expansion & Bust of Indian Real Estate Sector
Engulfing the period of stagnation, the evolution of Indian real estate sector has been exceptional, impelled by, growing economy, conducive demographics and liberalized foreign direct investment regime. However, now this unceasing occurrence of real estate sector has started to characterize the signs of contraction.
What can be the reasons of such a trend in this sector and what future course it will take? This article tries to find answers to these questions…
Overview of Indian real estate sector
Since 2004-05 Indian reality sector has tremendous growth. Registering a growth rate of, 35 per cent the realty sector is estimated to be worth US$ 15 billion and expected to grow at the rate of 30 per cent yearly over the next decade, attracting foreign investments worth US$ 30 billion, with a number of IT parks and residential townships being constructed across-India.
The term real estate covers residential housing, commercial offices and trading spaces such as theaters, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves buy sale and development of land, residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.
The sector accounts for major source of employment generation in the country, being the second largest employer, next to agriculture. The sector has backward and forward linkages with about 250 ancilary industries such as cement, brick,steel, building material etc.
consequently a unit increase in expenditure of this sector have multiplier effect and capacity to generate income as high as five times.
In real estate sector major part comprises of housing which accounts for 80% and is growing at the rate of 35%. Remainder be make up of consistently commercial segments office, shopping malls, hotels and hospitals.
o Housing units: With the Indian economy surging at the rate of 9 % accompanied by rising incomes levels of middle class, growing nuclear families, low interest rates, modern approach towards homeownership and change in the attitude of young working class in terms of from save and buy to buy and repay having contributed towards soaring housing need.
Earlier cost of houses used to be in multiple of nearly 20 times the annual income of the buyers, while today multiple is less than 4.5 times.
According to 11th five year plan, the housing shortage on 2007 was 24.71 million and total requirement of housing during (2007-2012) will be 26.53 million. The total fund requirement in the urban housing sector for 11th five year plan is estimated to be Rs 361318 crores.
The summary of investment requirements for XI plan is indicated in following table
SCENARIO Investment requirement
Housing shortage at the beginning of the XI plan period 147195.0
New additions to the housing stock during the XI plan period including the additional housing shortage during the plan period 214123.1
Total housing requirement for the plan period 361318.1
o Office premises: rapid growth of Indian economy, simultaneously also have deluging effect on the need of commercial character to help to meet the needs of business. Growth in commercial office space requirement is led by the thriving outsourcing and information technology (IT) industry and organised retail. For example, IT and ITES alone is estimated to require 150 million sqft across urban India by 2010. Similarly, the organised retail industry is likely to require an additional 220 million sqft by 2010.
o Shopping malls: over the past ten years urbanization has upsurge at the CAGR of 2%. With the growth of service sector which has not only pushed up the disposable incomes of urban population but has also become more brand conscious. If we go by numbers Indian retail industry is estimated to be about US $ 350 bn and forecast to be double by 2015.
consequently rosining income levels and changing perception towards branded goods will rule to higher need for shopping mall space, encompassing strong growth prospects in mall development activities.
o Multiplexes: another growth driver for real-estate sector is growing need for multiplexes. The higher growth can be witnessed due to following factors:
1. Multiplexes comprises of 250-400 seats per screen as against 800-1000 seats in a single screen theater, which give multiplex owners additional advantage, enabling them to optimize capacity utilization.
2. except these non-ticket revenues like food and beverages and the leasing of excess space to retailer provides excess revenues to theatre developers.
o Hotels/Resorts: as already mentioned above that rising major expansion in real estate sector is due to rising incomes of middle class. consequently with increase in income propensity to use part of their income on tours and travels is also going up, which in turn leads to higher need for hotels and resorts across the country. except this India is also emerging as major destination for global tourism in India which is pushing up the need hotels/resorts.
Path set by the government
The sector attained momentum after going by a decade of stagnation due to initiatives taken by Indian government. The government has introduced many progressive reform measures to unveil the possible of the sector and also to meet increasing need levels.
o 100% FDI permitted in all reality projects by automatic route.
o In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres.
o Urban land ceiling and regulation act has been abolished by large number of states.
o Legislation of special economic zones act.
o complete repatriation of original investment after 3 years.
o 51% FDI allowed in single brand retail outlets and 100 % in cash and carry by the automatic route.
There fore all the above factors can be credited towards such a exceptional growth of this sector. With meaningful growing and investment opportunities emerging in this industry, Indian reality sector turned out to be a possible goldmine for many international investors. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.
Top most real estate investors in the foray
The two most active segments are high networth individuals and financial institutions. Both these segments are particularly active in commercial real estate. While financial institutions like HDFC and ICICI show high preference for commercial investment,the high net worth individuals show interest in investing in residential in addition as commercial similarities.
except these, the third most important category is NRI ( non-resident Indians). They mostly invest in residential similarities than commercial similarities. Emotional preference for native land could be reasons for their investment. And additionally the necessary documentation and formalities for purchasing immovable similarities except agricultural and plantation similarities are quite simple. consequently NRI’s are showing greater interest for investing in Indian reality sector.
o Emmar similarities, of Dubai one of the largest listed real estate developer in the world has tied up with Delhi based MGF developments to for largest FDI investment in Indian reality sector for mall and other facilities in Gurgaon.
o Dlf India’s leading real estate developer and UK ‘s famous Laing O Rourke (LOR) has joined hands for participation in airport modernization and infrastructure projects.
o A huge investment was made by Vancouver based Royal Indian raj international cooperation in a single real estate project named royal garden city in Bangalore over period of 10 years. The retail value of project was estimated to be around $ 8.9 billion.
o Indiabulls real estate development has entered into agreement with dev character development, a company incorporated in Isle of Man, whereby dev got subscription to new shares and also minority shareholding the company. But in recent developments indiabulls have acquired complete stake in dev character development in a 138 million-pound sterling (10.9 billion ruppees) proportion-swap deal.
o except this real estate developments opens up opportunity for associated fields like home loans and insurance. A number of global have shown interest in this sector. This include companies like Cesma International from Singapore, American International Group Inc (AIG), High Point Rendel of the UK, Colony Capital and Brack Capital of the US, and Lee Kim Tah Holdings to name a few.
Following are names of some of the companies who have invested in India
International developer Country Investment
(US $ million)
Emmar similarities Dubai 500
Ascendas Singapore 350
Salem & ciputra group Indonesia 350
GE commercial finance U.S 63
Tishman Speyer similarities U.S 300
Simultaneously many Indian retailers are entering into international markets by meaningful investments in foreign markets.
o Embassy group has signed a deal with Serbian government to construct US $ 600 million IT park in Serbia.
o Parsvanath developers is doing a project in Al – Hasan group in Oman
o Puravankara developers are associated with project in Srilanka- a high end residential complicate, comprising 100 villas.
o 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 contracts in Malaysia.
o Kolkata’s south city project is working on two projects in Dubai.
On the eve of liberalization as India opens up market to foreign players there is tend to be competitive edge to give quality based performance for costumer satisfaction which will consequently bring in quality technology and transparency in the sector and ultimate winners are buyers of this situation.
However this never ending growth phase of reality sector has been hard hit by the global scenario from the beginning of 2008. Analyst say situation will prevail in near future, and latest buzz for the sector comes as a “slowdown”.
Sliding phase of the reality sector
In this present scenario of global slowdown, where stock markets are plunging, interest rates and prices are mounting, the aftermath of this can now also be felt on Indian real estate sector. Overall slowdown in need can be witnessed all across India which is causing trouble for the major industry players. Correcting character prices and rentals are eroding away the market capitalization of many listed companies like dlf and unitech.
Fundaments behind slowdown…
Propetry prices move because of the basic rule of need and supply
o when need is high and supply low prices will go up
o When need is low and supply high prices will go down.
For example let’s assume that somebody has bought a character for Rs X and he is trying to sell the character (say after a year), there can be three options, assumption being that the owner is in need of money and cannot wait for more than 3 months to sell the character.
1. When the character prices are gliding everywhere : now owner will try to add as much premium to the character as possible, in order to book profits, consequently he will wait for 3 months and sell off in last month at the highest bid. Where he ill get total of Rs X + Rs Y.
2. When character prices have stabilized: here owner will not be able to sell at premium and book profits due to market stabilization & since he don’t want to sell at a loss, he will try to get same amount he brought the character for. Where he’ll get total of Rs X = Rs Y
3. when character prices are going down : owner will try to sell the character at the minimum profit or least cost. consequently he ill get Rs X-RsY.
Reality deals in major cities like Delhi, Mumbai, Bangalore, Chennai and Hyderabad have shown enormous downfall from October 2007 – March 2008. The downfall had been cushioned by fall in stock markets as it put a stop for wealth creation, which leads to shortage of capital among investors to invest in real estate activities. except this in order to offset their proportion losses many investors have no choice, but sell their real estate similarities.
Other factors which have contributed to this slowdown are raising interest rates leading to higher costs. Due to this almost all the developers are facing serious liquidity crunch and facing difficulties in completing their current projects. Situation seems to be so disastrous that most of the companies have reported 50-70% cash shortfall. The grade A developers which are facing cash crunch include DLF,MGF, Emmar, Shobha developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group. As a outcome of this liquidity crunch many developers have started slowing down or already stopped construction of projects which are either in their initial stages of development or which would not effect their bottom line in near future.
Also with increasing input costs of steel iron and building material it has become it has become inviable for builders to construct similarities at agreed prices. As a consequence there may be delays in completion of the project leading finical constraints.
At the same time IT industry which accounts for 70% of the total commercial is facing a slowdown. Many residential buyers are waiting for price correction before buying any character, which can effect development plans of the builder.
Aftermath of reality shock to other sectors
Cement industry hit by reality slowdown
The turbulence in the real estate sectors is passing on pains in cement industry also. It is being projected that growth rate of cement industry will drop down to 10% in current fiscal. The reasons behind such a contingency are higher input costs, low market valuations and scaled up capacity which are in turn leading to reduced need in the industry. High inflation and mounting home loan rates have slowed down the growth flight of real estate sector which accounts for 60% of the total cement need. The major expansion plans announced by major industries will further add to their misery as low market need will considerably reduced their capacity utilization.
Setting up new facilities will impart additional capacities of 34 million tone and 45 million tone respectively in 2008-09 & 2009-10. This is likely to bring down capacity utilization in the industry down from current 101% to 82%. already as it loses strength to dictate prices, increased cost of strength, fuel and freight will add pressure on input costs.
Ambuja Cements too is trading at a higher discount than past down cycle, suggesting bottom valuations. However, substitute valuations for Madras Cements and India Cements indicate scope for further downslide when compared to their past down cycle valuations.
All this has additional to stagnation of the cement industry.
Dying reality advertising
The heat of reality ebb is also being felt by the advertising industry. It is being estimated that all major developers such as DLF, omaxe, ansals & parsvnath have decided to cut down on their advertising budget by around 5%. The advertising industry in India is estimated to be around 10,000 crore. This trend can be witnessed due to weakening spirits of possible buyers and real estate companies call it a reality check on their advertising budgets. A report from Adex India, a division of TAM Media Research, shows that the proportion of real estate advertisements in print media saw a drop of 2 percent during 2007 compared to 2006. According to Adex, the proportion of real estate advertisement in overall print and TV advertising last year was 4 percent and 1 percent, respectively. It’s a known fact that infrastructure and real estate companies are responsible for advertising industry maintaing double didgit growth rate. consequently its understood that a recent slowdown in iindian reality sector has made things worse for advertising industry. The Adex report indicates that the top 10 advertisers shared an aggregate of 16 percent of overall ad volumes of real estate advertising in print during 2007. The list include names such as DLF Group, Parsvnath, Sahara, HDIL and Omaxe group. However, the real estate had maximum proportion in South India publications followed by North and West publications with 32% and 26% proportion, respectively, during 2007.
According to many advertising agencies consultants, this occurrence is taking a toll as all real estate companies want a national foot print and also these companies are turning into professionals. consequently they are setting standards when it comes to advertising to sales ratio.
Falling stock markets knock down reality stocks
Reality stocks have been hard hit by uncertainties prevailing in the stock market. The BSE reality index is the worst performer having discarded 51% of its 52-week peak reached in reality. The BSE benchmark index has discarded 24% since January. The country’s largest real estate firm DLF scrip lost 54% while unitech lost 64% from its peak. The scrips of Delhi bases parsvnath and omaxe have lost 68% each since January.
The sector is facing a major downfall in sales quantity in most markets of the country. The speculators have exit the market and Mumbai and NCR, the biggest real estate markets in markets are cladding subdued sales. In Gurgaon and Noida, which had seen prices almost treble in four years, sales are down 70%, leading to a price correction of 10-20%.
Lets us have a look how major cities are affected by reality downfall.
Top 4 metros taking the rule – in slowdown
While produces are ruling the stock market, the real estate sector in Delhi & NCR vicinity has started facing departure of speculative investors from the market. According to these developers based in vicinity the selling of flats has become very complicated at the set afloat stage due to without of interest from the speculators. Developers attribute this to stability in prices against the past where prices were up surging on monthly basis. The scenario has changed so much in the present year that developers are now facing difficulty in booking flats which may delay their projects and reduce their pricing strength for example a year ago, if 100 flats were being sold in month at set afloat stage now it has come down 30-40 per month. Till mid 2007 speculators made quick money by booking multiple flats at set afloat of the project and exiting within few weeks or months. But now due to the stabilization of the character prices little scope is left for speculators to make money in short term. consequently outcome is their retreat from the sector.
Mumbai real estate market, which witnessed huge increase in prices in recent years, which made the city to go into in the league of world’s most expensive cities, is now feeling the heat of slowdown. character sales that have been growing at a clank of around 20% every year have been plumped by 17% in 2007-08.
Though slowdown news of character market in country’s financial capital has been much talked about, but it was first time that figures proved the extent of slowdown. Information about residential and commercial character sales from the stamp duty registration office show almost 12,000 fewer transactions during the last financial year compared to the year before. From April 2007 to March 2008, 62,595 flats were purchased in Mumbai as against 74,555 in 2006-07.
According to reality analyst sales quantity can die out further in south as developers persist on holding to their steep prices and buyers anticipate a further fall with current rates beyond reach. They further add that market is on a corrective mode and downward trend is expected for another 12 months.
Between 1992-96, the market ran up the same way it did during 2003-07. Post-’96, the volumes dropped by 50%. This time again it is expected to drop significantly though not so steeply. The need is now extremely sluggish and customers do not want to stick out their necks and transact at prevailing rates.Chennai in past few years we witnessed reality index gaining huge heights on BSE and it also impact could be felt allover India. Amongst them Chennai was no exception. With IT expansion in past few years and pumping of money by NRI’s have led to prices touching skies. Chennai also witnessed a huge expansion character prices over the last few years. However in past few months it has been facing slowdown in growth rate.
Following factors can be credited to this:
o This is one of the shared factor prevailing all over India- rise in home loan interest rates, which has made it extremely difficult for a normal salaried person to be able to provide a house.
o Depreciation of US dollar, which method NRI’s who were earlier pumping money into the real estate are now able to get less number of rupees per dollar they earn in US. consequently many of them have changed their plans for buying house in India.
o The Chennai Metropolitan Development Authority (CMDA) has imposed stricter norms for apartment construction and penalties for violations are more harsh than before.
o Failure of the legal system of chennai to prevent intrusion, forged documents and illegal construction has additional to the problem as many NRI’S are hesitating to buy plots in chennai.
o except this tsunami of 2004 has shaken the confidence of many investors to invest in real estate.
However many analyst are quite bullish about this vicinity. Especially in areas like old mahabalipuram, south Chennai etc because of numerous IT/ITES/ electronics/automobile companies are expected to set up their centers in these areas. Once these projects are complete and companies begin operations their, many people would like to live near to such areas and outcome will be expansion in residential sector.
As discussed for above cities Bangalore is also dwindling between the similar scenarios. Bangalore seems to be in midst of low need and supply. This trend is due to myopic developers, due to sudden growth in Bangalore in last few years, lot of builders have caught the opportunity of building residential houses thinking their will be lot of employment, increase in salaries and hence need for housing. Past few years have been jovial for Bangalore as IT industry was doing well and banking and retail sectors were expanding.
However with this sudden economic slowdown, due to which Indian stocks markets are trembling, interest rates are high, jobs and recruitment put on freeze have led to cessation of investment in local character markets.
According to the developers real-estate industry of Bangalore has experienced a drop of about 15- 20% in transaction volumes. Adding to it grade A developers have faced a dropdown of 50% on monthly levels of booking compared to what they enjoyed in December 2007.
The real estate explosion in Indian real estate is due to by the thriving IT and BPO industries. The inner reason for all these moves is that the Indian real estate is tremendously attractive, because of basic demographics and a supply shortage. Truly Indian real estate is having a dream run for last five years.
However in the current scenario Indian real estate market is going by a phase of correction in prices and there are exaggerated possibilities that these increased prices are likely to come down.
In this scenario hat will be the future course of this sector?
Many analyst are of view that tightening of India’s monetary policy, falling need and growing liquidity concerns could have negative impact on profiles of real estate companies. Slowing down would also aid in the time of action of exit of some of the weaker entities from the market and increasing the strength of some of the established developers. A prolonged slowdown could also reduce the appetite of private equity.
Its also been projected that large development plans and aggressive land purchases have led to a important increase in the financial leverage (debt/EBITDA) of most developers, with the smaller players now being exposed to liquidity pressures for project execution in addition as a general slowdown in character sales. character developers hit by falling sales and liquidity issues would need to reduce list prices to enhance need, but many nevertheless seem to be holding on to the asking price – which, would delay the time of action of recovering need and increase the risk of liquidity pressures.
It was being witnessed that before the slowdown phase the projects were being sold without any hook at an extravagant rate. But at present negative impact is highly visible as lot of high end projects are nevertheless lying unsold. In such a scenario, there may be blessing in concealment as high profile speculators will be out making way for the actual users.
But here also sector faces trouble as correction in prices has been accompanied by increase in home loan rates by the edges which have led to erosion of purchasing strength of middle and upper middle class majority of whom are covered in the category of end users or actual users.
consequently for future of real estate sector analyst call for a wait and watch method to grab the best opportunity with the hope of reduction in loan rates.