, of the new fund raising activity was aimed at real estate investments, said official of Venture Intelligence. The funds are talking about their plans but real estate companies such as Mantri Developers, GCorp, IDEB, and Sobha Developers who have received funds are upbeat on these investments. Detailing a few recent investments and funds, an industry analyst highlighted that Morgan Stanley invested Rs 3 billion in Mantri Developers in Bangalore, Merrill Lynch invested around Rs 2.5 billion in Panchsheel Developers while Siachen Capital, a New-York based fund reportedly invested close to Rs 5 billion in Nitesh Estates. Tishman Speyer Properties has formed a joint venture with ICICI Ventures and plans to invest about USD 1 billion in India within the next five years, the analyst highlighted. In 2005 nearly USD 850 million additional capital was invested into Indian real estate sector. Strong growth in private equity was driven by unlisted property funds and companies, which added around USD 82 million to the market, as well as by private individuals. However, even more significant growth came from private debt (i.e. bank lending for commercial real estate), with commercial banks lending USD 545 million during 2005.
Going Local
Indian real estate market permeates to smaller towns and cities
According to leading global property consultancy firm Knight Frank, the real estate action is no longer limited to the large metropolises of India but has now permeated to the burgeoning smaller towns and cities. According to Knight Frank Research, the upswing of the Indian real estate sector has been an outcome of a number of positive micro and macro factors. Consistent and sustaining GDP growth, expanding service sector, rising purchasing power and affluence, proactive and changing government policies have all lent momentum to this rapidly growing sector.
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Accounting for almost 80% of the total office space absorption, the Indian IT/ITES sector has been the primary demand driver. India's low cost-high quality and productivity model has given it a leadership position in the outsourcing arena. In a bid to scale up their operations and to remain globally competitive, the Indian IT/ITES companies are exploring the smaller towns and cities. Rising manpower and real estate costs, plaguing attrition levels and very often risk mitigation have been the key reasons for this movement. Positive economic growth has also translated in rising disposable incomes and growing aspiration levels across India. Rising consumerism has created a demand for new retailing and entertainment avenues. Realizing that consumers across cities have similar needs, albeit the scale may vary, new age retailers are vying to cash in on the first mover advantage and are expanding into hitherto unexplored smaller cities. Advent of organized retailing has also translated into real estate growth in these emerging locations. Growth of the Indian 'Rich' (annual income>USD 4,700) and 'Consuming' (annual income USD 1,000-4,700) class coupled with falling interest rates and other fiscal incentives on home loans has increased the affordability and the risk appetite of the average Indian consumer thereby leading to a substantial rise in demand for housing. This has been further fueled by the increase in the size of 25-55 age group of earning population and the emergence of double income, nuclear families. Over the last decade the average age of Indian home loan borrower has reduced by 10 years. Another variable facilitating real estate growth in India is the growing urbanization. According to United Nations Population Division, the urban population in India will continue to grow at a rate of 2.5% per annum for the next two and a half decade. As per the Census of India 2001, 41% of the total population of India will be living in urban areas by 2011. The number of cities with a population of one million or more is also is expected to double from 35 recorded in 2001 to 70 by 2005. This increase in population will generate incremental demand for housing and other real estate components. All these factors together with increased liquidity in the real estate sector through the international real estate funds and private equity funds will result in radically transforming the real estate landscape over the next 3-5 years.
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However, to support this growth and to make it more expansive, a lot needs to be done. Foremost is the thrust on infrastructure. According to a World Bank estimate, India needs to invest an additional 3-4% of its GDP on infrastructure to sustain its current levels of growth and to spread the benefits of growth more widely. Some positive steps have already been taken in this direction. Huge investments in infrastructure to the tune of $350 billion have been envisaged over the next five years. Connectivity may get a boost with the completion of ~13,000 kms of roads under the Golden Quadrilateral, North-South-East-West (NSEW) corridor and with 4-laning of all the major national highways. This will further facilitate the economic development of smaller towns and cities in the country. Major real estate destinations of the country and some other emerging towns can be classified into three broad categories depending upon the stage of real estate development that each one of them is undergoing. Tier I Cities: Bangalore, Mumbai and NCR Characteristics: Fairly well established real estate market. Demand drivers quite pronounced. Tier II Cities: Hyderabad, Chennai, Pune and Kolkata Characteristics: Growing real estate markets. Experiencing heightened demand and investments. Tier III Cities: Chandigarh, Ludhiana, Lucknow, Guwahati, Bhubaneswar, Jaipur, Ahmedabad, Surat, Nagpur, Indore, Goa, Visakapatinam, Mysore, Coimbatore, Kochi, Vijayawada, Mangalore, Trivandrum and Baroda Characteristics: Real estate markets yet to establish. Perceived to have substantial potential demand. As the Indian real estate sector moves higher on the growth curve, a number of state capitals and smaller cities which have relatively better infrastructure and are able to support higher economic growth have come into limelight. These emerging growth centers are characterized by low real estate costs, availability of land for development, untapped manpower pool and rising quality of life. Many of these towns have industrial and tourism driven economic base that can be leveraged for growth. Anticipating the latent demand in these markets, a number of real estate developers and retailers have chalked out expansive plans to harness the opportunity.
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Going Global
Simultaneously, many Indian realtors are making a name for themselves in the international market through significant investments in foreign markets.
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Prudential Real Estate Investors has acquired Round Hill Capital Partners Kabushiki Kaisha, a Japanese asset management firm. Embassy Group has inked a deal with the Serbian government to construct a US$ 600 million IT park in Serbia. Parsvnath Developers has tied up with the Al-Hasan Group in Oman. Puravankara Group is doing a project in Sri Lanka - a high-end residential complex, comprising 100 villas. The Hiranandanis are constructing 5000 5-star hotel rooms, which will come up between Abu Dhabi and Dubai. Ansals API tied up with Malaysia's UEM Group to form a joint venture company, Ansal API-UEM Contracts Pvt Ltd, which plans to bid for government projects in Malaysia. Kolkata's South City Projects is working on two projects in Dubai.
Government Initiatives
The Government has introduced many progressive reform measures to unlock the potential of the sector and also meet increasing demand levels.
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100 per cent FDI allowed in realty projects through the automatic route. In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres. Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly larger number of states. 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.
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Full repatriation of original investment after three years.
Factors driving the growth in the Real Estate Sector
One has to understand why the Indian real estate sector has presented itself as an asset class for international and institutional investors. All the factors driving growth and investment in this sector are driven by three key fundamentals.
• Strong Economic Growth:
The world’s fourth largest economy, growing at over 8% the last two years and forecast to grow at over 7% over the next five; Growth measures supported across the political spectrum; a boom in the services sector with a strong revival of industry; powerful internal consumption and demand. 300 million and growing with higher disposable incomes and even higher aspirations; educated, professional workforce driving urbanization beyond the traditional metro cities.
• The Rise of the Middle-Class:
• Enviable Demographics:
The world’s second most populous nation of 1.09 billion with 75% below the age of 50!
These fundamentals in turn have created a huge demand supply gap in all sectors of the real estate market - commercial, residential, retail, healthcare, hospitality to name a few. According to research conducted by ENAM Securities (a leading financial services firm) in late 2006, the market is expected to touch USD 50 billion by 2010 at a CAGR of 33% over five years. A requirement of 20 million new housing units; a five-fold increase in office space; 200 million square feet of organized retail and 50,000 new hotel rooms will drive this growth.
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Drivers of profitability • Knowledge of the business:
Though the principles of doing business are simple, over the many years of unregulated development, dealing in real estate in India has its own peculiarities, often at a local level and particularly in the area of transparency and legal documentation, and a thorough knowledge of these remains vital.
• A wide network:
There are developers and there are developers, and in a boom market everybody has got into the act. It is important to quickly sift the wheat from the chaff when forming JVs and SPVs for specific projects.
• The longer-term approach:
Real value to investors will accrue only on the sale of the end product in terms of its multiplier effect. Also longer-term investments are more likely to weather the hiccups of short term breaking news. Regulatory efforts to keep out hedge funds and such short term profiteers will go a long way in ensuring that this practice is sustained.
• Focus on quality:
This, more than anything, will derive the best value for investors, not just in monetary terms but also lasting goodwill. This entails not just the final product but also the totality of the environment where the development is located. Governments efforts to ensure that resettlement and social development of the displaced form part and parcel of all large projects is the most encouraging news of all.
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Why Invest In Indian Real Estate?
Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:
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It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector. India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. Presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space. Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even. Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.
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The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate in India is seemingly the most lucrative ground at present. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden change in investment policies, the overseas firms can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space. Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards.
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The Other Side of the Coin
The Indian real estate market is still in its infancy, largely unorganized and dominated by large number of small players, with very few corporate or large players having national presence. The Indian real estate market, as compared to the other more developed Asian and Western markets is characterized by smaller size, lower availability of good quality space and higher prices. Supply of urban land is largely controlled by state-owned development bodies like the Delhi Development Authority (DDA) and Housing Boards leaving very limited developed space free, which is controlled by a few major players in each city. Restrictive legislations and lack of transparency in transactions are other main impediments to the growth of this sector. Limited investment from organized sector has also hindered the growth of this sector. There is a thriving parallel economy in real estate, involving large amounts of undeclared transactions, mainly due to high stamp duty rates. The current legislative framework also leads to substantial losses to the Government.
Issues plaguing the real estate sector Legislative Issues
Much of the over 100 laws governing various aspects of real estate date back to the 19th century. Despite the plethora of laws, the situation appears to be far from satisfactory and major amendments to existing laws are required to make them relevant to modern day requirements. The Central laws governing real estate include:
Urban Land (Ceiling and Regulation) Act (ULCRA), 1976
This legislation fixed a ceiling on the vacant urban land that a ‘person’ in urban agglomerations can acquire and hold. A person is defined to include an individual, a family, a firm, a company, or an association or body of individuals, whether incorporated or not. This ceiling limit ranges from 5002,000 square meters (sq. m). Excess vacant land is either to be surrendered to the Competent Authority appointed under the Act for a small compensation, or to be developed by its holder only for specified purposes.
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The Act provides for appropriate documents to show that the provisions of this Act are not attracted or should be produced to the Registering officer before registering instruments compulsorily registrable under the Registration Act. The objective of acquiring the excess vacant land could not be achieved because of intrinsic deficiencies in the legislation itself. The provisions under Sections 19, 20 and 21 of the Act have together proved counter-productive to the objectives of the legislation. So far, only 19,020 hectares could be taken possession of by State Governments and Union Territories and the remaining land was locked up in various litigations. This has only helped push up land prices to unconscionable levels and practically brought the housing industry to a stop.
Land Acquisition Act, 1894
This Act authorizes governments to acquire land for public purposes such as planned development, provisions for town or rural planning, provision for residential purpose to the poor or landless and for carrying out any education, housing or health scheme of the Government. In its present form, the Act hinders speedy acquisition of land at reasonable prices, resulting in cost overruns.
Rent Control Act
Rent legislation in India has been in existence for a very long time. Rent control by the government initially came as a temporary measure to protect the exploitation of tenants by landlords after the Second World War. However these rent control acts became almost a permanent feature. Rent legislation provides payment of fair rent to landlords and protection of tenants against eviction. Besides, it effectively allows the tenant to alienate rented property. Tenants occupying properties since 1947 continue to pay rents fixed then, regardless of inflation and the realty boom. Some of the adverse impacts of the Rent Control Act are:
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Negative effect on investment in housing for rental purposes. Withdrawal of existing housing stock from the rental market. Accelerated deterioration of the physical condition of the housing stock.
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Stagnation of municipal property tax revenue, as it is based on the rent. Resultant deterioration in the provision of civic services. Increase in litigation between landlords and tenants.
The Rent Control Act, in fact, is the single most important reason for the proliferation of slums in India by creating a serious shortage of affordable housing for the low income families. Low and middle-income families typically live in rented accommodation all over the world and the need for such accommodation in our cities will only increase as the economy modernizes, labour mobility increases and urbanization takes place. It is, therefore, necessary to increase the stock of rental housing. Promotion of rental housing can have a significant impact on the economy in many ways:
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It reduces shortage of housing for a large section of the population who cannot afford ownership. Housing construction being a labour-intensive activity, investment in housing generates employment for both skilled and unskilled labour. Housing has backward and forward linkages with many other industries. Rental housing helps in stabilizing real estate prices and checking speculation and, thus, makes housing affordable for the weaker sections. It helps check proliferation of slums.
Needed Legislative Reforms
a. Revise the number of legislations governing property transactions and merge them into one comprehensive law. b. The repeal of the Urban Land (Ceiling & Regulation) Act by various states which have not done so is necessary. This is expected to facilitate the release of 2.2 lakh hectares of urban land, which remains frozen. c. Amend the Rent Control Act so as to remove the absolute authority of the rent controller over the disposition of the rented property. This allows the rent controller to virtually divest the owners of the natural right to his property and transfer it to the tenant. The Rent Control Act must limit itself to ensuring a level playing field in terms of rent (adjustment) negotiations
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and a reasonable period for vacation of property. Market rates must be allowed to prevail in the medium term. Instilling confidence in the owners would lead to release of vacant houses into the market within the levels of affordability of the tenants.
LAND MARKET ISSUES
It is estimated that removing land market barriers can contribute an additional 1 per cent to India’s GDP growth rate.
Titles and Records
Another important issue in real estate development is that of title to property. In India, the State does not certify a title to housing or land property. The revenue records are not documents of title, and ownership is established only by the sequence of earlier transfers. Thus, the fundamental question of title has often led to enormous litigation. At present there are three legislations which have a bearing on property transactions involving transfer of ownership of proprietary interest. These are the Transfer of Property Act, the Indian Registration Act and the Indian Evidence Act. An examination of the provisions of these Acts reveals a number of inadequacies. Most of the sale transactions are done through the power of attorney route to evade transaction costs like registration, stamp duties, property tax etc. The system, as it exists, imposes a responsibility on the part of the purchaser with regard to the inspection of the title. The result is tenuous titles to land and non-transparency in property transactions, thereby hampering large-scale real estate development. Titles to land have become necessary for more efficient handling of land title documents, to provide greater security of tenure for those in occupation of land, to keep pace with the greater demand for re-conveyancing, for better support for mortgaging and investment, to face the steady increase in the number of private and public users who make routine enquiries about land ownership. There is an urgent need to ensure compulsory registration of land deeds and also to computerize such records so as to create a database. The Andhra
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Pradesh experience is a good example to begin with where registration of sale of land/property is achieved within a month. The Tenth Plan Working Group on Information Technology for Masses has recommended computerization of land records all over the country with computerized land/property documents being available to the public at all levels, including in villages, by 2005. Through online documentation of land records, hyper links with court registries of the district or the State can be developed, so that the unwary buyer can get immediate information of any pending litigations.
Urban Land Monopoly
Many cities have created development agencies (like the DDA in Delhi) and handed over control of all urban land within the municipal jurisdiction to them in the belief that they would act in the interests of the public. However, such agencies tend to behave like the monopolies that they are. It is in the interests of the monopolist to restrict the development and sale of new land and keep prices high, so as to maximize its own returns. Introduction of a competitive construction boom requires abolishing the monopoly of such agencies over urban land by completely separating control of land from its development.
Conversion of Rural Land to Urban Use
Conversion of rural land at market prices should be completely de-controlled and left to the market. At present, in Delhi, historical village land situated within the city limits cannot be converted to develop urban colonies. The presence of ‘urbanized villages’ in the middle of the capital city is an anachronism and a testament to bad policy. The curbs on the expansion of urban limits into surrounding village areas should be removed.
Needed Land Related Reforms
a. Simplify and modernize the current registration system for land/property titles. The Registration and Other Related Laws (Amendment) Act 2001 must be notified at the earliest. b. A time-bound programme for auctioning of all vacant government land should be drawn up and implemented. State owned development bodies like DDA can bid along with others for the land they want to develop.
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c. Promote public-private partnerships in housing based on the HUDA model in order to increase the housing stock. d. Freedom to convert rural land for urban use would increase the supply of land and stimulate real estate development. e. Set up a regulatory commission for continuously reviewing zoning regulations.
Financial Issues
Credit Restrictions
Financing options are presently skewed in favour of personal loans vis-à-vis developer financing. Most housing finance companies cater mainly to individuals in the higher income group, who have reasonably assured credit worthiness. Only 5-7 per cent of the loans disbursed by these housing finance companies go to builders and institutional developers. The high default rate among the developers is one of the factors dissuading housing finance companies from investing in this sector. The legal recovery mechanism is time consuming. Lack of a code of conduct for the industry is the other factor that keeps investors away. Even now, developers need to become corporatized to avail funding from financial institutions. All this leads to builders and developers approaching private sources of finance at high interest rates, which ultimately leads to higher real estate prices. To attract investment into this sector, it is imperative that the government increases the comfort level of the existing fund providers through appropriate legal measures and corporatization of real estate, besides maintaining industry discipline. Developing a grading system among the developers will make investors aware of the risks associated with the projects of each developer. Grading would facilitate the overall growth of the real estate sector by providing the developers with incentives to conform to
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fair trade practices and legal requirements. This is expected to enhance the confidence of the end users and augment the interest of the lenders in these projects, thereby facilitating the flow of institutional funds to the project/project owner.
Sources of Funds
Real estate mutual funds, pension funds and insurance companies are the major investor in the housing sector in developed countries. In the United States, pension funds invest 5 per cent of their reserves in real estate equity and mortgages, whereas in India developers’ ability to get financial help from these sources is limited. Housing finance companies in India also need to be given access to pension, provident and insurance funds. As the gestation period of real estate projects is more than five years, on an average, it is necessary that developers have access to such long term funding sources.
Needed Financial Reforms
a. Allow the pension funds, provident fund and insurance sector to invest in real estate. Provident and pension funds must be allowed to invest in deposits/bonds of housing finance companies. b. Encourage creation of real estate mutual funds/real estate investment trusts. c. Promote trading in mortgage-backed securities. The introduction of foreclosure norms and establishment of recovery tribunals is essential. Though securitization of mortgage debt has just started in India it has not succeeded due to the high incidence of stamp duty on documents. d. The present stipulation that FDI will only be allowed for the development of integrated townships of a minimum area of 100 acres needs to be relaxed to 50 acres or less, as such vast expanse of land may not be available in urban areas. FDI in the rest of the real estate sector may be permitted up to 74 per cent with a lock-in period of three years and there should be no repatriation of dividend during the construction period. Repatriation thereafter may be allowed. e. Develop a grading system among real estate developers to keep fly-bynight operators out and control default rates among developers. This will help investors (end user/buyer of property) be aware of the risks regarding
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the developer’s ability to deliver as per specified terms and quality parameters and transfer of ownership on time.
Infrastructural Issues
Road Networks
According to a study conducted by the real estate management company, C.B. Richard Ellis, the returns on commercial property in India are among the highest in the world. Mumbai prime property fetches returns of 13 per cent, New Delhi 12 per cent and Bangalore 11 per cent. In contrast, returns in London are 5.3 per cent and in Singapore 4.8 per cent. Lack of space is not the reason for these high returns because India is a huge country while Singapore is just a tiny city. Various reasons have been put forward to explain the curious phenomenon of astronomical real estate values in a poor country. The real reason however is the distorted market for real estate combined with the under-supply of roads. Absurd land ceiling and rental laws combined with high stamp duties have skewed the real estate market towards a situation of perennial shortage. Roads add to the supply of land by connecting villages to towns and this makes land available to the urban economy. This keeps land prices down. It also reduces the rural-urban migration, easing the pressure on cities.
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Unfortunately, roads have long been neglected by our policy makers. Roads are a ‘public good’ and, therefore, an area where State investment is required. However, the ‘planned economy’ has failed to invest sufficiently in roads even as it has been investing in cars and running hotels. This has put pressure on land in cities, causing urban land prices to soar. It is now time to usher in a free market in real estate development. With roads, tramways and rail connections to the surrounding areas, a lot of rural land will be ‘developed’. All these parcels of land will add to the total supply of real estate and this will work to keep prices down.
Other Risks Associated • Liquidity risk:
The investment market is still in its infant stage. Investors face serious challenges in finding appropriate investment product.
• Regulatory risks:
In terms of property ownership, permission from the Reserve Bank of India is required for foreign investors. For capital repatriation, investors need to apply for approval from the RBI, and foreign direct investment is limited to a limited set of opportunities (e.g. townships).38
• Property market transparency risk:
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Jones Lang LaSalle rates the Indian property market transparency as low in its international transparency survey from 2004. Although market transparency has obviously improved, it is still hard to get reliable and consistent information on the Indian property market. There are also more professional due diligence and valuation institutions needed. This holds even for the Tier I cities.
• Overall market transparency risk:
Transparency International ranks India 88 out of 150 countries with regard to the perceived corruption level.
• Macroeconomic risks:
Interest rates, inflation and exchange rate risks remain important, although volatility in these indicators has decreased significantly in recent years. The provision of public goods is in many regions still inadequate (education, transport infrastructure).
The Big Question…….
Is the Real Estate Market a bubble waiting to burst???
Investing in real estate in India is becoming more expensive with each passing day. A study conducted by Donald Trump Jr. shows that the Indian real estate market is worth US $12 billion, with an average annual growth rate of 30%. Property prices have appreciated by over 50% in cities like Bangalore, Pune, and Mumbai. Why has real property become “out of reach” in India?
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The Indian economy, especially the information technology and BPO sectors, has been on a fast growth track. These industries offer high paying jobs. Also, people are more aware of the luxurious lifestyle of the West. With money in their hands, IT and call centre employees can afford to buy these luxuries in India. All put together, this has led to rise in property prices!
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Real returns in real estate caught the NRIs’ attention! The inflow of NRI funds in India’s real estate has also contributed to the price hype. There is also a rise in the trend of NRIs returning to India for good. This has put pressure on India’s real estate. India’s commercial and retail real estate has also been on a rise. There has been a mushrooming of shopping malls and entertainment centres throughout the country. Multi-national companies are also entering the Indian market regularly. Naturally, there is an increase in demand for office space. As the real estate investments gave high returns to investors, foreign investors have also started taking interest in India’s real estate. For example, Morgan Stanley invested US$ 68 million in Mantri developers and Merrill Lynch has invested US$ 50 million in Panchsheel Developers. Foreign companies like GE Commercial Finance Real Estate has invested US$ 63 million in IT parks in India. According to the Merrill Lynch forecast, the real estate business in India will grow to $US 90 billion by 2015.
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•
•
In a highly opinionated society where everybody has an opinion on everything, it is generally the growth story that is targeted. No wonder, in the Indian context today, the largest economic activity post agriculture, Real Estate seems to be under the scanner of every prophet of doomsday. It is made to believe that a bubble is waiting to be burst. In the absence of any sound logic, the critics have now got the Fitch Ratings' outlook for the Indian real estate which suggests a price correction this year. The report suggests property prices are likely to undergo a correction in 2008; partly as home buyers, deterred by increasing property prices and high interest rates over the last three years, may wait for the prices to moderate. Therefore, debate rages today about whether or not a housing bubble exists in the country in general and the NCR in particular. The fact that there is even any controversy about the bubble's existence testifies to the power of the forces of misinformation. This also proves that the long habit of wishful thinking among the millions of victims of the so-called New Economy has yet to start to dissipate. What the critics fail to see here is that even Fitch notes that price corrections may not follow a uniform pattern geographically. I
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would like to add here that with the kind of retail growth that is forecasted, it won't affect the commercial real estate, too. There may be a price correction in the residential real estate, but it won't be a bubble burst by any stretch of imagination. Growth in the country over the last three years has been supported by sound economic fundamentals, with increased demand on the one hand and increasing supply supported by equity raising on the other. Real estate Companies here have produced strong topline growth in 2007, and even Fitch expects revenue growth to continue in 2008, as Companies would continue to launch several new projects. Moreover, real estate Companies have expanded to cities in a big way outside their principal area of operation, and we all expect this geographical diversification to continue through 2008. We live in a consumption Economy that is financed by debt, which in turn largely rests upon our home foundations. Thus if there was a real shift downward in housing demand, it would have a dramatic impact across the entire Economy. This goes true for any Economy, and India is no exception
REITs and REMFs: impact on the real estate boom
The Securities and Exchange board of India (SEBI) has been actively screening proposals to structure an investment instrument known as Real Estate Investment Trust (REIT). This comes in conjunction with the Real estate Mutual Funds (REMF), for which norms are expected to be finalized soon. Mutual Fund houses, such as Kotak Group, ICICI and HDFC have already expressed interest in floating these funds. While both these investment instruments are widely popular in the developed economies, India is yet to witness the introduction of such an investment option. Designed for a small investor, these instruments enable you to benefit from the booming real estate industry. In a normal scenario,
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you would need a lot of money to invest in real estate projects but REITs and REMFs will enable you to invest even your little surplus savings and reap substantial returns. These instruments will attract investments from the small investor and invest in projects, construction companies and commercial malls. The valuation mechanism of these instruments is still a question because the duration of projects may vary and so would the risk. While valuation norms of such instruments need to be considered carefully, you cannot ignore the benefits that these instruments will provide to the small investors as well as to the real estate industry. Some such benefits are:
• • •
The money that these instruments raise will help structure the entire financial system supporting the real estate industry. These could potentially become instruments for long term savings for small investors and help in diversification of individual portfolios. An increased transparency in data pertaining to the real estate industry will help the consumer, the developer as well as administrative authorities to take well informed decisions. These instruments will definitely enhance liquidity for housing finance companies as they would be able to invest in secondary mortgage markets.
•
Why REITs?
REITs have become the preferred "Brand Name" public property investment vehicle around the world. Some of the more salient reasons why nations have reformed their tax and other laws to create REITs are listed below. These are also important credit factors Moody's and ICRA review in rating analysis.’ • REITs boost and help to stabilize capital access, and reduce capital costs. REITs have proved successful in helping the commercial property business efficiently access the four quadrants of capital: debt and equity, public and private. Capital, especially long-term capital, is a vital resource for the property business, and REITs have proved effective in attracting it. This is in part a reflection of their public status and partly of their tax efficiency.
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Unsecured debt — the most flexible debt type — has been a hallmark of REITs, and has aided them in boosting both their strategic and financial flexibility. • REITs create conditions for building integrated property businesses. Most REITs in the leading national markets are internally managed, and have diverse skill bases in property development, redevelopment, acquisitions, divestitures, leasing and management. As such, they can create long-term, value-added ongoing enterprises, and not just assemblages of assets or "deals". • REITs can help attract foreign capital. There is a substantial amount of global capital seeking commercial property opportunities in India and elsewhere. Transparent, liquid entities such as REITs can help tap into this pool. This can also add to a REIT's financial flexibility. • REITs can help develop the broader economy. With the introduction of REIT’s allows better transparency and efficiency, and access to stable, global and more competitively priced capital, as well as stronger and more professional property businesses. As such, the commercial property sector can become better positioned to help develop the Indian economy.
But Legal and Governance Issues Remain To Be Resolved…
However, several issues would likely need to be addressed for REITs to find a footing in India. For instance, India has one of the highest levels of Property Taxes and Stamp Duty among the major countries in Asia – stamp duty is running at 5-7% for example. This has lead to high levels of non-registration of property transactions as well as transfers through the 'Power of Attorney' route. Moreover, high stamp duties, registration charges and capital gains tax leads to high incidence of cash transactions. These cash-based transactions are typically routed through various shell companies. A multitude of Approving Agencies for planning permission also boosts costs, and adds time to development. A creaky Land Title monitoring system also means that ownership problems are all too common. These factors have led
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to corporate governance issues within real estate companies regarding transparency and disclosure. Common areas where there is a lack of clarity include the number and size of projects being executed by any given property group, the end use of customer advances, and the nature of consolidated indebtedness and fund flows within the group. The mushrooming of property players without a track record in the real estate sector has exacerbated these issues.
Part III: City Wise Breakdown of India’s Real Estate Scenario
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Cities Covered:
• Chennai • Delhi • Kolkata • Mumbai
Areas Explored (for each city):
• Urban Agglomeration • Residential real estate scenario • Commercial/office space scenario • Retail real estate (malls) scenario
[An Urban Agglomeration, as per Census definition, is a continuous urban spread constituting a town and its adjoining urban outgrowths or two or more physically continuous towns together and any adjoining urban outgrowths of such towns.]
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Chennai
Chennai Urban Agglomeration – Real Estate Perspective
Chennai Urban Agglomeration (CUA): Overview
CUA comprises of: ? Area under Chennai Municipal Corporation
? Part of Thiruvallur district (Ambattur, Thiruvallur, Ponneri and
Poonamallee ) ? Part of Kancheepuram district (Tambaram, Sriperumbudur and Chengalpattu
Infrastructure initiatives
•
Roads TN Govt has started a decongestion drive Chennai Metro Rail Project 10 mini flyovers within the city In 1999-2000 it proposed the construction of 10 mini flyovers by Chennai Corporation. ? The project cost is estimated at Rs 3.7 billion. ? ? ? ?
•
Outer Ring Road ? Chennai Metropolitan Development Authority is planning the development of Outer Ring ? Road (ORR) along the periphery of Chennai Metropolitan Area CMA to decongest the city.
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? ORR connects NH45 at Vandalur, NH4 at Nazarathpet, NH 205 at
Nemilichery. NH5 at Nallur and TPP road at Minjur and is of length 62.3 km.
•
Railways ? Chennai Metro Rail Project ? The Tamil Nadu Government has implemented the metro rail project to ease traffic congestion and improve the public transport system. ? The project consists of 3 corridors, 2 of which will be completed in the first phase at an estimated cost of Rs 58 billion. ? The first phase will carry 10.5 lakh passengers a day.
Residential apartments: Key characteristics
• •
Houses with lawns converted to buildings in late 90’s. G+4 floors storey structures – “ordinary buildings” - prevalent ? As multi storey apartments are not allowed according to prevailing developmental norms ? Specific areas notified by the municipal corporation for “multi storey” apartments ? Lack of futuristic vision among local developers
•
Concept of 2BHK+study in vogue Average size ? 2BHK is 770-1,000 sq. ft. ? 3BHK is 1100-1,500 sq. ft. Stamp duty=8% and registration charges=1% of the total property value About 400 small developers/builders representing approximately 65% of the total builders.
• •
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•
Such players built structures of only 4-30 flats.
Residential Supply
•
Within the City ? Around 42 mn sq. ft. of residential construction is expected for the period 2007-2008. ? The nucleus of the city comprising the old residential areas of George Town, Chintadripet, Triplicane and Purasawalkam, are now decaying and in need of an urban renewal. ? Residential development has now shifted to the south and west of Chennai city, which are the most preferred locations among IT/ITES employees and the expats. ? Around 20 residential projects in Velacherry and Perangudi owing to proximity to the IT Corridor situated to the South of Chennai. ? Residential construction in Besant Nagar, Anna Nagar, Mylappore, and Adyar is targeted towards the income category of Rs 400,000 and above. ? T Nagar, Poes Garden, Boat Club, Nungambakkam are the premium areas.
•
On the Outskirts ? Townships in Tambaram and Pallavaram (near Airport) ? Upcoming Electronic SEZ at Sriperumbadur – although 20 kms away from the city huge residential supply expected in the form of townships.
Property Pricing
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Residential: Key conclusions
•
IT/ITES, followed by auto industry employment is key demand driver.
Chennai Residential Prices (Rs./Sq.ft)
Area Adyar Alwarpet Anna Nagar Besent Nagar Boat Club Nungambakkam T. Nagar Vellecherry (all values are approximate) Source: Bhuwalka Estates Pvt. Ltd Purchase(Rs./Sq.ft) 3200 4500 3300 3400 4600 2900 2900 2500
• • • •
Total incremental demand across income categories of around 175,000 units for the period 2007-09 Supply of 52,000 units targeting 5 lakh income categories For the income segment of 2-4 lakh – substantial un-catered demand Demand slowly shifting outside – around the city outskirts. Local players losing hold as new non local developers cashing in on opportunities.
Strengths as a Commercial Destination
•
Major IT players like Infosys, Tata Consultancy, Wipro, Ascendas, and Polaris etc have settled base in Chennai.
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• • •
With Ford, Hyundai, Hindustan Motors, TVS, Ashok Leyland, MRF, etc., Chennai city is known as Detroit of India Has the 5th largest resource pool of graduating students ensuring a steady supply of qualified personnel for IT/ITES Has the highest upcoming supply of relatively cheap real estate (as compared to Mumbai and Bangalore) in the country – mainly along the borders of Chennai city, i.e., Kancheepuram and Thiruvallur Old Mahabalipuram road has been successfully established as an IT Corridor. The government is now promoting the area between Tidel Park and Kelambakkam as a software corridor.
• •
Commercial Market Features
•
IT/ITES Demand ? At present IT/ITES drives around 65-75% of the total office demand. ? Total commercial space supply of around 7 msf is expected in 200709
•
In the past, lack of quality commercial space - in terms of structure and outlay was the major hindrance to commercial development in Chennai – commercial construction was not of much interest to local players. Change in scenario - entry of national builders and increased corporate interest due to IT boom – major commercial construction along the south west of Chennai.
•
Office Space: Price Trend
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Chennai Commercial Rental Values
Area Guidy Mount Road Nungambakkam OMR R K Salai (all values are approximate) Source: Bhuwalka Estates Pvt. Ltd Rent(Rs./Sq.ft per month) 55 52 40 33 39
Malls and Multiplexes: Supply Addition
•
Foreground: ? The concept of organized retailing had its origin in Chennai with the establishment of Spencer Plaza ? The Mall, which started with a super built up area of 300,000 sq. ft., has now become the Mega Mall of city with a total of 1.05 million sq. ft. ? In high street retailing, Chennai has major retail chains like Shopper's Stop, Lifestyles, West side, Pantaloons, Landmark, and Globus etc.
Mall Space : Major Projects under development
Projects Ansal Plaza DLF IT Park Mall Matrix Metropolis Mall Source: Internet Developer Ansal DLF Parsavnath Polo Group Location Mohali Manimajra Mohali Panchkula
National Capital Region
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NCR comprises
• • • • • •
National Capital Territory of Delhi 8 districts, Haryana 5 districts, Uttar Pradesh Alwar district, Rajasthan NCR: Total population: 12,877, 470 Due to the faster growth of Delhi, the National Capital Region Plan 2001 was formulated and it aimed at increasing the growth potential of the region thereby redirecting the migrants from the metropolis
Infrastructure problems and initiatives
•
Flyovers
? Two new flyovers opened on Delhi - Gurgaon section of NH-8 ? Opening of these two flyovers has eased traffic congestion
between Km 15 to Km 28 of NH-8, in Gurgaon.
? Length ? The •
of Mahipalpur (Delhi)-1800 m and Udyog Vihar (Gurgaon)length 1500m entire project, from Rao Tula Ram Marg Junction till Km 42 in Haryana, is likely to be completed by September 2007.
Railways ? Noida-Delhi metro from New Ashok Nagar to Noida City Centre (7.1 km) ? Total project cost Rs 7.36 billion ? The metro is expected to begin operations in 2009.
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Major infrastructure developments
•
Roads ? Implementation of Peripheral Expressways comprising Eastern and Western Peripheral Expressway.
? The length comprising both Peripheral Expressways (Eastern and
Western) is about 269 km
? The cost of the project including cost of land acquisition is
estimated at Rs 41.20 billion ? The project is likely to be completed by 2010
•
Railways ? Delhi Metro Rail project ? Phase-I is completed. The overall progress of Phase-II Project is 8.96 %. ? The estimated project cost Rs 1,057 billion
Residential Apartments: Key Trends
•
The NCRPB has been drafting the Regional Master Plan 2021 for the last few years. The Delhi Development Authority Master Plan 2021 has also been coordinated with the Regional Master Plan. But both are awaiting clearances and notification. Currently, the laws of individual states are applicable to the towns and cities in the region. Delhi is dominated by the business community, bureaucrats and politicians with huge disposable incomes. The large multi-storey societies in east Delhi (Mayur Vihar, Patparganj etc) have found preference with the service class, the blue-collar segment. The business and trader class still largely dominate old residential areas in west and northwest Delhi and the newly developed suburb called Rohini.
• •
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•
Gurgaon has been the forerunner in the development, attracting a number of multinational companies in the service sector followed by Noida, Ghaziabad and Faridabad. Gurgaon: Driven by IT/ITeS companies and Corporate offices of many companies Noida: Driven by IT/ITeS and presence of many SSI units Ghaziabad: One of the major industrial zones of North India –railway coaches, steel industries, pharmaceutical units etc. Some of the important industrial units present in Ghaziabad include Bhushan Steel, Dabur India, Ghaziabad Ispat Ltd, Rathi Ispat etc Faridabad: Eicher, Escorts, Lakhani and Thompson Press
• • •
•
Demand pattern for residential units
• •
Delhi: Demand for houses is more or less saturated - It is mainly consumption driven Gurgaon: According to industry sources, around 5 years ago, demand was substantially investor driven. Currently, it’s in favour of consumption demand Noida and Ghaziabad: Consumption demand (70-80%): Investor (2030%) Faridabad: Consumption demand (60-70%): Investor (30-40%)
• •
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Demand mix: Framework
Residential: Supply
• •
Around 20 million sq. ft. of residential construction expected during 2007-2008 Supply coming up in ? Delhi: High end residential projects, particularly bungalows, are still in great demand in central and south Delhi. ? Ghaziabad: Driven by improved connectivity-Delhi Metro Railway System is being extended to Ghaziabad in the second phase ? Noida: The prime residential areas in Noida are located in Sector 14, 15, 27, 28, 29, 37 and 44. All these sectors predominantly consist of plot housing, while Sector 44 predominantly consists of Group housing.
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Residential: Major Projects under development
Projects Ansals Year Developer Ansals Central East
NCR Residential Real Estate Prices (Rs./Sq.ft)
West DLF Park Place DLF 02-03 (Approx) 5000 2000 03-04 (Approx) 5800 2900 Habitat Unitech 04-05 (Approx) 7000 3500 05-06 (Approx) 8000 Horizon Unitech 5000 06-07 (Approx) 10000 6700 Parsavnath Prestige Parsavnath Growth (%) (in 25.00 34.00 06-07) Parsavnath Parsavnath 0.4 Source: Phone Interviews with Leading Real Estate Agents Privilegde Parsavnath Sterling The Summit Uniworld Spa Source: Internet Parsavnath DLF Unitech 0.2 0.2 1.7 Ghaziabad Ghaziab ad 0.5 DLF City 1500 2000 1100 2000 2500 1500 3.0 Gurgaon 2600 2900 2000 3500 3400 Greater Noida 2900 2.3 4500 4500 3500 0.1 Noida 28.57 32.35 20.69 Noida Ghaziabad DLF City Gurgaon 0.6 Noida
Area (mn. Sq. ft.)
Location
Residential Property Prices Residential: Key Conclusions
• • • •
Huge demand for houses in the middle income group (annual income range Rs 2-5 lakh per annum) Around 20 million sq. ft. of residential construction is expected for 2007-2008 Growth driven by IT/ITeS in Gurgaon and Noida Major action in Gurgaon, Ghaziabad, Faridabad and Noida
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•
Delhi is now more or less saturated and the high demand for residential properties has increased rates beyond the reach of the middle class. As a result, the suburban towns within the NCR have become destinations for new residential projects. As these suburbs are now also increasingly generating employment, they will decide the future growth pattern of the National Capital Region.
Office Space: Market Features
• • • •
NCR, next to Bangalore as the IT hub of the country NCR has a significant share of FDI inflows Hub to several large companies (such as GE, Daksh), besides home to several IT/ITeS companies Supply: The commercial districts of the city can be classified into two categories: ? The historical commercial districts being that of the walled city of Shahjehanabad ? The modern ones: Connaught Place (Central Business District), the District Centres (planned by the Delhi Development Authority DDA) and the government districts of Central Government Office (CGO) complex, R.K. Puram and around the Rashtrapati Bhavan zone (Presidential House Zone) Around 15 million sq. ft of office space in the coming 2 years. Supply mainly in Gurgaon, Noida. Majority of the demand for commercial space is coming from IT/ITES.
• • •
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Office Space: Major Projects under development NCR Residential Real Estate Prices (Rs./Sq.ft)
Projects Year
Developer Area (mn. Sq. Location Connaught Nehru Bhikaji Cama Saket ft.) Place Place Place 02-03 (Approx) 9000 3800 5300 4500 DLF IT Park DLF 1.2 Noida 03-04 (Approx) 9500 5000 6400 6100 Infospace Unitech 4.9 Noida 04-05 (Approx) 12500 7400 8000 7500 Infospace Unitech 3.2 Gurgaon 05-06 (Approx) 17500 8500 9500 10000 06-07 (Approx) 24000 11000 10900 13500 Infospace Dundehra Unitech 3.1 Gurgaon Growth (%) (in 37.14 29.41 14.74 35.00 06-07) Net City Ansal 1.0 Gurgaon Source: Phone Interviews with Leading Real Estate Agents The Campus Ansal 3.3 Gurgaon Source: Internet
Commercial Property Prices Malls and Multiplexes: Existing Malls
•
Traditional markets include old markets of Delhi, like ? Chandini Chowk, ? Sadar Bazaar ? Daryaganj
•
Contemporary markets are ? Connaught Place, South Extension I & II, Defence Colony, Greater Kailash I & II, ? Basant Lok, Noida (Sector 18), ? Khan Market, Saket, Karol Bagh, etc.
•
The past couple of years have seen a surge in the number of retail malls in the suburban location of Gurgaon (Mall Road), closely followed by Noida
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•
Existing mall space in NCR ~ 19.25 msf
•
Some of the malls include, ? Gurgaon ? DLF City Centre Mall ? DLF Grand Mall ? DLF Mega Mall ? Gold Souk Mall ? MGF Mega City Mall ? MGF Metropolitan Mall ? The Wedding Mall Gurgaon ? Ansal Plaza, Delhi
? Centre Stage Mall, Noida
? Lifestyle, Rajauri Garden ? North Square Mall, Pitampura ? The Great India Place, Noida
• •
Gurgaon Mall road has witnessed oversupply. Few malls are reported to be financially stressed. Substantial Supply still expected in NCR region. Industry sources indicate around 60 new malls to be constructed in the next 2-3 years.
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Major projects
Mall Space : Major Projects under development
Projects
Apparel International Mart Concept Mall Project Delhi Gold & Wedding Souk Project 'Empario Mall' Project Gurgaon "Gold Souk" Jewellery Mart Gurgaon Imax Mall Project Gurgaon Shopping Mall House Of Home Mall Project Indirapuram Park Plaza North Square Mall Project Office Complex Project Parsvnath City Mall Project Pearls Omaxe Mall Project 'Promenade Mall' Project Retail Outlet Projects Scottish Hi-Life Mall Project Vasant Kunj Shopping Mall Vasant Square Mall Project Wedding Mall Project
Developer
Apparel Export Promotion Council Aerens Developers Ltd. Aerens Goldsouk Intl. Ltd. Regency Park Pvt. Ltd. Aerens Infrastructure Ltd. Aerens Infrastructure Ltd. Ansal Properties Ltd. Omaxe Ltd. Omaxe Ltd. Suncity Projects Ltd. National Construction. Ltd. Parsvnath Developers Ltd. Omaxe Ltd. Beverly Park Maintenance Ltd. Trendsmith (India) Ltd. Niho Construction Ltd. Ambience Infrastructure Pvt. Ltd. Suncity Projects Ltd. Omaxe Ltd.
Location
Gurgaon Gurgaon Delhi Vasant Kunj Gurgaon Gurgaon Gurgaon Gurgaon Indirapuram Pitampura Saket Faridabad Pitampura Vasant Kunj New Delhi Sohna Road Vasant Vihar South Delhi Gurgaon
Source: Internet
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Kolkata
Kolkata Urban Agglomeration (UA)
•
KUA comprises areas under Kolkata Municipal Corp, Howrah Municipal Corp and the outskirts
Infrastructure initiatives
Traffic & Transportation
•
Kolkata Metropolitan Development Authority has established major connectivity over the last 5 years including major projects like, Lake Gardens Flyover, Dum Dum Expressway, Sonarpur Flyover, EMBP widening etc at a cost of Rs 20 billion Work on projects worth Rs 1.38 billion is in progress including Bondel Gate Flyover, Prince Anwarshah Road connector to EMBP, Roads in Sector-V of Salt Lake etc. KMDA has proposed major projects worth Rs 6.04 billion including ? ? ? ? ? ? Flyover between EMBP and VIP Road Flyover from Park Circus to Parama Island Vivekananda Road Flyover Extension of EMBP from Garia to Baruipur, Widening and extension of Kalyani Dum Dum Expressway, Modernisation of traffic dispersal system at Howrah and Sealdah stations.
•
•
Water supply
•
Kolkata Metropolitan Development Authority has completed 13 major water supply projects in the last 5 years at a cost of Rs 1.63 billion.
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•
Kolkata Metropolitan Development Authority has implemented 8 major water supply projects benefiting the residents of Nadia, Hooghly and North & South 24 Parganas. The project cost is estimated at Rs 1.35 billion.
Sewerage, Drainage and Sanitation
•
KMDA has completed projects worth Rs 0.44 billion in the last 5 years for providing sewerage network, sewage treatment plant and solid waste disposal system. KDMA has implemented project worth Rs 0.37 billion mainly in 24 Parganas.
•
•
Trans-municipal solid waste disposal project for 6 municipal towns at a cost of Rs 1.70 billion being taken up under Japanese Bank for International Cooperation funding. Projects worth Rs 1.28 billion to be taken up under JN-NURM.
•
Residential apartments: Key trends
• • •
Shift from plot based houses to flats: Substantial in the main city Shift from G+5 to high rise apartments Increase in demand for larger floor space: For instance more demand for 2-3 bedroom-hall-kitchen (BHK) flats with larger rooms, as compared with 1 BHK flats Many companies unlocking the value of their land assets Major action happening in Rajarhat
• •
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? Rajarhat, also called New Town, is the latest township being
developed on the north-eastern fringes of Kolkata city.
? The state government has acquired thousands of acres of land to
develop a mega city, with one of the largest IT parks, mega housing projects, multiplexes, hospitals, golf clubs, the works.
? The master plan envisions a township that is thrice the size of
neighbouring Salt Lake City. Still under development, this area was till recently a big swamp and full of fisheries.
? Rajarhat is also close to the airport and is thus another favourable
location for industry to set up shop.
Buyers- A mix of consumption demand
60:40
in
favour
of
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Residential: Supply addition
• •
Around 47.36 million sq. ft. of residential construction is expected for 2007 & 2008 Following areas are witnessing increase in supply of residential units: ? ? ? ? ? Bata Nagar Howrah Prince Anwar Shah Road Rajarhat-New Town South Kolkata- Ballygung and Alipore (catering to high income group)
•
Trend of townships and high-rise buildings on the rise. Some examples of such townships are given below: ? Dankuni Township, ? Rajarhat Township, ? West Howrah Township
Residential: Property prices
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Residential: Key conclusions
Kolkata Residential Property Rates
Area Alipore Ballygunje Behala EM Bypass Narendrapur Park Street Rajarhat Tollygunje VIP Road (all values are approximate) Source: Champalall Properties Pvt Ltd Purchase(Rs./Sq.ft) 5800 4700 1400 2700 1300 4400 2500 1700 1900
• • • • •
Huge demand for houses in the middle income group (annual income range Rs 2-5 lakh per annum) Around 47.36 million sq. ft. of residential construction is expected for 2007-2008 Growth driven by IT/ITeS Major action in Rajarhat South Kolkata- Ballygung and Alipore- Continue to be favourite locations, especially for high income groups
Office space: Supply addition
•
~ 12 msf expected to be added from 2007-2009
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• •
~ 80 % of office space is expected to be for IT/ITES Many foreign players keen to enter
? Singapore’s Keppel Land plans to develop an IT park in Rajarhat
with hotelier Shiv Jatia ? Ascendas planning to develop an Rs 4.30 billion IT park spread over 2 million Sq.ft. ? Nanjing New & Hi-Tech Industry Development Zone in JV with Bengal Peerless Housing Development Company to develop a high technology industrial investment zone with an initial investment of $6 million (Rs 0.30 billion) ? The Union Cabinet has approved Indonesia-based Salim Group's proposal for a $500 million investment in development projects in West Bengal. The company is looking at developing integrated infrastructure including townships, housing, SEZ, and industrial parks.
•
Non-locals also showing interest
? The Godrej group has lined up real estate projects (includes two IT
parks comprising 3.5 million Sq.ft and a retail mall of 400,000 sq. ft.) worth Rs 3 to Rs 4 billion in and around Kolkata ? DLF has entered into an agreement with the Kolkata Metropolitan Development Authority (KMDA) to build a new township in Dankuni, Hooghly district with an investment of Rs.330 billion ? Unitech
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Office space: Major projects
Office Space: Major Projects under development
Projects DLF Info City Globsyl Crystal Godrej Waterside Infinity Benchmark South City Pinnacle Unitech Source: Internet Developer
DLF Bengal Sharchi Group Godrej Infinity Group
Location Rajarhat Salt Lake Sector V Salt Lake Sector V Salt Lake Sector V Salt Lake Sector V Rajarhat
Southcity Projects
Bengal Unitech
Commercial prices
Kolkata Commercial Property Rates
Area AJC Bose Road Chowrungee Gariahat Park Street Rajarhat Salt Lake (all values are approximate) Source: Champalall Properties Pvt Ltd Purchase(Rs./Sq.ft) 5200 4500 4000 5000 3900 4300
Malls: Supply addition
•
Currently 4 major malls- Forum, Metropolis, Gariahaat Mall and City Centre
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• • • •
Current mall development focus is in Rajarhat, Prince Anwar Road, Howrah and Jessore road. Around 7-8 new malls are expected to come up in the city in the coming 2 years. Total built-up area of upcoming or under construction malls/ shopping centres is close to 5.8 million sq ft Reliance Industries has secured 150,000 Sq.ft for its hypermart in the 262 acre Batanagar Township.
Major projects
Malls : Major Projects under development
Projects South City Mall Manisquare Unitech Axis Mall City Centre II River Side Mall Ozone 2 Source: Internet Developer Southcity Projects
Manigroup Unitech Bengal Peerless Bengal Ambuja Avni Group Astor Group
Location Prince Anwarshah Road E M Bypass Rajarhat Rajarhat Rajarhat Howrah B T Road
Mumbai
Mumbai urban agglomeration (UA)
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• • • •
Mumbai UA comprises the area of Mumbai Municipal Corporation, Thane, Kalyan, Dombivili, Navi Mumbai, and the outskirts Total area: 1,334.5 square kilometers (km) Total population in 2001: 16.77 million Key industries affecting real estate: ? Financial services ? IT/ITES ? Entertainment industry capital
•
Financial capital of India
Infrastructure initiatives
•
Mumbai is one of the five cities included in the centre sponsored Mega City Scheme launched by the Government of India in the Eighth Five Year Plan. The scheme for Mumbai is being implemented by the BMC, BEST, CIDCO, TMC, KMC and NMMC. North-South arterial corridors are being developed through building flyovers, road widening etc. Current projects are concentrated more around arterial roads: ? Flyover on Western express highway (airport) ? Bandra-Worli sea link ? New Link road
• •
•
Mumbai Urban Transport Project (MUTP) and Mumbai Urban Infrastructure Project ( MUIP) envisages investment in suburban railway projects, local bus transport, new roads, bridges, pedestrian subways, and traffic management activities.
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•
Development of East-West corridors (road and rail) to ease traffic flow between eastern, central, and western suburbs ? Jogeshwari–Vikhroli link road ? Santacruz–Chembur link road ? Goregaon–Mulund link road Mumbai Metro Rail Project also envisages connectivity ? Versova–Andheri–Ghatkopar link (West–East) ? Bandra–Kurla–Mankhurd (West–East) ? Colaba–Bandra–Charkop (South–North) East-West corridor
•
•
Development of Mumbai Metropolitan Region (as shown alongside) as part of long-term development initiatives ? Development of international airport and railway terminus near Panvel ? Development of Sewri–Nhava Sheva sea link (planned)
Residential apartments: Key characteristics
•
Land availability is limited; hence, ? High-rise buildings form up to 80 per cent of the supply ? Limited township concepts developed in centrally located areas ? Aggressive development in accessible proximity to Bandra-Kurla Complex
•
CBD and premium areas ? Growth is limited (Marine Drive, Napean Sea Prabhadevi) — led by reconstruction of old buildings Road, Worli,
•
Average area of apartment is smaller than that in other cities ? Typically, 1BHK measures around 600 sq feet; 2BHK, around 800 sq feet ? Better amenities and quality of construction are demanded as price points are rising ? Accessibility through road/rail of paramount importance
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Residential apartments: New growth areas
•
Higher growth in suburbs
? Western suburbs such as Andheri, Kandivali, Borivali, Malad along
the Western Express highway ? Central suburbs such as Thane, Ghatkopar, Mulund closer to Eastern Express highway ? Mill land to drive development in Parel, Mahalakshmi, Wadala and areas along the Tulsi-Pipe Road ? IT/ITES to drive development in Navi Mumbai
•
Navi Mumbai development also to be dependent on SEZ and transport connectivity with island
Buyers:
A
mix
of
local demand investment demand
•
and
Consumption demand ? Salaried: 90–95 per cent ? Nearly 40 per cent of demand is investment demand
Residential: Major projects
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Residential : Major Projects under development
Projects Zahara Estate Meadows Acropolis Royal Palms Estate Oberoi Woods Source: Internet Developer Lokandwala
Hiranandani Raheja Royal Palms Oberoi
Location Worli Thane Chembur Goregaon Goregaon
Residential: Key conclusions
•
Demand driven by ? IT/ITES ? Financial services ? Entertainment industry
•
Supply ? Substantial supply in high-income group with typical price points upwards of Rs 4 million in western, central, and southern parts of the city ? Huge demand-supply in LIG/MIG segments gap — this gap needs to be addressed through rental housing or lower cost suburban development ? SRA is key for LIG supply — excessive land prices have made housing unaffordable for lower income groups
•
Key characteristics ? Supply across the city in small projects ? Supply mainly in the form of high rises.
Office space: Key growth drivers
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•
Strong growth driving demand in IT / ITES ? IT/ITES was the initial demand driver for Mumbai office space. However, higher cost of commercial real estate has pushed IT / ITES companies towards distant suburbs. ? However, Mumbai STPI continues to clock export growth. ? Development of Navi Mumbai technology parks is central to IT/ITES demand.
•
Financial services gaining prominence ? Financial services outsourcing is gaining prominence due to availability of trained professionals. ? Typically, financial services are able to afford higher commercial rentals than IT / ITES companies.
Malls and multiplexes: Key drivers
• • •
Mumbai has substantial purchasing power; yet higher land costs raise rents for tenants. Malls and multiplexes are in a mature phase, in response to the growth in premium residential areas in the city. Growth led by IT/ITES and financial services has resulted in demand for retail growth.
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Property Rates: Mumbai
Property rates : Mumbai
Location Andheri Bandra (W) Bhandup / Mulund Churchgate/ Marine Lines Cuffe Parade Dadar Jogeshwari to Borivali Juhu / Vile Parle Khar (W) / Santacruz (W) Mira Road to Virar Parel Powai Prabhadevi Thane Nepeansea Road Worli / Worli Seaface 2008 Rs. 6,500 - 16,000 Rs. 13,000-30,000 Rs. 3,000-6,000 Rs. 18,000 – 32,000* Rs. 22000-65000* Rs. 8500-15000 Rs. 3,000-6,500 Rs. 11,000 18,000 Rs. 13,000 – 22,000 Rs. 1,650-2,500 Rs. 10,000-14000 Rs. 4,500 -11,000 Rs. 13,000 24,000 Rs. 3,500-5,000 Rs. 22,000 70,000* Rs. 18,000 50,000*
(Per Sq.ft.)
2007 Rs.5000-9000 Rs.9000-22000 Rs.2500-4500 Rs. 12000-18000 Rs. 15000-40000 Rs.7000-15000 Rs.3000-6500 Rs.7000-16000 Rs.8000-16000 Rs.700-2000 Rs.8000-11000 Rs.4000-9000 Rs. 11000-22000 Rs.3000-4800 Rs. 15000-40000 Rs. 12000-35000
Source : 'Narains Corp' Property Consultants & REALTORS ® * Rates for "Carpet Area" based calculations. Rates are subject to amenities, upkeep & vary from apartment to apartment within the 81 | P abuilding depending on view, layout etc. same g e
Part IV: Emerging Investment Pattern in National Capital Region (NCR)
Research Group
The research group consisted of 100 people among whom questionnaires were distributed and the following findings are based on the analysis of the answers to those questionnaires.
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The above mentioned 100 people were equally distributed among the following four classes of income:
• • • •
Category A: Income Rs.2,00,000 : 25 people
Questionnaire Analysis
The first question that was asked from the respondents was:
“Have you ever invested in the Real Estate Sector?”
The answers given by each category are given below. Also some of the respondents had not as yet invested in any type of real estate asset so they
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were asked to provide the reason for same. Also graphically depicted are the type of investments made by the people who answered yes to the first question:
Category A: Income Rs.2, 00,000
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Investment in Real Estate
NO , 2, 8%
YES, 23, 92%
YES
NO
Out of the 25 respondents, 2 respondents answered NO & 23 answered YES. Resons for not investing in Real Estate
No. of People
2 0
1
1
Reasons Huge Capital Outlay Long Investment Period
For those who answered YES: Nature of Investment
No. of People 20 10 0 Investment Options
Flat Commercial Space Pre Built House Industrial Space Plot Farm House Premium Community (Flat/Bunglows) Other
6
10
7
13 3 5 0 2
Some of the respondents had invested in multiple properties. The next question that the respondents answered was:
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“According to you what are the three most attractive investments in the Real Estate Sector? (1-1st choice, 22nd choice, 3-3rd choice)”
The choices were then denoted points. For example 3 points for 1st choice, 2 points for 2nd choice and 1 point for 3rd choice. These points were then added up for all the investment options and the one with the highest sum total was chosen as the Most Attractive Investment Option. The results of the answer to the above question have been graphically depicted below:
Most Attractive Investment Options
120 105 100 Total No. of Points 80 60 40 20 0 Investme nt Options
Flat Commercial Space Pre Built House Industrial Space Plot Farm House Premium Community (Flat/Bunglows) Other
89 78
39 27 13 5 0
Commercial Space was found to be the most attractive investment option especially in Malls or so. Close on its heels were Ultra luxury Flats or bungalows in Premium Communities and Plots. The least attractive investment option was Industrial Space. The next question that the respondents answered was:
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“From the options given below, choose the reasons for the above selected choices: (write 1 in reasons for 1st choice and so on, same reasons for multiple choices can be marked)”
The answers to the above questions have been graphically depicted below. The graph shows the percentage of people that felt that the given reasons were apt for the each of the provided investment options.
Reasons for Attractive Investment
100% 90% 80% %of People 70% 60% 50% 40% 30% 20% 10% 0%
Fla t
10 5 5 40
5 15 20
10
10
20 10
20 H s F as le ree L iving 40 Eas y Aces ibility s S tandard of L iving S Occupation elf S ecurity R eturn Growth
60 20
50
10 10 20
10 30 30
60 20 15 5 5 5 20 10 10
As can be seen that Flats were mainly purchased for Self Occupation as was the case with Pre Built Houses, on the other hand Standard of Living was one of the primary reasons for purchasing assets like Farm houses and for investing in Premium Communities. Commercial Space was mainly purchased for return. Growth was also one of the main factors considered when going for investment options like Plot, Flat and Commercial Space.
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Co Pl ot m m er cia lS pa ce Fa rm Ho us Pr e e Bu Pr it em Ho iu us m e Co m m un iti es
Inves ent Options tm
The question next in line was specifically constructed for the purpose of finding the current most popular investment destination. The question asked for this purpose was:
“From the options given below, which is the best location to invest in at the moment?”
The graph given below depicts the answers received for the above question.
Most Attractive Investment Destinations
40 No. of Votes 30 20 10 0 Location
Central Delhi East Delhi Gurgaon North Delhi West Delhi Ghaziabad South Delhi Noida & Greater Noida Faridabad
37
33
2
1
1
4
9 2
11
Noida and Greater Noida were found to be the most attractive investment options in light of the extreme pace at which these cities are growing as seen by the fact they are now host to some the most important projects in the country. The new International Airport and the Formula One track are both set to be constructed just alongside Greater Noida. Noida is also the starting point of the Taj Expressway which will drastically reduce the time need to travel to Jaipur. Gurgaon was the next favourite keeping in mind the fact that not only was it titled one of the Fastest Growing Cities in the world but it’s also home offices of almost all the reputed firms in India as well as a Mecca for all the shopping enthusiasts as far as its innumerable shopping malls are concerned.
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Lastly people were asked whether they had heard about “REITS”.
REITS Awareness
80 70 No. of People 60 50 40 30 20 10 0
Answer
69
21
YES
NO
Out of 100 respondents 21 people answered Yes & 69 people answered NO. This clearly shows that REIT’s is still part of a largely unexplored territory as still not many people heard of it. Thus for this concept to kick off, it must be sold to the masses in such a manner so as to guarantee their participation.
Conclusion
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•
More than 95 % of the respondents having incomes of less than Rs. 50,000 per month couldn’t afford to invest in real estate as most of the Investments now a day’s require huge capital outlay.
•
Long Investment period and slow returns were also considered as reasons for not entering into real estate investments.
•
This trend did not change significantly with people having incomes between RS. 50,000 – Rs. 1,00,000 (per month) as here too only about 25% of the respondents had invested in real estate. Huge capital outlay, slow returns and long investment period were still popular reasons given by most respondents.
•
Also investments among the people having incomes between RS. 50,000 – Rs. 1,00,000 (per month) mainly consisted to relatively low capital consuming investments like Flats.
•
Significant deviations from the above trend were noticed among people having incomes between RS. 1,00,000 – Rs. 2,00,000 (per month) as about 70% of the respondents had actually invested in real estate.
•
Investments in this category mainly consisted of investments in Flats, Plots, Commercial Space and investments in premium communities. But still investments in flats were clearly leading the pack, indicating that investments in other properties were still not very popular option with people existing in the middle class.
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•
As far as people having incomes between RS. 1,00,000 – Rs. 2,00,000 (per month) are concerned almost all the respondents (90%) had invested in real estate.
•
In the above mentioned category investments in Premium Communities, Commercial Space and Plots were found to be most popular. Indicating that such high capital outlay investments were gaining popularity very fast.
•
As far as the Most Attractive Investment option was concerned, Commercial Space was a clear winner. Close behind it were investments in Premium Communities and Plots.
•
Investments in Commercial Space were popular mainly for Return and Growth.
•
Investments in Premium Communities were popular mainly for reasons like Standard of Living, Hassle Free Living and mainly for Self Occupation by the respondents.
•
Investments in Plots were entered into mainly with a view point of occupying them later on by constructing houses on them. Still Growth, Return, Financial Security and Hassle Free Living were popular reasons for buying Plots.
•
Noida and Greater Noida were clearly the most popular investment destinations due to the emergence of popular investments opportunities like Premium Communities, Prime Commercial Space in these areas, with Gurgaon, Faridabad and Ghaziabad hot on their heels.
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•
Delhi is fast losing its shine and is not a preferred destination for real estate investments mainly due to existing sky high prices and extremely low chances to substantial growth.
•
Last but not the least it was found that still most of the people were unaware of the foray of Real Estate Investments Trusts (REITS). Out of the 100 people that responded to the questionnaires, about 70 % had no clue as to what were “REITS”.
Part V: References & Annexure
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Annexure I: Investor’s Questionnaire
Potential Sector)
Investors
Questionnaire
(Real
Estate
Name: ___________________________________________________ Age: __________________ yrs Sex: M F
Tel/Mobile No: _____________________________________________ ? Income Bracket: (Monthly)
Rs.2,00,000
? Have you ever invested in the Real Estate Sector?
Yes
No
If yes, then if possible kindly describe nature of investment: ______________ If no, then reason for the same: __________________________________
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? According to you what are the three most attractive investments in the real estate sector?(1-1st choice, 2-2nd choice, 3-3rd choice)
Flats Plot Commercial Space Farm House Industrial Any other: Pre Built House
Premium Communities (flats/bungalows)
___________
? From the options given below, choose the reasons for the above selected choices: (write 1 in reasons for 1st choice and so on, same reasons for multiple choices
can be marked) Growth Return Security Self Occupation Standard of living
Easy accessibility
Hassle free living
Any other:
________________
? From the options given below, which is the best location to invest in at the moment:
Central Delhi North Delhi South Delhi Gurgaon East Delhi Ghaziabad West Delhi Faridabad
Noida & Greater Noida
? Have you heard about “Real Estate Investment Trusts” (REITS)? Yes No ***THANK YOU FOR YOUR TIME***
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Annexure II: Bibliography
www.nrirealtynews.com www.realestateindiaconsultant.com www.realestateindiaconsultant.com www.indiaproperties.com www.kothi.com www.indiapropertyexpert.com www.indianpropertydevelopers.com www.indiahousing.com www.realtyplusmag.com www.propertybytes.com www.interactyve.com/knowledgecenter/realestate.htm www.isb.edu/WCED/IndianRealEstateScenario.Shtml
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www.indianground.com/indian-real-estate-watch.aspx www.indianrealestateforum.com www.thehindubusinessline.com www.niteshestates.com www.labnol.org www.therealtor.co.in/ www.indianrealtynews.com www.reubenestate.com
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