Real Estate Sector – The India Story

Real Estate Sector – The India Story

Current Scenario of the Real Estate Market in India

Commercial real estate sector is in boom in India. In the last fifteen years, post liberalization of the economy, Indian real estate business has taken an upturn and is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. This growth can be attributed to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors

Characteristics of the Real Estate Market in India

Cause-Effect scenario leading to emergence of organized real estate market in India

The property market in India has traditionally been unorganized and fragmented. However, the recent past has seen a consolidation of positions in the market as developers are stretching their capacities to the maximum in order to meet the growing market demand, which in turn has encouraged large projects with sourced financing. The IPOs by large real estate developers like Sobha, Raheja and DLF have led to organization of the market in the Tier I cities, but the Tier II and Tier III cities still demonstrate the traits of an unorganized market. Whilst the Indian real estate market still lacks transparency and liquidity compared to more mature real estate markets, the increasing requirements of multi national occupiers, as well as the influx of international property consultancies has led to the introduction of greater availability of market information, both in published and private form pushing the sector to an organized market form.

Driving Forces

Stated below are the reasons that have led to the real estate boom in the country

• Booming economy; accelerated GDP to 8% p.a.

• India’s emergence as an attractive offshoring destination and availability of pool of highly skilled technicians and engineers ; Development of large

Growing Market Demand

• Realization of large commercial projects

• IPOs by developers

• Gradual organization of the markets in the Tier I cities

Greater availability of information • Emergence of transparency and liquidity • Entry of international real estate consultancies • Governing legal framework relaxed • Competitive pricing

captive units of major players include GE, Prudential, HSBC, Bank of America, Standard Chartered and American Express

• Rise in disposable income and growing middle class, increasing the demand for quality residential real estate and real estate as an investment option.

• Entry of professional players equipped with expertise in real estate development;

• Relaxation of legal rulings and processes by the governing bodies encouraging investments in real estate

• Improvement in infrastructure facilities

Categorization

The demand for new office space in India has grown from an estimated 3.9 million sq. ft in 1998 to over 16 million sq. ft in 2004-05. 70% of the demand for office space in India is driven by over 7,000 Indian IT and ITES firms and 15% by financial service providers and the pharmaceutical sector. In 2005 alone, IT/ITES sector absorbed a total of approx 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft. of space across major cities by 2010. This data clearly demonstrates the growth of the real estate sector in the country.

With reference to the availability of infrastructure facilities, following cities are currently attracting MNCs/corporate/real estate developers:

Tier I cities, Mumbai (Commercial hub), Delhi (Political hub) and Bangalore (Technological hub):

• Preferred option for many new market entrants

• Command the highest international profiles and significant proportion of FDI

• Offer qualified labor pool and the best infrastructure facilities

• Exhibit development of sub-urban commercial real estate

• Yield of 9.5 – 10%

Tier II cities, notably Hyderabad, Chennai, Chandigarh, Kochi, Mangalore, Mysore, Thiruvananthapuram, Goa, Bhubaneshwar, Ahmedabad and Pune

• Yield of 10.5-11.5%

• Offer competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure,

• Attract high value IT, ITES and biotech corporate houses

Tier III cities, like Cuttack and Jaipur

• Low liquidity and still highly unorganized.

Special Economic Zones:

• 28 operational SEZs in the country, including those converted from Export Processing Zones (EPZ) to SEZ

• Development of SEZs in various segments such as multi-product, Information Technology, Bio-technology, Gems and Jewellery, Textiles and technology intensive industries

• Attract both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs)