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Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY
Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY
Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY

Building, Construction and RealEstateServices

Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY

t Submitted By :

Building, Construction and RealEstateServices t Submitted By : SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY

SURABHI AGARWAL ERAM KHAN FATIMA ABBAS AARTI CHAUDHARY

ABHISHEK GANGWAR

ACKNOWLEDGEMENT

Before we get into thick of things, We would like to add a few words of appreciation for the people who have been a part of this project right from its inception. The writing of this project has been one of the significant academic challenges We have faced and without the support, patience, and guidance of the people involved, this task would not have been completed. It is to them We owe Our deepest gratitude. It gives us Immense pleasure in presenting this project report on “Real Estate Industry”. It has been our privilege to have a team of project guide who have assisted me from the commencement of this project. The success of this project is a result of sheer hard work, and determination put in by us with the help of my project guide. I hereby take this opportunity to add a special note of thanks for Prof. Yash Shridhar, who undertook to act as our mentor despite his many other professional commitments. His wisdom, knowledge, and commitment to the highest standards inspired and motivated us. Without his insight, support, and energy, this project wouldn't have kick-started and neither would have reached fruitfulness.

We convey our heart full thanks to the member faculties of IIPM, with their help and corporation.

We are very thankful to our Project guide Prof. Swati Srivastava(IIPM , Lko) for her full support in completing this project work.

Last but not least, we would like to thank our families and Friends for their full cooperation & continuous support during the course of this assignment.

The project is dedicated to all those people, who helped us while doing this project.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services
  • 1. Executive Summery

Table of Contents

  • 1.1. Industry size and Growth of Construction Industry ................................................................

18

  • 1.2. Industry Segmentation

 

19

 
  • 1.3. Real Estate Sector

20

  • 1.4. Infrastructure

22

  • 1.5. Key Risk Factors for Construction Industry

 

26

  • 1.6. Market Structure of Construction Industry

30

 
  • 1.7. Major Players

31

1.

Analysis

  • 1.1 PEST Analysis……………………………………………………………………

..

35

  • 1.2 Swot Analysis……………………………………………………………………

36

  • 1.3 Porter’s Five Forces Model…………………………………………………………37

  • 1.4 Ratio Analysis……………………………………………………………………….42

  • 1.5 CAGR………………………………………………………………………………44

  • 2. JnNurm

    • 2.1 Power…………………… 4 .........................
      8

    • 2.2 Ports…………………………………… 49 ..

    • 2.3 Airports………………………………….49

    • 2.4 Roads……………………………………50

      • 3. Research

        • 3.1 Abstract………………………………53

        • 3.2 Introduction………………………… …53 ..

        • 3.3 Objective of the Study………………….54

        • 3.4 Hypotheses Of the Study……………….54

        • 3.5 Research Methodology…………………54

        • 3.6 Discussion…………………………… 54 ....

        • 3.7 Conclusion and Suggestions…………

58 ....

List of Figures

Figure 1: Industry size and growth of Construction GDP at constant prices (Rs.

4

Figure 2: Indian Construction Industry Landscape

5

Figure 3: Share of Real Estate and Construction by GDP

5

Figure 4: Real Estate Segments

6

Figure 5: Housing Shortage by State over the Eleventh Five Year Plan (million houses (% of share of

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 6: Size of Commercial/Retail Construction .............................................................................

8

Figure 7: Commercial Office Space Absorption by location, 2007 ...................................................

9

Figure 8: Distribution of Outlay in Infrastructure Segments in Tenth and Eleventh Five Year

Plans

..

10

Figure 9: Breakup of employment in Building, Construction and Real Estate sector in India ........

18

Figure 11: Value chain within the Real Estate segment ....................................................................

21

Figure 12: Value chain within the Infrastructure segment .................................................................

22

Figure 13: Activities in the Project Execution stage ..........................................................................

22

Figure 16: Investment planned under JnNURM totalling Rs. 3,35,000 crore ...................................

38

Figure 17: Investments under various heads of JnNURM (Rs. crore) ...............................................

38

Figure 18: State-wise investments under

39

Figure 19: Investments in Power Generation, Transmission and Distribution up to 2021-22 (Rs. crore)

39

Figure 20: State-wise investments in Transmission and

40

Figure 21: Planned Investments in Roads in the Eleventh Five Year Plan (Rs.

42

Figure 22: Projected Real GDP of Construction sector (Rs. billion)

42

List of Tables

Table 1: Urban Population in

13

Table 2: Total Power Generation Capacity in India

.........................................................................

14

Table 9: Airports commissioned / granted approval / under consideration ......................................

41

Table 10: Share of economic activity estimated in the Infrastructure segment .............................

Executive Summery

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

T h e

p r o j e c t ”

R e a l

E st a t e

i n d u st r y ”

is

b a s e d

o n

t h e

c u r r e n t

i n d u st r y

t r e n d s

o f

R e a l

e st a t e

s e c t o r . The main objectives of the project are:

Understanding the functioning of Real Estate Industry

 

Analysing the industry performance on Qualitative and Quantitative Basis.

 

Forecasting the Future Investment in the Sector.

 

JnNurm Scheme in coming years.

To study the fundamental factors affecting the real estate value.

 

To examine the factors of real estate boom in 2008.

 

To present the future constraints of real estate investment in India.

 

For this project the financial performance of the major players of the industry was studied and interpretation were drawn. We learnt Cumulative Average Growth Rate and Compound Average Growth rate to conduct Quantitative analysis of the Industry.

The Report Is Divided Into Various Sections:

Industry Overview

This part describes the Industry profile. This part recognizes the

Characteristics of Real Estate

,Driving Forces, it also gives little insights into Real Estate

Investment Banking . This section also describes the Major Players Of the Sector.

Analysis

Quantitative and Qualitative analysis are conducted in this sector and Recommendation are the output .

JnNurm

This Part Discusses JnNurm Schemes and various investment to be made under this Schemes. It’s Effect on Real Estate industry.

Research

This Part Contains the Study Conducted in year 2008. The factors in the present paper are the

Macro Economic factors for which the secondary data is more suitable and reliable. The

collected in the aforesaid manner have been tabulated in condensed form to

Building, Construction Industry and Real Estate Services

draw the meaningful results. To analyze the data tables, percentage and graphs were used.

Findings

A Detailed Analysis Of the industry Shows that Growth Rate of The industry has declined since last five years , showing the effect of Global Recessions in India. Although India’s Real estate’s situation is very much healthy against over countries of the World. But Developers did face the Drop in demand of the properties which has decreased the prices of Properties indirectly. As companies are trying to achieve large number but lower margin sales these day.

At the end submitted to “ IIPM – lko”.

Industry Overview

Building, Construction Industry and Real Estate Services

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

• Growing Market Demand • • Realization of large commercial projects IPOs by developers Gradual organization
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

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

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

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

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

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)

Corporate

Location

Reliance Industries

Gurgaon, Mumbai/Navi Mumbai

Adani Group

Mundra

TCG Refineries

Haldia

Suzlon

Coimbatore, Udipi, Vadodara

Hindalco

Sambalpur

Genpact

Bhubaneshwar, Jaipur, Bhopal

Vedanta

Orissa

Corporate interested in development of SEZs in India and the location of interest

Apart for the corporate clientele, the SEZs also attract a number of real estate developers, including DLF, Ansals, Omaxe, Parsvnath, Shipra Estate to name a few. As per utilization, the real estate space can be classified as follows:

Real Estate Utilization Commercial
Real Estate Utilization
Commercial
Residential

Residential

 
Office
 

Office

Office
 
Hospitality Retail Malls Multiplexes
Hospitality
Retail
Malls
Multiplexes

Real estate utilization

Listed below are the salient features of each category:

Commercial Real Estate

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Office Space

Backed by strong infrastructure

Promoted by increasing demand from IT industry

Shift of focus from the traditional CBDs towards secondary centers owing

Retail Space

sharply higher land prices in the city centers.

Growth of 25- 30% expected in the organized retail sector (malls and

multiplexes) leading to an increased demand in real estate Affected by government policies for foreign retailers

Pronounced in the Tier I, Tier II and Tier III cities.

Hospitality Space

Criteria

Statistics

Annual growth rate of the industry

8%

Number of foreign tourists in 2005

4000000

Total number of five star rooms (2005)

96000

Total number of five star rooms needed by

150000

2010

Growing demand of real estate in the hospitality industry

Increasing demand of lodging in commercial cities such as Bangalore, Mumbai, Delhi etc. from business travelers. • Established brands in this sector include Asian Hotels, Indian Hotels, ITC, Le Meridien etc are in expansion mode with many new players such as Accor Group, Marriot, Choice, IHG Group

Residential Real Estate

Development triggered by:

 

o

Low per capita housing stock

o

Rising disposable income

o

Easy availability of finance

Currently growing at 30-35% per annum

Driven by retail investors who view real estate as an attractive investment

option as compared to mutual funds and stocks Geographically widespread with townships being built in both the metros and the tier II and III cities

Real Estate Investment Banking

Real Estate Investment Banking is an approach to real estate financing – providing the

client a host of services including the structuring of real estate projects, legal advice, operative management of real estate projects and support in marketing properties. The banking focus in Real Estate Investment Banking is on structured financing products and

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

structuring of entire portfolios. Extending on similar lines is the importance of syndication that forms the base line of larger-sized transactions.

Real estate investment banking focuses on the following target market as prospective client base:

Real Estate Consultants

The increase in transparency and liquidity in the real estate market in India is attracting

international real estate consultants to India. These consultants offer end to end solutions for their clients’ real estate needs. These services include strategic consulting to developers, investors, advisors and lenders seeking assistance with existing assets, potential acquisitions, new development projects and properties slated for disposition, feasibility studies, concept testing, business planning exercises, investment advice, market research and analysis, demand forecasting, financial modeling and project structuring exercises, portfolio optimization and re-engineering strategies, expansion and occupancy, location and entry, brokerage services, legal documentation review, valuations etc. Real estate consultants also ensure that the financing needs of the client are well taken care of by liaising with banking/non banking institutions and providing them with investment and structured finance solutions including securitization and sale & leasebacks, structured finance facilitating equity/debt into development projects on behalf of private and government sector clients, structuring development financing, public - private - partnerships, joint ventures, portfolio transactions and privatization exercises. The recent players in the Indian market are Jones Lang Lasalle, Colliers, CBRichard Ellis, Frank Knight and Trammell Crow Meghraj.

Developers and Construction Companies

With the opening up of the real estate sector in the country, the construction houses are scaling up the commercial and residential constructions. An increasing number of developers are offering IPOs for fund raising. AIM too is a sought after solution to meet

the fund requirements for these developers.

Group

Route/Market

Parsvanath

IPO

Sobha

IPO

Pyramid Saimira

IPO

DLF Universal

IPO

K Raheja Corp

AIM

Unitech

AIM

Hiranandani

Construction

AIM

Fund raising options by developers

Domestic Corporate Houses

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

As the land prices in the Tier I cities have always moved upward, land was regarded as a safe investment which, regardless of how it was used, would produce capital gains far above the inflation rate. It was thus common for companies in the manufacturing and service industries to acquire real estate even though they themselves were completely unrelated to property rental or real estate investment, seeking collateral value and tax benefits from depreciated assets, and expecting unrealized gains to absorb business risk. Acquisition of real estate as an asset was further encouraged as part of a diversification strategy in the investment portfolio of these corporate houses .. As these real estate possessions are classified as fixed assets held for the company’s own business purposes, it becomes feasible recent moves to increase real estate liquidity often involve the conversion of corporate real estate into commercial use. The corporate houses in India are also demonstrating a shift from ownership to leasing. With the advent of MNCs into the country, a growing number of companies no longer see real estate ownership as an absolute necessity. From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. This has been greatly encouraged by corporate restructuring and a return to focusing on core competencies. Thus, there seems an opportunity to tap the corporate houses who have a large corpus of real estate and are willing to trade this asset for want liquidity.

FDIs/FIIs

Post liberalization, the investment opportunities in real estate for the FDIs and FIIs have greatly opened up. Foreign investors can now purchase commercial development projects (under construction) over 50,000 sq m (540,000 sq ft), or plotted residential developments with a minimum size of 10 hectares. Foreign investors may purchase an equity stake in an unlisted real estate company and thereby partner in its growth plans across asset classes and cities. Listed real estate companies also offer good liquid

investment opportunities routed into designated special purpose vehicles that hold the asset(s) being developed, thereby reducing risk. These investors look for innovative financial products to suit their investing needs.

Financial Institutions – Real Estate Mutual Funds

Major financial institutions such as ICICI, HDFC, IL&FS and Kotak Mahindra have all launched real estate funds, either as joint ventures or sole investors. Most institutional funds operate on a pan-Indian basis, and are increasingly looking at opportunities in Tier III cities, in order to gain "first mover advantage".

Private Equity/Venture Capital Funds

As per the Securities and Exchange Board of India (SEBI), Foreign Venture Capital Investors (FVCIs) may invest in real estate assets, within the framework of SEBI. This has paved the way for capital infusion into the market and a significant weight of foreign capital is now chasing Indian real estate. Indirect real estate investments are made into a pooled investment fund; such funds are usually created in partnership with domestic developers or financial institutions. Such VC firms, partnered with developers form a potential client base, keen to invest in the real estate sector.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Real Estate and Financing Trends in India

Securitization and CMBS

From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. Securitization is primarily used by the corporate houses to convert the corporate real estate to commercial real estate.

Realty Funds/ Realty Mutual Funds in India

Initiated by SEBI, the REMFs true potential would be tapped only after the setting up of

REITs, as they infuse confidence among investors by serving as custodians of title deeds. (REITs pool various real estate assets, including warehouses, buildings, industrial estates and parks, malls, commercial and residential premises and get listed on the stock exchange to enable investors to buy and sell. They afford an opportunity to diversify the portfolio within that limited sense as well. However, SEBI has not allowed the creation of REITs in India as yet, though REITs are well established in the more mature real estate markets. ) Currently the REMFs in the Indian market are targeted at the HNIS and corporate investors.

Risks involved in the Real Estate Investment Market

Liquidity risk

The real estate investment market is still in its infant stage. The time required for liquidity

of real estate property can vary depending on the quality and location of the property.

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). The REMFs work within the SEBI framework. Being a developing and growing sector, the rules, regulations and legalities demonstrate frequent changes, making it seem as a cumbersome investment option to the investors.

Property market transparency risk

The Indian property market has low transparency when compared to the more mature and

developed real estate markets. Although market transparency has improved, reliable and consistent information on the Indian property market is still not easily available. There are also more professional due diligence and valuation institutions needed. This holds true even for the Tier I cities.

Macroeconomic risks

Interest rates, inflation and exchange rate risks are amongst the important macroeconomic indicators and have shown decreased volatility. The provision of facilities, is in many regions, still inadequate (education, transport infrastructure). These risk factors are not likely to disappear in the near future, impeding the development of the real estate sector.

Ownership and Land Title Issues

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

Lack of information and low transparency in the real estate segment in India, coupled with the age old property related issues discourages the investment of the large players in the semi urban and rural areas thus slacking an overall growth of the real estate sector.

Conclusion

The Indian real estate sector promises to be a lucrative destination for foreign investors into the country. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages. However, there are potential constraints for domestic as well as foreign investments in India. Absence of a single regulator to monitor business practices prevailing in Indian real estate market is perceived to be a risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained.

Maturity of the real estate markets will lead to infusion of foreign investment and adoption of international best practices by real estate players. Developers will get more organized, and become more transparent to avail opportunities emerging in the market. With the Indian securities market regulator SEBI allowing real estate mutual funds (REMFs) in India, equity investors will have an exit option available to them. All these factors will contribute in making the Indian real estate market more organized and structured, thus providing better investment opportunities.

Environment Scanning and Competitiveness of Construction Industry

  • 1.1. Industry size and Growth of Construction Industry

The size of the Construction industry is around Rs. 2.1 trillion 1 in 2008. The Construction sector in India is the second largest economic activity after agriculture and provides employment to about 33 million people. India's Construction industry has grown at a Compounded Annual Growth Rate (CAGR) of about 11.1% over the last eight years on the back of massive infrastructure investment and rapid rise in housing demand. Foreign Direct Investment (FDI) inflow into the sector during 2007-08 is estimated to be around Rs. 240 billion. Spending on infrastructure sectors such as ports, power plants and roads is projected at more than Rs. 2.5 trillion annually for the next six years, and will

require 92 million man years of labour 2 .

Construction investment accounts for around 52.4% of the Gross Fixed Capital Formation in India. Investments in Construction have a positive domino effect on supplier industries, thereby contributing immensely to economic development. The Construction sector has strong linkages with various industries such as cement, steel, chemicals, paints, tiles, fixtures and fittings. While in the short term it serves as a demand booster, in the long term it contributes towards boosting the infrastructure capacity.

Figure 1: Industry size and growth of Construction GDP at constant prices (Rs. billion)

2,500 2,263 2,055 2,000 1,839 11.1% 1,58 1,500 2 1,217 1,127 1,084 1,362 1,000 500 -
2,500
2,263
2,055
2,000
1,839
11.1% 1,58
1,500
2
1,217
1,127
1,084
1,362
1,000
500
-
2001
2002
2003
2004
2005
2006
2007
2008
Source: Economic Survey 2008-09 and IMaCS analysis

2 Construction Industry Development Council

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services
  • 1.2. Industry Segmentation

Construction sector can be broadly classified into 2 sub-segments:

1) Real estate (Residential, Commercial/Corporate, Industrial and Special Economic Zones (SEZs))

2) Infrastructure (Transportation, Urban development, Utilities)

Figure 2: Indian Construction Industry Landscape

Construction Industry Real Estate Infrastructure Residential Utilities Urban Infrastructure Transportation Commercial Power Railways Special Irrigation Civil
Construction Industry
Real Estate
Infrastructure
Residential
Utilities
Urban Infrastructure
Transportation
Commercial
Power
Railways
Special
Irrigation
Civil Aviation
Economic
Zones
Roadways
Ports

Source: IMaCS analysis

The Real Estate segment contributes around 24% to the Construction GDP of India while

Infrastructure segment contributes around 76%.

Figure 3: Share of Real Estate and Construction by GDP contribution Rs 504 Billion 24% Rs
Figure 3: Share of Real Estate and Construction by GDP contribution
Rs 504
Billion
24%
Rs 1,596
Billion
76%
Real Estate
Infrastructure

Source: Economic Survey 2007-08, IMaCS analysis

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
  • 1.3. Real Estate Sector

In terms of GDP contribution, Real Estate sector is estimated at around Rs. 504 billion in 2007-08.

The market size of the Indian real estate sector is estimated to be around Rs. 2,643 billion in 2007-08.

The sector has been growing at a CAGR of 12%. It is constituted of the Residential, Commercial and

real estate activities of Special Economic Zones.

Figure 4: Real Estate Segments

Commercial / Retail SEZ 9% 9% Residential 82%
Commercial
/ Retail
SEZ
9%
9%
Residential
82%

Source: I-Sec Research, Ministry of Commerce and Industry, IMaCS analysis

1.3.1. Residential

At around Rs. 2,171 billion, the housing sector is estimated to grow at 12% in the long term. Demand

for housing is estimated to be around 4.8 million houses per year over the Eleventh Five Year Plan

period. In addition to the need for new housing tenements, the demand is also likely to be fuelled by

the housing shortages already prevalent in several states. The shortage of housing across several

states, as illustrated in the graph below, amounts to about 25 million houses in the period of the

Eleventh Five Year Plan.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

Figure 5: Housing Shortage by State over the Eleventh Five Year Plan (million houses (% of share of various states)

Andhara Pradesh Gujarat 1.95 1.66 8% 7% Karnataka Other States 1.63 5.11 Delhi 7% 21% 1.13
Andhara
Pradesh Gujarat
1.95
1.66
8%
7%
Karnataka
Other States
1.63
5.11
Delhi
7%
21%
1.13
Madhya
4%
Pradesh
West Bengal
Maharastra
1.29
2.04
3.72
5%
8%
15%
Uttar Pradesh
Tamil Nadu Rajasthan
2.38
2.82
1
10%
11%
4%

Source: Planning Commission Working Group on Urban Housing, 2007

  • 1.3.2. Demand drivers for Residential Sector

Favourable demographics - The demographics work strongly in favour of the Indian Construction

industry. India is the second highest populated country in the world after China. India's estimated

population as of March 2008 is 1.14 billion, while the average age of Indians is 26 years. The

demographic profile indicates that India's working population forms around 61% of the total

population. India is and will remain one of the youngest countries in the world for some time. The

strong economic growth led to sharp income generation, which led to rise in middle class segment.

India currently has around 260 million persons in the middle class segment. This segment's rising

purchasing power and propensity to consume is expected to drive and support a robust growth rate of

the economy in the coming years. The middle class along with robust macro-economic scenario and

changing demographic profiles has a major role to play in the growth and emergence of the

Construction industry in India.

Urbanisation and Migration - The decadal growth rate of urban population (20% between 1991-

2001) in India is higher than the rural population (18% during the same period). Average annual rate

of change (AARC) of the total population in India during 2000-2005 is estimated at 1.41% with

2.81% for urban and 0.82% for rural sectors. AARC for urban areas by 2025 will increase to 2.25%

whereas the AARC for rural population will decline to -0.4% showing a clear shift of population from

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

rural to urban areas 3 . The average household size has been estimated by the National Sample Survey

Organisation as being around 4.47 in urban areas and only 67% of the houses are pucca units.

Though there is a slump in real estate activity in the last one year, investment over the long term will

be primarily led by housing, which is expected to account for nearly 90% of the total real estate

sector.

  • 1.3.3. Commercial/Retail Construction

The rapid growth of the Indian economy has had a significant impact on the demand for commercial

property to meet the needs of business, by way of 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 organised retail. For example, IT and ITES alone is

estimated to require 150 million square feet across urban India by 2010. Similarly, the organised retail

industry is likely to require an additional 220 million square feet by 2010 4 .

Figure 6: Size of Commercial/Retail Construction Retail Rs 113 billion Office Rs 126 billion 47% 53%
Figure 6: Size of Commercial/Retail Construction
Retail
Rs 113 billion
Office
Rs 126 billion
47%
53%

Source: I-Sec Research, Ministry of Commerce and Industry, IMaCS Analysis

  • 3 Planning Commission – Working group on Urban Housing for the 11 th Five Year Plan
    4 Source: India Brand Equity Foundation (IBEF)

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 7: Commercial Office Space Absorption by location, 2007

Bangalore, 20 Others, 8% % Total : 45 Million Square Feet Pune, 8% Mumbai, 9% NCR,
Bangalore, 20
Others, 8%
%
Total : 45 Million Square
Feet
Pune, 8%
Mumbai, 9%
NCR, 19%
Chennai, 12
%
Hyderabad, 1
Kolkata, 12%
2%

Source: IBEF

  • 1.3.4. Demand drivers for Commercial/Retail Sector

The following are some of the demand drivers in the Commercial/Retail Sector:

ƒ Sharp growth in organised retailing – Organised retail, which is expected to grow at over 25%

in the next few years, is likely to drive demand in the commercial real estate sector. Growth in

IT/ITES sector at 30% annually - The investments in commercial Construction are expected

to grow faster than investments in housing mainly due to the spurt in office space construction

driven by IT/ITES industry.

  • 1.3.5. Special Economic Zones

Over the next five years, growth in investments in Indian Industry will be driven by strong capacity

additions, led by strong growth in demand and high existing operating rates. Special Economic Zones

(SEZs) will be at the forefront of this growth. About 315 SEZs which have been notified as of now, of

which about 202 belong to the IT/ITES Sector.

1.4.

Infrastructure

With the government's focus on infrastructure development along with the active participation of the

private sector, this segment is growing rapidly. The Power, Irrigation, Transportation including

Roadways, Railways, Airports and Ports, Urban Development and Communications sectors have

witnessed investments of Rs. 6.9 trillion over the Tenth Five Year Plan (10 th FYP) and will witness

around Rs. 14.8 trillion in the Eleventh Five Year Plan (11 th FYP).

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 8: Distribution of Outlay in Infrastructure Segments in Tenth and Eleventh Five Year Plans

1,600,000 Rs 953 billion 1,400,000 1,200,000 Rs 5.7 trillion Communications 1,000,000 Transportation 800,000 Urban Development Rs
1,600,000
Rs 953 billion
1,400,000
1,200,000
Rs 5.7 trillion
Communications
1,000,000
Transportation
800,000
Urban Development
Rs 1.2 trillion
Irrigation
Rs 989 billion
600,000
Rs 2.1 trillion
Power
Rs 2.2 trillion
400,000
Rs 382 billion
Rs 1.03 trillion
Rs 4.8 trillion
200,000
Rs 2.3 trillion
-
10th FYP
11th FYP

Source: Economic Survey 2007-08

India's infrastructure is set to improve rapidly with an estimated CAGR of 15%. Public spending

would continue to dominate this sector. The Government of India projects that for the economy to

grow at 9% per annum over the Eleventh Plan period the Gross Capital Formation 5 in the

infrastructure should increase from 5% of GDP at the start of the Tenth Plan to around 9% at the end

of the Eleventh Plan. The central government would contribute 37%, the state governments 32% and

the private sector would contribute 31% of the total investments in infrastructure for the next five

years.

1.4.1. Roads

Roads occupy an eminent position in India’s transportation as they carry nearly 65% of freight and

85% of passenger traffic in the country. The Government of India in the Tenth Plan provided for an

outlay of Rs.595 billion for development of roads. The largest highway project ever undertaken in the

country is being implemented by the National Highways Authority of India (NHAI). Phase I and II of

the National Highways Development Project (NHDP) envisaged 4/6 laning of about 14,279

  • 5 Measure of the net new investment by enterprises, government and households in the domestic economy in fixed capital assets, during an accounting period

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

kilometres of National Highways at a total estimated cost of Rs. 650 billion (at 2004 prices). These

two phases consist of the Golden Quadrilateral, the North-South & East-West Corridors, port

connectivity and other projects. The upgradation of 12,109 km of existing national highways has been

approved by the Government under NHDP Phase-III at an estimated cost of Rs. 806 billion.

The Government has also approved six-laning of 6,500 km of NHs comprising 5,700 km of the

Golden Quadrilateral and balance 800 km of other sections of NHs under NHDP Phase-V at a cost of

Rs. 412 billion. The Government has approved construction of 1,000 km of expressways with full

access control on new alignments at a cost of Rs. 166 billion under NHDP Phase-VI and the

construction of ring roads including improvement of NH Links in cities, grade separated intersections,

flyovers, elevated highways, underpasses and service roads at a cost of Rs. 166 billion under NHDP

Phase-VII.

One of the physical targets for state infrastructure in the Eleventh Five Year Plan is the construction

of a core network would include expressways, four-laned roads, strengthened pavements, and

pavements with good riding quality, bypasses, bridges, etc. for a length of about 71,500 km, with a

financial outlay of about Rs. 80,000 crore covering the states. This network could be based on the

‘corridor concept’, such that a commercial vehicle can cover about 500 km on this network in one day

(800 km or more on expressways) with adequate road safety.

Rural roads would also be an important thrust area The Government of India has launched the

Pradhan Mantri Gram Sadak Yojana (PMGSY) which aims to provide good all-weather road

connectivity to unconnected habitations.

  • 1.4.2. Airports

India has 125 airports. Of these, 11 are designated as international airports. Airports Authority of

India (AAI) has taken up the development of infrastructure in the country through the PPP model.

Joint Ventures formulated for the modernisation of Delhi and Mumbai airports, and development of

greenfield airports at Bangalore and Hyderabad are cases in point. AAI has also drawn an action plan

to develop and modernise 35 non-metro airports. An investment of about Rs. 400 billion is projected

for the development of airports during the Eleventh Five Year Plan.

  • 1.4.3. Railways

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

The premier transport organisation of the country, the Indian Railways is the largest rail network in

Asia and the world’s second largest. However there is a need to upgrade facilities to meet the growing

rail transportation needs. The proposed investment in railways over the eleventh five year plan is Rs.

2.8 trillion. PPP projects are estimated to account for 9% of total investment over the period to ramp

up infrastructure in 22 metropolitan city stations, increase terminal capacity by 43% and construct

2,700 km of rail lines.

The Tenth Five Year Plan document had envisaged construction of Dedicated Freight Corridors

(DFCs) on selected trunk routes. This has since been given effect to with the announcement of

construction of DFCs separating freight traffic from passenger traffic on trunk routes. The proposal

for capacity augmentation through construction of DFCs along the highly saturated freight routes is a

part of the new long-term strategy to provide premium services in freight and passenger travel.

A Western Corridor of 1,469 km will connect Jawaharlal Nehru Port to Dadri and Tughlakabad in the

North. An Eastern corridor of 1,232 km will connect Ludhiana to Sonnagar via Dadri and Khurja, thus

facilitating transfer from one corridor to another. The Eastern corridor will further get extended to

Kolkata region to connect the proposed deep-sea port. The estimated cost of construction of both

these corridors is expected to be around Rs. 372 billion and it is likely to take about five years for

completion of these corridors and have a spill-over beyond the Eleventh Plan.

  • 1.4.4. Ports and Shipping

There are 12 Major Ports and 185 Minor Ports along India’s 7,517 km long coastline. 100% FDI

under the automatic route is permitted for all port development projects. PPP is seen by the

Government as the key to improve the existing facilities. This sector would see Rs. 1 trillion

investments on shipbuilding and port infrastructure development within the next 5 years.

The Eleventh Plan outlay for the shipping sector is Rs. 1,000 crore at 2006–07 prices. The sector is

also expected to generate IEBR 6 amounting to Rs. 12,285 crore at 2006–07 prices. In addition, the

budgetary support for ship-building and repairs is Rs. 150 crore (Rs. 170 crore at current price). The

IEBR for this sector is Rs. 550 crore at 2006–07 prices.

The total projected outlay for the Eleventh Plan for the Department of Shipping (including Ports) is

Rs. 43,874 crore at 2006–07 price (Rs. 49623 crore at current price) which includes Rs. 4465 crore of

6 Internal & Extra Budgetary Resources

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Gross Budgetary Support at 2006–07 price (Rs. 5,050 crore at current price) and Rs. 39409 crore of

IEBR at 2006–07 price (Rs. 44573 crore at current price).

The Indian shipbuilding industry is centred around 27 shipyards comprising 8 public sector (6 yards

under Central Government and 2 under State Governments) and 19 private sector shipyards. The

shipyards between them have 20 dry docks and 40 slipways with an estimated capacity of 2,81,200

Dead Weight Tonnage (DWT). A major share of this capacity is held by the 8 public sector yards and

only Cochin Shipyard Limited (1,10,000 DWT) and HSL (80,000 DWT) have the required

infrastructure to build large vessels.

India’s share in the world shipbuilding market has increased from an insignificant 0.1% in the

beginning of Tenth Plan to 1.3% in 2006. On the export front, one public sector shipyard, that is

Cochin Shipyard Ltd (CSL), and three private sector shipyards, viz., ABG, Bharti, and Chowgule

performed remarkably well during the Tenth Five Year Plan period and were able to get export orders.

The Indian Shipbuilders Association has estimated that the industry can grow at a rate of more than

30% and this momentum can be maintained for the next 10 years to reach a level of 5 million DWT

order book for the Eleventh Five Year Plan as against 1.3 million DWT for the Tenth Five Year Plan.

  • 1.4.5. Urban Infrastructure

India’s total urban population is around 285 million, which is 30%of India’s population. There has

been significant growth of the urban population over the past decade and the trend is expected to

continue. This warrants an urgent up-scaling and up-gradation of urban infrastructure. This sector is

expected to be the second-largest contributor to infrastructure investments after roads.

Table 1: Urban Population in India

Year

1981

1991

2001

Number of metro cities (population-1 million +)

 
  • 12 23

35

Population (million)

 

42

70

108

Percentage

of

total

 
  • 26 32

38

urban population

Source: Report of the Steering Committee on Urban Development, 11th FYP, Planning Commission of India

Urban Infrastructure covers basic civil services such as water supply, sewerage, solid waste

management and urban transportation. Water supply and sanitation projects alone offer scope for

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

annual investment of Rs. 294 billion. Urban infrastructure investments will get a boost from the

Jawaharlal Nehru Urban Renewal Programme (JnNURM). The programme was started in 2005-06 to

enable sustainable urban infrastructure development of 63 mission cities. Under this scheme, the

programme receives Rs. 500 billion as central assistance and Rs. 500 billion from state governments

and urban local bodies. Rs. 3.3 trillion was allotted under the City Development Plans scheme. Some

other notable schemes for urban development include the Rs. 28 billion sub-mission on infrastructure

development scheme and the Rs. 11.7 billion additional central scheme. Currently, 100% foreign

direct investment (FDI) under the automatic route is allowed in townships, housing, built-up

infrastructure and construction-development projects. Urban transport development is currently

supported by the National Urban Transportation Policy (NUTP).

  • 1.4.6. Utilities (Power and Irrigation)

India has a power generation capacity of 122 GW. The sector has been growing at a Compound

Annual Growth Rate of 4.6% over the last four years. India has the fifth largest electricity generation

capacity in the world. The Ministry of Power has formulated a blueprint to provide reliable, affordable

and quality power to all users by 2012. This calls for an investment of Rs. 3.7 trillion in the next five

years.

The gross electricity requirement by the end of the Eleventh Plan projected by the Planning

Commission Working Group on Power is 1,038 Billion Unit (BU) and peak demand estimation is

1,51,000 MW. To fulfil the estimated electricity demand requirement, the Working Group

recommended the capacity addition programme initially of 78,530 MW and updated at 78,577 MW

during the Eleventh Plan.

Table 2: Total Power Generation Capacity in India

 

Source

Central

State

Private

Total

Hydro

9685

3605

3263

16553

Thermal

26800

24347

7497

58644

Nuclear

3380

0

0

3380

Total

39865

27952

10760

78577

Source: Planning Commission, 11 th Plan

Five Year

 

The emphasis of the Central Government to improve irrigation facilities in the country through

programmes such as Bharat Nirman, Accelerated Irrigation Benefit Programme (AIBP), and state-

level initiatives will be the main driver of investments in the irrigation sector. The plan outlay under

the Tenth Plan for irrigation sector was Rs. 922 billion. There is a renewed emphasis on this front

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

with states like Andhra Pradesh drawing ambitious plans. Increased focus on irrigation is evident from

the fact that the Tenth Plan irrigation outlay was 50% more over the Ninth Plan. Investment in

irrigation in the Eleventh Plan is projected to increase to Rs. 2,533 billion from Rs.1,115 billion spent

in the Tenth Plan 7 .

Apart from the above, Government spending on infrastructure activities for defence and other

specialised construction would also be a demand driver for the sector.

  • 1.4.7. Demand drivers for Infrastructure Sector

ƒ

Economic growth would be around 7% CAGR over next decade

 

ƒ

Increased

domestic

investments

and

foreign

direct

investment

in

sectors

such

as

communications

 

ƒ

Government policies with a thrust on developing infrastructure and increased government

 

spending on transportation, urban development and utilities.

 

1.5.

Key Risk Factors for Construction Industry

 

ƒ

Manpower Shortages - Although the construction industry employs 33 million people, second

only to the agricultural sector, the incremental workforce requirement is around four million

people per year over the next seven years to sustain the current growth rate. The construction

industry is set to face a challenge in terms of sourcing manpower. Adding to this problem is

the shortage of contractors.

 

ƒ

Procedural and Legal Vulnerability - Development projects entail clearances and permissions

from various government departments. Delays are tedious and vary from state to state

depending on local laws. Hence this adds to overall complexities of transaction, increasing the

need for local expertise in each market.

 

ƒ

Low project risk, but high payment receivable risk - The project risk for a contractor is low,

due to low financial commitments. Most construction projects are executed on a cash contract

basis and are funded and managed by the owner/sponsor. The number of construction projects

with equity participation by contractors is limited to a few projects

..

Payment security

concerns are high, and they depend on the credit profile of the client. Usually outstanding

payments and retention money payable to the contractor are delayed, as these payments are

made after the entire construction activity and project period is completed. This may affect

the smaller players in the industry.

7 Planning Commission, Government of India

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

ƒ

Infrastructure Bottlenecks - Infrastructure is a cause of concern in majority of cities across the

country as recent infrastructure developments have been slow and has not kept in pace with

the development. Inadequate power, absence of drinking water, electricity failure, traffic

congestion and pollution are common features across the major cities in India. On the basis of

current plans, electricity generating capacity will rise by 6% annually over the period 2007 to

2012, double the rate of the past five years and the second largest absolute increase in

capacity in the world. However, this is still well below the likely growth rate of GDP. Power

shortage could be an impediment to construction activities in the future.

ƒ

High level of fragmentation - The industry is highly fragmented, as the entry barriers are low

due to less fixed capital requirements. It is estimated that in 2004, over 3 million construction

entities (including housing contractors) existed, of which only around 28,000 were registered.

However, there is more fragmentation in the housing segment than the industrial/

infrastructure segment, as the unorganised sector accounts for 75% of the same. Furthermore,

the industrial/infrastructure sector requires far more technical expertise and it is difficult for

smaller players in the unorganised sector to compete effectively.

ƒ

Title clearances for SEZs are invariably delayed - Title clearance in India is a complicated

process in the absence of a central database of properties. This also adds to the costs and

delays in a project.

ƒ

Delays in land acquisition: Delays in land acquisition is a major source of project delays and

escalating project costs. This is applicable to large infrastructure projects such as SEZs, power

plants, and others.

ƒ Delays in Master Plan / Development Plan Review and Implementation - Experience of

implementing the Master Plans has not been encouraging because of weak data base, financial

constraints, lack of resource mobilization, over ambitious plan proposals, lack of integration

between spatial planning proposals with economic development plans and inadequate

ƒ

legislative support and enforcement.

Frequent and expensive reconstruction - The maintenance requirement of the high density

corridor of NHs under construction and post implementation support is provided by NHAI.

However, the non-NHDP NH sections, which are maintained by State PWDs, are poorly

managed, primarily because the funds made available to them for maintenance are well short

of the requirement as per norms.

  • 1.6. Market Structure of Construction Industry

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

The Construction industry is highly fragmented, as the entry barriers are low due to less fixed capital

requirements. Reportedly, in 2004, over 3 million construction entities (including housing contractors)

existed, of which only around 28,000 were registered 8 .

However, there is more fragmentation in the housing segment than the industrial/infrastructure

segment, as the unorganised sector accounts for 75% of the same. Furthermore, the

industrial/infrastructure sector requires far more technical expertise. Around 96% of construction

companies are classified as small and medium enterprises.

  • 1.7. Major Players

Post independence, in the First Five Year Plan, construction of civil works was allotted nearly 50% of

the total capital outlay. The first professional consultancy company, National Industrial Development

Corporation (NIDC), was set up in the public sector in 1954. Subsequently, many architectural, design

engineering and construction companies were set up in the public sector (Indian Railways

Construction Limited (IRCON), National Buildings Construction Corporation (NBCC), Rail India

Transportation and Engineering Services (RITES), Engineers India Limited (EIL), etc.) and private

sector (M N Dastur and Co., Hindustan Construction Company (HCC) etc.).

The Indian Construction industry comprises of about 200 firms in the corporate sector. In addition to

these firms, there are about 1,20,000 class-A contractors registered with various government

construction bodies. There are thousands of small contractors, which compete for small jobs or work

as sub-contractors of prime or other contractors.

The major players in the construction industry are:

ƒ

Companies such as L&T, Unitech, GMR Infrastructure, HCC, Gammon, Jaypee group, Jaiprakash associates, BL Kashyap etc. which undertake large infrastructure projects.

 

ƒ

Companies such as IVRCL, Nagarjuna, L&T, DLF, Omaxe etc. involved in the construction

ƒ

of flyovers, pipelines, apartments and housing/office spaces. Companies such as DLF, Purvankara, Raheja and others are engaged in the construction of

residential and office space.

8 Planning Commission – Eleventh Five Year Plan

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Organized Real Estate Industry in India is only a couple of decades old .Real Estate Industry in India

took off with the global boom in the Realty Sector which percolated down to India as well.Lack of clear

land titles and litigation has made this industry one of the most opaque and corrupt ones.Due to the

massive price appreciation and huge valuations, Land Scams have become quite common with Chief

Ministers,Generals,Top Bureaucrats all involved in the murky environment of Real Estate in India.The

most recent scam related to bribing of top public banks officials in the LIC Housing Finance Scandal has

again put question mark on the fundamentals of the industry.Valuing the industry and making a real

Managers are staying away from the Sector due to lack of trust in the Financial Statement given by the

industry.That said modern India presents a booming picture of tall buildings and huge office areas &

shopping malls. A list of the chief players in Indian market is given below:

DLF: DLF’s chief business is to develop housing, marketable and retail properties. Currently it

has undertaken the development of 70 million sq ft of housing projects which it intends to finish in the next three years. DLF has joined hands with Delhi Development Authority to develop townships in Amritsar, Pune, Gurgaon, Mumbai, Chennai and Goa. DLF has been the construction company behind different malls in the major cities in India. The company is also developing 50-75 hotels along with Hilton Hotels and infrastructure and SEZ in India in collaboration with Laing O’Rourke (UK).The current market cap is around Rs.51,832.22 crore. Tata Projects: Tata Projects registered an annual turnover of Rs 2,300 crore on July 1, 2007.

With more than 1,500 professionals the company has emerged as one of the chief player in EPC projects. Over the last four years, it has attained a CAGR of 50 per cent which quadrupled its annual turnover of 2006-07. Tata Projects functions in concentrated divisions like broadcast and distribution, steel, power production, oil, gas and hydrocarbons and industrial infrastructure. Sobha Developers Ltd: With an annual turnover of Rs 1,189 crore, Sobha Developers Ltd was

initiated by the now chairman PNC Menon in the year 1995. On June 30, 2007, the company has 3,706 skilled professionals working for it. At present it owns Rs 3,500-acre land in eight Indian cities namely Coimbatore, Bangalore, Mysore, Chennai, Thrissur, Kochi, Pune and Hosur. The company’s clientele include some of the top players in IT, hotel and construction sector such as Hewlett Packard, Mico, Infosys, Ramaraju Developers, Dell, Timken, etc. Shapoorji Pallonji & Co: The Company has more than 3,500 professionals working for it and

is largely driven by its loyalty to consumer satisfaction. Some of the major projects undertaken by Shapoorji Pallonji & Co are World Trade Centre, Mumbai; TELCO industrial complex, Pune; Bhabha Atomic Research Centre, Kalpakkam; HSBC Bank, Mumbai; Hotel Taj Intercontinental, Mumbai; Bank of India, Mumbai; Indira Gandhi International Airport, New Delhi, etc. the company has created magnum opus of construction and has been a consistent executer of challenging projects. Unitech: Recently Ramesh Chandra, Unitech’s Chairman has declared the investment of $ 720 million by his company in the coming four years to develop 28 hotels along with Marriott

Building, Construction Industry and Real Estate Services

International. The market capitalisation of the company is Rs.16,867.40 crore.Its chief activities

Building, Construction Industry and Real Estate Services ∑ International. The market capitalisation of the company is
Building, Construction Industry and Real Estate Services ∑ International. The market capitalisation of the company is

include construction, expansion of real-estate, consultancy in associated sectors, hotels,

electrical broadcast and information technology. India Bulls Real Estate: One of India’s largest listed developers developing residential and

commercial real estate. Being a focused regional player, more than 90% of IBREL’s portfolio by value is in the three major markets of Mumbai, NCR and Chennai. Established in 2000, the company has grown into one of the leading Indian business houses with its companies being listed on Indian and overseas financial markets having a combined net worth in excess of Rs. 18,000 crores. the current market cap being Rs.6,545.17 crore. HDIL: Ranked as India’s fastest growing real estate company by Construction World-NICMAR

in October 2007 & with a current market cap of Rs.8,567.76 crore, Housing Development & Infrastructure Limited has established itself as one of India’s premier real estate development companies, with significant operations in the Mumbai Metropolitan Region. HDIL is a public listed real estate company in India with shares traded on the BSE & NSE Stock Exchanges. With operations spanning every aspect of the real estate business, from residential apartment complexes to towers & townships, commercial premium office spaces and retail projects like world-class shopping malls. it is India’s largest slum rehabilitation company, & was given the Mumbai International Airport Slum Rehabilitation project in October 2007,one of the largest urban rehabilitation projects in India .. Emaarr-MGF: One of the world’s leading real estate developers company in India and

Development of properties in the residential flats, Commercial Properties, premium apartments etc. The ‘Commonwealth Games Village builder’ is still trying to get listed on NSE. Currently not listed.

Analysis

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Quantitaive

Analysis

Pest Analysis of Indian Real Estate Sector

The various factors which influenced the Real Estate segment were Political, Technological, Social and Economical factors.

POLITICAL FACTORS:

Government’s regulations and policies in favour of real estate sector.

Heaviest tax imposed on the construction industry.

FDI experience in Indian real estate market.

ECONOMIC FACTORS:

Controlled Inflation levels.

 

Low Interest Rates.

 

Provides further Liquidity

 

SOCIAL FACTORS:

Increase in consumption.

 

Urbanization.

 

Increase

in

per

capita

income

(current

prices).

 

Rise

in

Demand

for

Quality Housing

Projects.

 

TECHNOLOGICAL FACTORS:

Internet revolution

 

Media

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

SWOT analysis

Strength

employment and training opportunities in the field of construction

Private sector housing boom and commercial building demands

Construction of the multi building projects on the feasible locations in the country.

Good structured national network facilitates the boom of construction industry.

Low cost well- educated and skilled labour force is now widely available across the country.

Sufficient availability of raw material and natural resources in the country is supportive for the industry.

Real estate development is on high and it is attracting the focus of the industry towards construction.

Weakness

Chances of Natural disadvantage are there.

Distance between construction projects reduces business efficiency.

Training itself has become a challenge.

Changing skills requirements and an ageing workforce may accentuate the skills gap.

Improve in long-term career prospects is highly required to encourage staff retention and new entrants.

External allocation of large contracts becomes difficult.

Lack of clearly define processes and procedures for construction and its management.

Huge amount of money need to be invested in this industry and inefficiency may lead to high level of risk.

Opportunity

continuous private sector housing boom will create more construction opportunities.

Public sector projects through Public Private Partnerships will bring further opportunities.

Developing supply chain through involvement in large projects is likely to enhance the chances in construction.

Renewable energy projects will offer opportunities to develop skills and capacity in new markets.

More flexible training delivery techniques are now available.

Financial supports like loan and insurance and growth in income of people is in support of construction industry.

Building, Construction Industry and Real Estate Services

∑ Financial supports like loan and insurance and growth in income of people is in support
∑ Financial supports like loan and insurance and growth in income of people is in support

Historical cultural heritages like the TAZ MAHAL encourage and provide a creative platform for the industry.

Remote areas in the country are easily accessible and plenty of land is available in the country.

Threat

Long term market instability and uncertainty may damage the opportunities and prevent the

expansion of training and development facilities. Current economic situation may have an adverse impact on construction industry.

Political and security conditions in the region and Late legislative enforcement measures are

always threats to any industry in India. Infrastructure safety is a challenging task in construction industry.

Porter’s five forces Model

  • 1. Intensity of Industry Rivalry (Neutral to Favorable)

Compared to many other industries, the intensity of rivalry among developers in residential development is relatively low. The area where it is felt most is in competition for development land. When it comes to selling end units, developers typically try to avoid competing directly by 1) developing products in different markets / locations; 2) launching products at different time periods; 3) differentiating product types.

The key factor is that residential property is sufficiently differentiable and not subject to any sort of perishibility or technological obsolescence such that developers have much more flexibility with the timing of producing and selling their end product.

∑ Financial supports like loan and insurance and growth in income of people is in support

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

2. Threat of new entrants (Neutral to Unfavorable)

When an industry has over 60,000 registered participants, it is hard to conclude that barriers to entry are high. Although the number of entrants varies over time and according to market condition, they are sufficiently low relative to other industries that new entrants can continue to enter and eventually push above average returns back to historical means.

Generally speaking, the potential barriers to entry to any industry fall into several broad categories: 1) capital; 2) technology; 3) legal authorization; and 4) expertise and know-how.

Legal authorization is necessary for certain types of industries such as telecoms and utilities. The number of participants in these industries is limited due to the nature of the businesses (“natural monopolies”) or the return profiles (massive upfront investments which can only be recovered through limited operating competition).

For most real estate development, no special legal authority is needed to enter the industry. That is why many non-property companies find it relatively easy to migrate into this industry as and when returns become attractive or simply out of interest.

Furthermore, the technological and expertise/know-how component of this industry is not particularly high. Designs, names and concepts can all be copied as there is less ability to protect these through patents or copyright. Large value supply chains such as agents, consultants, property managers and employees of rivals can all be hired or co-opted.

Capital can be considered a barrier but mostly to larger scale projects. The gross amount of capital needed to “enter” the industry is paltry compared to the likes of steel mills or chip fabs.

In addition to the above factors, the wide range of different types and scales of development each entail different barriers to entry. Obviously larger, more specialized developments in top tier cities would have much higher barriers to entry than a small residential project3. Threat of substitutes (Favorable for End Use; Neutral for Investment)

Real estate development involves different types of products - residential, office, retail and industrial being the most common. To narrow the scope of discussion, we will just consider private residential real estate.

Currently in China, residential real estate is in high demand both for its utilitarian value as accommodation and also for its investment value as a stable, inflation- proof store of wealth. As such we need to consider the substitutability on both

fronts. As accommodation, new private housing from any firm can be replaced by 1

Building, Construction Industry and Real Estate Services

fronts. As accommodation, new private housing from any firm can be replaced by 1 Building, Construction
fronts. As accommodation, new private housing from any firm can be replaced by 1 Building, Construction

competitive product from another developer; 2) existing private housing for sale or for rent; 3) social housing either for sale or rent. Any specific developer can lower the risk of substitution by differentiating their product offering by i) location; ii) type and iii) quality. The more generic a developer’s productthe more substitutable . Developers that have managed to distinguish their product or image will fare the best.

The threat from the secondary market varies by city. In T1 and large T2 cities, a sufficiently large stock of housing exists for the secondary market to be a viable choice for potential homebuyers. In many T3 and T4 cities, there are either not enough secondary units for sale or the market is simply is too illiquid.

The threat from social housing exists but not significant. Usually, those allowed to buy or rent social housing would only be able to enter the low end of the private housing market anyway - if at all. Moreover, resale and other restrictions make it a far less liquid asset class. For that reason, the threat is only to the lower end of the private housing market.

Given China’s current state of negative real interest rates and capital controls, most individuals have limited channels for savings and investment. Real estate has helped fill this void. If investors were given more alternatives and if other asset classes such as equities start to perform better, investment demand for real estate would quite likely cool.

  • 4. Bargaining power of suppliers (Favorable)

Overall, developers are in a favorable bargaining position relative to the key suppliers in the industry. The 3 key suppliers to any residential developer are 1) land sellers (usually cities or other developers); 2) construction contractors; 3) building materials and home furnishing / equipment manufacturers; 4) capital providers. This situation is more or less reflected in that the typical cost of sales for any developer is made up of roughly 1/3 land, 1/3 construction and 1/3 financing costs.

A typical developer’s bargaining position relative to a land seller varies according to 1) nature of sale and 2) location of sale. Developers typically prefer to buy land through direct bilateral negotiations with the government or 3rd party rather than be involved in a multi-party bidding ware. Auctions are the least desired channel for land acquisition but sometimes a necessity. For land bought in smaller cities or newer areas of larger cities, developers wield a lot more bargaining power. Smaller cities are generally eager to entice well known national developers. For example, if Vanke or COLI buys into a smaller T3/4 city, it would signal to other developers that this city is worthy of investment. In such cases, local officials are willing to give a discount to entire desired players. This logic is also true of newly emerging districts in T1/2 cities. Construction companies do not command much if any pricing power and many

work on thin margins. Although developers can backward integrate and take on construction duties themselves, this is often more for ensuring timeliness of completion or maintaining quality standards than for cost savings. Also, the

Building, Construction Industry and Real Estate Services

work on thin margins. Although developers can backward integrate and take on construction duties themselves, this
work on thin margins. Although developers can backward integrate and take on construction duties themselves, this

construction materials and household furnishings that developers buy are mostly commodity goods for which the manufacturers not only command no particular pricing power but would also yield a discount on bulk or volume purchases.

Lastly, capital providers, be they banks, shareholders or bondholders, may have different investment appetite for this industry at different times but whether investors or bankers demand a specific risk premium to provide capital is more dependent on the perceived risks at any point in the property cycle and not any kind of structural risk premium.

  • 5. Bargaining Power of Buyers (Neutral)

Of all the five forces, this is perhaps the most dependent on 1) the stage in the industry cycle; 2) regulations to protect consumer interests and 3) financial state of individual developers. Given this wide variance, it is very difficult to conclude definitively that buyer power is always strong or always weak. The truth is buyer power will fluctuate greatly. Thus developers that have a larger proportion of their business in markets with weaker buyer bargaining power will obviously realize higher returns.

work on thin margins. Although developers can backward integrate and take on construction duties themselves, this

Near the peak of a property cycle, the combination of investment and end user demand generally outstrip available supply. This gives developers tremendous pricing power and leads to outsized returns. Conversely, near the bottom of the cycle, developers are usually overstocked and must cut prices to move units.

In

the

transaction

of

any

large sized

 

information

is

purchases, the key to knowing

what

a

reasonabl\price to pay is.

Figure 1 Property Cycle regulations,

In the

absence of rules and

Building, Construction Industry and Real Estate Services

developers often maximize revenue by trying to extract the maximum possible price for each unit. They can do this by 1)

not publishing any standard price lists and 2) not reporting critical information such as how many units have been sold and at what price. This situation is generally known as asymmetric information and gives the developer tremendous power. However, in most large markets, regulators are aware of this and have enacted laws to protect consumer interests by making information more transparent and readily available. In general, all else being equal, consumers in T1/2 cities or those with consumer protection laws have more bargaining power than cities without protection.

Lastly, developers that are on solid financial footing (larger resulting from a more prudent management of working capital) would generally have greater pricing and operational flexibility than those that are financially overstretched heading into a cyclical trough.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Quantitative

Real Estate Industry: A Financial Analysis

I have attempted to capture the current trends in the Indian real estate industry through financial analysis of a sample of listed companies. This section provides a brief overview of the performance of the sample of listed real estate companies.

The sample selected for this analysis comprised listed real estate companies that had total income of 750 mn and above. We then narrowed down its choice to a fair representative list of 30 companies for which financial information was available for the past five years.

It further categorised the 30 real estate companies into large-size, mid-size, and small-size companies based on their total income, by using the 80:15:5 principle. Based on this categorisation, 12, 10, and 8 large-size, mid-size, and small-size companies respectively were chosen.

This classification primarily aims to study the dynamics and operating efficiencies of the chosen companies in the real estate industry. Of the 30 companies under study, in FY10, large companies contributed 80% of total income and had 40% representation.

Debt- equity Ratio

Real estate companies require significant resources to fund their projects. Thus, they went on an equity capital raising spree during FY06–FY08 to scale their operations aggressively. These companies also procured considerably high debt to finance their capital-intensive projects.

However in FY09 and FY10, growth in equity and debt declined due to decreased demand, a downtrend in sales, stoppage in execution of projects, rising interest expenses and the credit crunch arising out of the global financial crisis.

The global financial crisis, volatile capital markets, slowdown in FII flows made it difficult for companies to raise funds through equity markets.

Further, in FY10, the focus of companies was to enhance cash flows, release cash blocked in non-core assets, increase process improvements and cost cutting, and achieve better working capital management along with real estate development. This resulted in renewal and progress of certain stalled projects and new launch announcements.

ROCE

The return on capital employed (ROCE) is a measure of returns that a company is realising from capital employed. ROCE is defined as the ratio of profit before interest and taxes (PBIT) to capital employed.

Building, Construction Industry and Real Estate Services Quantitative Real Estate Industry: A Financial Analysis I have

Another factor that led to a sharp decline in ROCE of real estate players is increase in capital employed at a higher pace than PBIT growth. In fact, small and large companies registered a sharp decline in PBIT as against a positive growth in capital employed, which had a double effect on ROCE. In FY10, PBIT of mid-size companies grew at a lesser rate of 19.7% compared with 27.8% growth in capital employed. However, large and small companies saw a decline in PBIT of 20% and 30.2% compared with 25.3% and 8.6% growth in capital employed.

Fixed Asset Turnover Ratio

Fixed Asset Turnover ratio shows that 12.32% . FATR is mostly modest leaving one firm, which tell that most of the companies were able to sail out with much fixed asset harm.

Compound Annual Growth Rate - CAGR ( Revenues )

Company

March

Mar’11

Mar’10

Mar 09

Mar 08

CAGR

Name

2012

DLF

10,207.88

10,091.54

7,791.31

10,392.55

14,655.01

-6.98%

Omaxe

62.90

62.51

90.77

 
  • 78.12 -30.88%

398.80

   
 

UNITECH

326.71

510.08

544.30

 
  • 739.66 -20.53%

1030.68

   
 

ANSAL API

  • 10.32 10.55

 

6.41

 
  • 10.06 7.39%

7.24

   
 

Parsvnath

 
  • 25.53 133.85

75.48

   
  • 113.04 -42.57%

408.74

   

Developers

 

Ltd.

GODREJ

 
  • 81.36 121.84

106.24

   
  • 74.74 1.47%

75.89

   

PROPERTIES

 

LTD

Real Estate

10714.7

10856.4

8688.48

10668.51

16276.36

-8.02%

 
 

Where,

Formula

Another factor that led to a sharp decline in ROCE of real estate players is increasegeometric mean of 1 plus each year's return (i.e. +3% becomes 1.03 and -2% becomes 0.98), minus 1 " id="pdf-obj-43-205" src="pdf-obj-43-205.jpg">

 : start value, : finish value, : number of years.

: start value,

 : start value, : finish value, : number of years.

: finish value,

 : start value, : finish value, : number of years.

: number of years.

Actual or normalized values may be used for calculation as long as they retain the same mathematical proportion.

The CAGR can also be calculated as the geometric mean of 1 plus each year's return (i.e. +3% becomes 1.03 and -2% becomes 0.98), minus 1

Analysis:

CAGR of Real Estate industry has Been -8.02, which clearly signifies that industry has been

Building, Construction Industry and Real Estate Services

suffering from low earning capability over 5 years or so. The main reason for such Drastic fall is “recession” , which has made consumer reluctant to invest. It was backed by Raising interest Rates.

Cumulative Average Growth Rate

Interpretation

Real Estate is suffering from down turn of cumulative average growth rate.

A -340 % of decrease show that industry is not healthy right now.

Recession has had adverse effect on Indian real estate industry.

Suggestion

Real estate companies has to inject money to start new projects.

Companies have to formulate effeicient policies to skip florclosures.

JnNurm

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services
  • 2.6. Profile of Investments and Projected Industry Size

Given the skill requirements outlined in the earlier section, it is also necessary to forecast the human

resource requirement required in the Infrastructure and Real Estate sector. The first step is to forecast

the industry size.

In this section, we will analyse the profile of investments planned in each of the sectors and arrive at

the projected industry size.

2.6.1. JnNURM

According to India's Census in 2001, more than 285 million people (27.8% of the total population)

live in urban areas. With this large base, which is growing at the rate of around 2.7% annually, India

has the world's second largest urban population. Given the current trends in population growth and

migration, India's urban population is estimated to reach 575 million by 2030. Consequently, the

Jawaharlal Nehru National Urban Renewal Mission (JnNURM) was set up to encourage reforms and

fast track planned development of identified cities. Focus is to be on efficiency in urban infrastructure

and service delivery mechanisms, community participation, and accountability of Urban Local Bodies

(ULBs)/Parastatal agencies towards citizens. The current list of 65 12 cities under JnNURM together

host around 120 million residents, which constitutes 42% of all urban residents in the country, or 12%

of total Indian population.

For the 65 cities identified under the JnNURM, the total investments are expected to be over Rs.

3,35,000 crore directed towards Urban Infrastructure and Governance (UIG), Basic Services to Urban

Poor (BSUP) and Capacity Building and Institutional Development (CBID). Of these investments in

Urban Infrastructure and Governance (UIG) account for over 80% of the total investments under the

JnNURM, as below:

12

Including inputs on addition or deletion of cities/ UAs/towns, the total number of

cities under the

JNNURM will remain around 60 – the figure of 63 cities has recently been revised to 65 cities.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 16: Investment planned under JnNURM totalling Rs. 3,35,000 crore

Basic Services C Capacity to U rban Poor Building and (BSUP) Institutional 17% D velopment e
Basic Services
C
Capacity
to
U
rban Poor
Building and
(BSUP)
Institutional
17%
D velopment
e
(CBID)
1%
Urban
Infrastructure e
a nd Governa ce
n
(UIG)
82%

As part of Urban Infrastructure and Governance, investments are being made under the heads of

Urban Transport, Water Supply, Sewage/Sanitation, Drainage/Solid Waste Disposal, MRTS, and

Solid Waste Management. Of these, the investments in Urban Transport, Water Supply, Sewage

/Sanitation account for about 80% of the total investments under the JnNURM, with Urban Transport

alone accounting for over 50%, as seen below:

Figure 17: Investments under various heads of JnNURM (Rs. crore)

Urban Transport 137,391 t 9 Water Suppl 40,062 y 0 Sewage / Sanitation g n 33,324
Urban Transport
137,391
t
9
Water Suppl
40,062
y
0
Sewage / Sanitation
g
n
33,324
2
Drainage / SW D
20,100
s
Others
16,762
S
MRT
12,050
M
SWM
6,80 9
9
-
20,000
40,000
60,000
80,000
8
100,000
120,000
140,000
160,000

With respect to the states, investments in Maharashtra, Tamil Nadu, Andhra Pradesh, Delhi, Uttar

Pradesh, Karnataka, Kerala, Gujarat, Jharkhand and West Bengal account for over 80% of total

investments under the JnNURM, as seen below:

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 18: State-wise investments under JnNURM

West Other s 3% Maharashtra M 18% 18% d 4% Tamil Nadu Gujarat 13% 5% Andhra
West
Other
s
3%
Maharashtra
M
18%
18%
d
4%
Tamil Nadu
Gujarat
13%
5%
Andhra Pradesh
h
Karnataka
a
12%
7%
Uttar P
r adesh Delhi (NCT)
(
%
%
Kerala a
7%
7%
6%

2.6.2. Power

The total installed capacity of power currently in India is over 1,50,000 MW. This is expected to

increase to over 3,18,000 MW by 2021-22. Hence additional capacity of about 1,68,000 MW will be

needed. For this, it is expected that about Rs. 7,07,500 crore will be needed for Generation and about

Rs. 6,19,000 crore will be needed for Transmission and Distribution, as seen below:

Figure 19: Investments in Power Generation, Transmission and Distribution up to 2021-22 (Rs. crore)

T Transmission and Distribution 47% Generation 53%
T
Transmission
and
Distribution
47%
Generation
53%

The infrastructure for Transmission and Distribution needs to be set up in each state based on the

additional capacity required in that state. The investments in power Generation cannot be attributed to

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services

the state which has the demand, since the power need not be generated at the same location where it is

needed. Thus, while the state-wise breakup of investments for Transmission and Distribution are as

seen below, investments in power generation cannot be attributed to particular states.

Figure 20: State-wise investments in Transmission and Distribution

Andhra Pradesh h Others Uttar Pradesh 9% 18% 10% West Bengal 4% Tamil Nadu Bihar 9%
Andhra Pradesh
h
Others
Uttar Pradesh
9%
18%
10%
West Bengal
4%
Tamil Nadu
Bihar
9%
4%
Maharastra
a
9 %
Karnataka
4%
Gujarat
u
Delhi
Rajasthan
Punjab
n
7%
5%
5%
5
7%
Madhya
Pradesh
4% Haryana
y
5%
  • 2.6.3. Ports

India currently has 12 major ports and 187 minor ports. In 2007-08, major ports accounted for about

70% (519 million tonnes) of the total port traffic in

remaining 30% (220 million tonnes).

India, while minor ports accounted for the

As regards investments going ahead, the investments in minor ports will account for abut 50% of the

total investments in ports.

  • 2.6.4. Airports

India has a total of 125 airports and currently all 125 airports are owned and operated by the Airports

Authority of India (AAI). The Government aims to attract private investment in aviation

infrastructure, as seen in the cases of privatisation of the Delhi and Mumbai airports as well as the

new international airports at Bangalore and Hyderabad. The latest status of airports that have been

commissioned/granted approval/are under consideration is as below:

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Table 9: Airports commissioned / granted approval / under consideration

 

Name

State

Status

Bangalore International airport

Karnataka

Commissioned

Hyderabad International airport

Andhra Pradesh

Commissioned

Mopa airport

Goa

Approval Granted

Navi Mumbai International airport

Maharashtra

Approval Granted

Kannur airport

Kerala

Approval Granted

Bijapur airport

Karnataka

Approval Granted

Simoga airport

Karnataka

Approval Granted

Hassan airport

Karnataka

Approval Granted

Gulbarga airport

Karnataka

Approval Granted

Sindhudurg Airport

Maharashtra

Approval Granted

Dabra Airport

Madhya Pradesh

Approval Granted

Durgapur Airport

West Bengal

Approval Granted

Greater NOIDA

Uttar Pradesh

Under

international

airport

Consideration

 

Under

Chakan international airport

Maharashtra

Consideration

 

Under

Karaikal airport

Puducherry

Consideration

 

Under

Jhajjar airport

Haryana

Consideration

 

Under

Ludhiana

Punjab

Consideration

 

Under

Paladi-Ramsinghpur

Rajasthan

Consideration

 

Under

Bharuch

Gujarat

Consideration

 

Under

Rameswaram

Tamil Nadu

Consideration

 

Under

Itanagar

Arunachal Pradesh

Consideration

2.6.5. Roads

India has an extensive road network of 3.3 million km – the second largest in the world. Roads in

India carry about 65% of the freight and 80% of the passenger traffic. The Government of India plans

to spend about Rs. 50,000 crore per annum on road development over the next five years. Road

projects in India consist of the National Highways that are being constructed under 7 phases of the

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

National Highway Development Project (NHDP), State Highways, Rural Roads and the North East

roads Special Accelerated Road Development Program, the investments in which are as below:

Figure 21: Planned Investments in Roads in the Eleventh Five Year Plan (Rs. crore)

NE roads Spl Rural Roads Acc Road Dev Program 36,800 4,800 12% 2% State Highways 116,000
NE roads Spl
Rural Roads
Acc Road Dev
Program
36,800
4,800
12%
2%
State
Highways
116,000
National
37%
Highways
154,300
49%
  • 2.6.6. Projected Size of the Infrastructure and Real Estate sector 13

Given these investments, we forecast that the real GDP of the Building, Construction and Real Estate

sector to grow at a CAGR of 9.5% to 10% till 2022, in real terms. The GDP economy of Construction

would be about Rs. 8,000 billion in constant prices at 2022.

Figure 22: Projected Real GDP of Construction sector (Rs. billion)

9,000 - 7,925 8,000 9.5% to 7,000 5,833 6,000 5,000 4,000 3,427 3,000 2,263 2,000 1,000
9,000
-
7,925
8,000
9.5% to
7,000
5,833
6,000
5,000
4,000
3,427
3,000
2,263
2,000
1,000
-
2008
2012
2018
2022

Source: IMaCS analysis

13 Our overall approach to macro-economic modeling and forecasting is explained in a separate annexure

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

While Real Estate (including housing and commercial) would account for 30% of the activity, the rest of

the infrastructure activity (70%) would be shared across the following areas in the proportion

indicated below.

Table 10: Share of economic activity estimated in the Infrastructure segment

Sector in Infrastructure

% of economic activity

Electricity

32.4%

Road and Bridges

15.3%

Telecommunication

12.6%

Railways (including MRTS)

12.7%

Irrigation

12.3%

Water Supply and

7.0%

Sanitation

Ports

4.3%

Airports

1.5%

Others

1.9%

Source: Planning Commission’s Tenth and Eleventh Five Year Plan and IMaCS analysis

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Abstract

The Global Credit Crises that began like a small fire in the US housing finance market in 2007 spread and became a forest fire that first engulfed the US, then the Western economies, and eventually the rest of the world, including India. The crisis is clearly the deepest and the most widespread economic meltdown that the world has faced since the Great Depression. Indian industry started experiencing the real impact of the global financial meltdown from the last quarter of 2008. The Indian economy, which was on a robust growth path up to 2007-08, averaging at 8.9 per cent during the period 2003-04 to 2007-08, witnessed moderation in 2008- 09, with the deceleration turning out to be somewhat sharper in the third quarter. IT industries, financial sectors, real estate owners, car industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy. The Real Estate Business has seen 62 per cent decline in revenues, 58 per cent decline in PBDIT, and 78 per cent decline in net profit, between March 2008 and March 2009. This decline has been accompanied by a significant fall in the property prices in India. The importance of the real estate sector in India cannot be understated given the strong forward and backward linkages that it generates. The sector has demand implications for intermediate inputs like steel, cement, etc., while keeping afloat the whole construction industry including transport and other intermediate labour services. Given its importance for the economy it is worthwhile to see how adverse expectations are playing a role in this sector and what the possible solutions are.

Introduction

“March 16, 2008: Bear Stearns is acquired for $2 a share against its 52-week high of $134. July 14, 2008: Oil hits $145 a barrel and then collapse to $34 within six months. September 15, 2008:

Collapse of Lehman Brothers. November 20, 2008: Dow Jones at a record low of 7,449 points. June 1, 2009: General Motors files for bankruptcy. We are living in a time that has seen unprecedented volatility. From boom to bust in a matter of months”.

To begin with let us define the term Recession; „recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

The Real Estate industry in India witnessed unprecedented growth in a relatively short span of time. With most companies having seen only the upward swing, the economic downturn proved to be a litmus test. Companies with stronger fundamentals and ability to make quick strategic decisions continued to operate, though with reduced visibility and size of operations, the weaker ones found it challenging to retain their position and image as a Real Estate developer.

As has been said, “Businesses with the right strategy and vision come out stronger from times of depression”.

In order for Companies to gear up to face the challenge, it is imperative to understand how the real estate market has been impacted. There is an overall slowdown in demand across India as has been experienced by industry players. Property prices and rentals are correcting which have led to the erosion in market capitalisation of many listed players like DLF and Unitech. Many current projects of real estate developers have been stalled due to lack of funds and investors either do not have funds to invest or are reluctant to do so. Consequently, companies are forced to sell of the properties at a lower value. This scenario is ascertained by the fact that finding buyers is also proving to be a challenge.

Building, Construction Industry and Real Estate Services

Increasing input costs has led to margin shrinkages, in fact, companies with ordinary supply chain management have stalled their projects. Rising costs, lack of capital, reluctance of buyers have all contributed to the current scenario. This paper aims to analyse various strategic initiatives by companies to combat the existing times and sustain their businesses through future turbulent times.

Objectives of The Study

Following are the objectives of the study:

  • 1. To study the impact of Global recession on Indias real estate sectors foreign direct investment flows, rate of growth, sales and profit after tax (PAT) and

  • 2. To analyse various strategic initiatives by companies to combat the existing times and sustain their businesses through future turbulent times.

  • 3. To give suitable conclusion & suggestion.

Hypotheses of The Study

  • 1. There is no significant impact of recession on Indian real estate market (Ho)

  • 2. Global recession has a definite impact on development of Indian real estate market (Ha)

Research Methodlogy

The study is primarily based on secondary data collected through journals, periodicals, Websites and newspapers

Results and Discussions

The real estate market in India remains unorganized, fragmented and characterized by small players with a local presence. The growth of the real estate sector is attributed to various factors such as growing economy, growing business needs etc. However, this boom is restricted to areas such as commercial office space, retail and housing sectors. The major concerns of this sector namely are skill shortage, non-availability of statistics, lack of low cost-affordable housing, lack of sustainability and to meet a future that might have downturn due to oversupply. The industry is presently facing a major resource crunch – an obvious lack of qualified and skilled people. Coupled with this manpower shortage is the shortage of availability of relevant statistics, which has created an ambiguity as to how much construction activity is actually taking place and one cant gauge the demand and supply trends accurately.

The major issues that plague this industry is tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing. So, there is a dearth of low cost affordable units. Recession in US economy has caused great impact on Indian real estate business. The real estate industry was a booming industry in pace with information technology (IT) industry. Demand for it space and from high net worth individuals had created opportunities for the this sector.

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

Figure 1: Quarterly Estimates of GDP At Constant (1999-00) Prices-Growth Rates 7

12 10.2 9.4 9.8 9.7 10 9.2 9.3 9 8.6 7.8 7.7 8 5.8 5.8 6
12
10.2 9.4 9.8
9.7
10
9.2
9.3
9
8.6
7.8
7.7
8
5.8
5.8
6
4
2
0
2006-07
2007-08
2008-09
Q 1Q2
Q3
Q4
Real GDP Growth (%)

Source: Reserve Bank of India Bulletin

The Indian industry has dealt with economic slowdowns in the past but this one is in the nature of contagion effect of the western recession. The full spectrum of the shades of the contagion is not evident in the GDP growth trend. Numbers alone would indicate that economic slowdown, so far, has been barely a two-quarter phenomenon. In figure 1, the real slowdown was seen only in the last two quarters of 2008-09. Sales growth respectively dropped to 9.5 per cent and 1.9 per cent in Q3 and Q4 with much worse impact on the net profits that respectively fell by 53.3 per cent and 19.9 per cent.

Figure 2: Sales And Profit After Tax Trend of India Real Estate Sector 8

5000 4500 real-estate sales 4000 real-estate profit 3500 3000 2500 2000 1500 1000 500 0 Rs.
5000
4500
real-estate sales
4000
real-estate profit
3500
3000
2500
2000
1500
1000
500
0
Rs. in Crores
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09

Building, Construction Industry and Real Estate Services

Building, Construction Industry and Real Estate Services
Building, Construction Industry and Real Estate Services

The trend in sales and net profit of “worst affected” Real Estate is given in figure 2. The Real Estate has been 62 per cent decline in revenues, 58 per cent decline in PBDIT, and 78 per cent decline in net profit, between March 2008 and March 2009. This decline has been accompanied by a

significant fall in the property prices in India. However, the sector shows a moderate recovery in the quarter after March 2009.

Table 1: Rate Of Growth At Factor Cost At 1999-2000 Prices (Per Cent) 9

 

2003-

2004-

2005-

2006-

2007-08

2008-

04

05

06

07

09

Agriculture, forestry & fishing

10

0

508

4

4.9

1.6

Mining & quarrying

3.1

8.2

4.9

8.8

3.3

3.6

Manufacturing

6.6

8.7

9.1

11.8

8.2

2.4

Electricity, gas & water supply

4.8

7.9

5.1

5.3

5.3

3.4

Construction

12

16.1

16.2

11.8

10.1

7.2

Trade, hotels & restaurants

10.1

7.7

10.3

10.4

10.1

9

Transport &

15.3

15.6

14.9

16.3

15.5

9

communication

Real estate & Financing

5.6

8.7

11.4

13.8

11.7

7.8

Community, social & personal services

5.4

6.8

7.1

5.7

6.8

13.1

Total GDP at factor cost

8.5

7.5

9.5

9.7

9

6.7

Source: Central Statistical Organization

Figure 3: FDI Equity In Indian Real Estate Business 10

14000 12621 12000 10000 8749 8000 6000 412% 144% 4000 2121 2000 0 2006-07 2007-08 2008-09
14000
12621
12000
10000
8749
8000
6000
412%
144%
4000
2121
2000
0
2006-07
2007-08
2008-09
Rs. in Crores

Source: RBI’s Bulletin August 2009 (Table No. 46 – Foreign Investment Inflows)

Above Table no 1 reflects how the steady growth rate of real estate sector was slowed down in

Building, Construction Industry and Real Estate Services

year 2008-09 due the recessionary trend prevalent in the economy .this proves our hypothesis (Ha) that recessionary effects were responsible for downtrend in the real estate sector and null

hypothesis is rejected from the observations made. In figure 3, it is seen that FDI equity in Indian Real Estate Business is increasing but in reality it is not so. In the year 2007-08 it is increased by 412 per cent and in 2008-09 it is only increased by 144 per cent. So it is not rise as it is accepted by the Real Estate Market.

Strategies To Cope Up With The Above Situation

Challenging times present an opportunity for Companies to capture market share by outperforming competitors. A quick analysis of the market conditions and quicker response to mitigate existing risks differentiates companies. There can be multiple reasons why some companies continue to tread well while some companies falter badly, when faced by serious challenges. But, invariably, the most significant role here is played by the strategic decisions taken by the company. When the global economic crisis, compounded by the local economy issues, started hitting real estate demand in India, different companies reacted in different ways.

1) Financial Decisions

Initially, developers were reluctant to reducing real estate prices in order to revive demand. However, with no immediate respite and growing pressure to cut down losses, a gradual slash down in prices was introduced. The worsening situation of credit availability led developers into liquidity crunch. Many developers succumbed to borrowing at a very high cost, Private Equity which was once easily available became a very distant option.

2) Diversification of Business

Recognizing the need of developing multiple streams of revenue, some cash-rich developers vertically diversified (or attempted to diversify) their businesses into telecommunications, financial services, insurance, etc. Horizontal diversification into services related to property management and leasing also surfaced up as a preferred strategy for dealing with the downturn. Owing to increased competition in metropolitan cities, developers opted to diversify geographically as well. Tier II and Tier III cities thus came under their radar. Interestingly, one can easily find developers cheering their strategy of foraying in smaller cities, which are relatively less-affected of the ongoing economic turbulence. Maintenance of high equity

As part of long term strategy, instead of selling off properties, developers began to enter onto lease agreements with larger companies for commercial space. The long term rental arrangement, though at reduced rates, guaranteed a steady stream of income.

3) Cost Control

In the wake of controlling cost like most other sectors of the economy,

Indian real estate

companies also embarked upon various cost cutting strategies. Capital intensive projects that

had no impact on companys revenues in the short term were either put on hold or scaled down, and even cancelled. IT related projects were among major ones in this case.

Building, Construction Industry and Real Estate Services

had no impact on company ‟ s revenues in the short term were either put on
had no impact on company ‟ s revenues in the short term were either put on

However, some significant projects such as those including the use of IT to improve investor access to information are important, and most developers appear to agree on this. Therefore, projects meant for maintaining a fair interface between the company, investors and customers hold water, especially during the turbulent times. A number of companies also downsized their extra manpower. However, in many instances, this was not done in a thoughtful manner, thereby putting companies on the risk of losing essential talent in exchange of short term cost savings. A number of real estate companies in countries such as the US and the United Kingdom (UK) dont hesitate in outsourcing their marketing activities after carrying out the necessary due diligence. This acts as a measure to infuse efficiency and cut unnecessary costs involved in many of the related processes.

4) Focus On Customer Satisfaction

The ongoing condition of economic contraction has also resulted in improved services to the customer. In order to shed off an image of being non-transparent and unorganised, a number of developers increased their focus on customer satisfaction. A customer was provided the facility of checking the status of construction of his property by logging on to a website. Earlier, this was possible only after visiting the site and following up with the concerned officials. With such initiatives, developers are fast changing their image as professionally managed corporate houses, committed for meeting customer expectations and empathetic in resolving the concerned issues.

Conclusions & Suggestions

Owing to the correction in real estate prices and re-aligning of business strategy, as per the ongoing business environment, has resulted in some signs of revival in the Indian real estate sector, in the recent past. A stable political scenario has also boosted confidence in the Indian capital markets, and the overall business environment. This was further complemented with the Indian economy managing to achieve a growth rate of 6.7% during 2008-09, despite recession in the global economy.

At the first instance, such positive indicators reinforced the potential of Indian domestic economy, while uplifting sentiments otherwise enshrouded by negative movements on the front of employment and deepening financial crisis in the global economy.

These small packs of positive developments slowly flowing into the economy have also started generating interest amongst customers, and some developers have experienced improving situation in terms of demand of real estate in select pockets. The recent situation, however, has sent the message home. The Indian real estate companies are urged to focus on customer satisfaction. The industry is no more dominated by a developer, putting customer expectations at the backstage and carrying on operations at his own sweet will.

More significantly, the ongoing correction in the real estate market has indicated towards its fundamental strength wherein it tends to correct itself with any excesses on the front of prices, and other demand relating factors. Nevertheless, real estate companies are fast-learning to lay emphasis on retention of existing customers and acquire new customers. The present times have been calling for a fair level of flexibility, which even the real estate companies have been

expecting from their suppliers and service providers. At the same time, many developers have found a viable strategy in forging collaborations – leading to cost benefits, synergies, and mutual

Building, Construction Industry and Real Estate Services

strength. The potential areas of collaboration include supply chain, procurement, production and brand promotion.

Nevertheless, this phase of market consolidation is a real opportunity where weaker players will be defragged and stronger ones will increase their market share through well-thought business strategies, and further tighten their belts for high growth in the future. The Budget 2010 presented a mixed bag for real estate sector in India. However, it has failed to address some of the key demands of the real estate developers, including infrastructure status to the real estate sector, relaxation of external commercial borrowings to fund projects, provision of separate deduction of Rs. 1 lakh for housing loan repayment or increasing the overall 80C deduction to Rs. 2 lakhs etc.the key to growth of this sector lies in growth of disposable income with the population and willingness of property developers to build affordable homes for middle class.

“It is said, that success is not about how high you rise, but about how high you bounce back when you hit rock-bottom. Real Estate companies today are at that strategic inflection point, where they must define new imperatives to be successful once again. Bridging the gap between the customers and themselves, taking a harder look at resource-sapping processes, and above all gaining agility and flexibility as organizations, will be the stepping stones to success.” - Vinamra Shastri

Head – Strategic Services & Partner, Grant Thornton India

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