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Indian Real Estate Sector

From:
Equit-I Finance Club, IIM Indore

Introduction
Overview

FDI in Real Estate

The real estate and construction sector is an integral


part of the economy and plays a major role in
developing countrys infrastructure base and
generating economic activity
The construction sector has strong linkages with
various industries such as cement, tiles, steel,
chemicals, paint, fittings and fixtures, etc
Real estate is one of the biggest drivers of economic
growth and investments and is critical to Indian
economy given its multiplier effect
Real estate sector in India contributes around 6.3% to
the total GDP. The estimated market size was US$78bn
in 2012, which is expected to double and become
US$140bn by 2017
Changing demographics, rising income level and rapid
urbanization would be the key factors in fueling this
significant growth
As per CREDAI estimates, the real estate sector alone
would have generated close to 7.6 million jobs during
the year 2013. CREDAI has also projected that the real
estate sector would generate more than 17 million
employment opportunities for India by 2025
However the sector is largely fragmented and is highly
unorganized in India. Though with increased foreign
investment, entry of international real estate players
and corporates, the industry is getting more organized

The sector riding high on the back of rapid


urbanization, positive demographics and increasing
income levels, has attracted significant investment
over the past few years.
FDI inflows into the construction development sector
in 2013-2014 stood at US $ 1,226 million
Recently, in the budget, a big impetus was provided to
attract FDI and bring in expertise to set-up new
townships and communities. This will help boost
urbanization, especially in tier II and tier III cities
which were earlier struggling to develop such large
projects, and where developers were hesitant to take
up such risky ventures
40,000
30,000
21,376
20,000

15.0

34,833

9.0

7.8

21,825
6.1

10,000

24,299
5.0

9.0
6.0
3.0

0.0
2010-11

2011-12

2012-13

2013-14

FDI Equity Inflows (US$ Million)


Share of FDI Equity Inflows in Construction Sector

Source: Company Website, Press

12.0

Key Factors and Growth Drivers


Factors affecting Real Estate

600

Demographics

500
400

Factors affecting
Real Estate

State of the
Economy

300

Government Policy

100

Source: CII & CBRE Realty 2014, Press

0.322

0.3

0.382

0.4
0.3
0.2

286

357

432

534

2011

2021

2026

0.1

2001

Urban Population (in Millions)


Urban Population as a % of total population

Current Growth Drivers in India


Increasing urbanisation
Rising disposable incomes
Rapidly growing middle class
Growing number of nuclear families
Tax benefits on interest and principal payments for
housing loans
Easier and flexible financing options for buyers
from increasing number of private players
Real estate being considered a conventional class of
investment asset
Government push for development of suburbs &
peripheral business districts to decongest old cities
Office Space demand led by service sector especially
IT-ITES

0.278

200

Interest Rates

0.5

Household Income (INR)


400,000

350,000
290,000

300,000

200,000

250,000
160,000

156,000
123,000

100,000
0
Rural

Urban
2009-10
2015-16

All India

Source: NCAER National Survey of Household Income and Expenditure, 2011

Real Estate Segments & Emerging Trends


Segment specific Growth Drivers

Future Drivers of Growth

Commercial Office Space


IT/ITES sector to grow at 14% (as per Nasscom)
Shift in the type of operations from Sale Model to
Lease & Maintain Model
Residential
Decreasing household size Average household size
declined from 5.5 in 1981 to 4.8 in 2011
Easier
Retail Space
Increasing disposable incomes
Changing customer tastes & preferences rapid
growth of organized retail
Entry of international retail chains & liberalization
of FDI in retail
Hospitality
Increasing number of business travellers due to
expanding economy
Strong growth in domestic & international tourism,
Travel and tourism in India is expected to grow at
12.7% till 2019

Most of the current drivers will continue to drive


growth. Additional drivers of future growth include:
Funding REITs, FDI, ECBs for affordable housing
Better regulatory framework for the sector with the
proposed Real Estate Bill
Push towards Affordable Housing by government
incentives & private sector cost efficiencies
Modernization of Land Records
Smart Cities & Townships along industrial corridors

Emerging Trends

Affordable Housing Large Demand Supply Gap,


housing shortage of 18.4 million units in 2012
Senior Citizen Housing 60+ yrs population to
touch 173mn by 2025 & 240mn by 2050
Green Homes Currently 1.76 bn sq ft of built-up
green space, likely to swell to 16 bn sq ft by 2020
Pre-cast Construction Due to shortage of skilled
labour, rising material costs, regulatory issues &
high interest rates

Reasons for Current Slowdown

General Slowdown in the economy


High Interest Rates
Project Competition Delays
Regulatory Issues Land Acquisition

23%

Distribution of
Investments
(H1 2014)

Source: CII & CBRE Realty 2014, Census India, CMIE Website, CREDA Website, Press

38%

32%

6%

Office
Residential
Development Sites
Others

Economic Impact
Overall economic impact of the real estate sector in the year 2013
The following is the broad estimate of the economic footprint of the real estate construction sector in the year 2013:
Total estimated real estate supply (2013)

3.6 billion sq. ft.

Organised investment grade commercial office, retail and residential space (2013)

200 million sq ft

Total commercial office stock in India

415 million sq ft

Total revenue potential of real estate construction in 2013

INR 370,000 crores

Estimated gross domestic product (2013)

INR 5,833,685 crores

Total employment generated by the sector in 2013

7.6 million people

Total investment generated by the sector in 2013

INR 254,000 crores

Economic footprint of real estate sector in 2013


The economic opportunities generated by the estimated consumption of the selected construction component sectors have been
provided below.
Economic footprint of real estate sector
Potential revenues (INR Crores)
Investment generated (INR Crores)
Direct employment generated

Iron &
Steel

Cement

Bricks

Glass

Sand

Wood

Others

1,03,000

78,000

47,000

34,000

15,000

45,000

48,000

87,000

70,000

18,000

4,000

7,000

35,000

33,000

1,57,000

1,00,000

16,00,000

2,000

1,05,000

1,29,000

350,000

Potential employment generated on the building site during the construction of 3.6 billion sft in 2013

Source: CBRE Research, CREDAI

5,100,000

Budget 2014-15 Initiatives


Budget 2014-2015 measures for real estate sector
Key policy measures relating to the real estate sector announced in the budget were :
o Provision of INR 7,060crores for development of 100 smart cities
o Allocation to National Housing Bank of INR 8,000 crores and 4,000 crores to support
rural housing and urban affordable housing respectively
o Inclusion of slum development in Corporate Social Responsibility activities

o Built-up area and minimum capitalization requirements for FDI in real estate sector
proposed to be reduced from 50,000 sq. meters to 20,000 sq. meters and from
US$10million to US$5million respectively with a three year post completion lock-in
o Exemption from minimum built-up area and capitalization requirements for projects
committing atleast 30% of the total project cost for affordable housing

o Real Estate Investment Trusts (REITs) to be allowed with pass-through tax status
o Deduction of home loan interest increased from INR1.5 lacs to INR2.0 lacs and for
home loan repayment increased from INR1.0lacs to INR1.5 lacs

Source: Company Website, Press

Outlook
Estimated share of the Real Estate Sector in Indias GDP

The economic contribution of the real estate sector is projected to increase significantly during the period,
from 6.3% in 2013 to almost 13% in 2025
This spiralling of growth can be attributed to the significant construction opportunities offered by the
housing sector, largely accentuated by the intensifying demand for residential space in the expanding urban
city limits

6.3

2013

13.0

2025

CRISILs view
With an improvement in economy, residential demand is expected to pick up
o But the pick up is likely to take 2-3 quarters ( 6% in 2015 and 8% in 2016)
o Consequently, growth in capital values will be moderate (3% in 2015 and 5% in 2016)
Commercial and retail real estate industry to remain subdued
Funding requirement is expected to remain high over the next 2 years; developers to sustain this period
o Going forward, developers will continue to adjust construction to avoid further liquidity pressure
o Funding to be mainly supported by banks; alternate sources to also gain momentum
Source: CBRE Research, CREDAI, CRISIL

Outlook (Contd)
Measures announced in Budget 2014-15 will help ease the liquidity crunch that the
sector is battling, and simultaneously promote large-scale investments in the
infrastructural sector
Also, the tax exemption measures announced will boost household savings, leading to
a revival in demand for real estate
Recent policy-based efforts and progressive reforms initiated in mid-2013 in the form
of Real Estate Regulatory (RER) Bill and new Land Acquisition Act will collectively
make the real estate sector more transparent and appealing for developers, investors
and buyers.
Economic and political stability are the vital catalysts for revival of the real estate
sector in India. A stable government at the helm, prospects of revival in GDP growth
and strong expectations regarding the introduction of developer and buyer friendly
policies, indicate a promising outlook for the real estate sector in 2014

Source: Sector Reports