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Sector Analysis- Real Estate

Sector Analysis- Real Estate

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Published by lisa moh

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Published by: lisa moh on Jan 15, 2010
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12/06/2010

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THE REAL ESTATE SECTOR 
Size of The Sector:
The real Estate sector is currently worth US$ 12 billion, it is growing at therate of around 30% annually and has a potential to grow to a whopping US$45 – 50 billion in the coming five years. People all across the Asia Pacificregion are viewing the real estate sector in the country as the most lucrativeone and thus offering great prospects in the near future in respect tocontribution to the nation’s growth and the same can be gauged from the factthat it is the second largest employer next to only agriculture. Five per cent of the country’s GDP is contributed by the housing sector. Inthe next three or four or five years this contribution to the GDP is expected torise to 6%.
Growth Trends:
Driven by positive growth in the economy, real estate in India is booming.The year 2006 started on a promising note when the Government of Indiaopened the construction and development sector in February 2006, andallowed 100 per cent foreign direct investment (FDI) under the 'automaticroute' in order to spur investment in the vital infrastructure sector. By 2015,it is projected that the market size would grow to $ 90 Billion.Estimates suggest that the urban housing sector would require investmentsto the tune of $25 billion (Rs. 1.10 lakh crore) over the next five years. Priceshave remained buoyant as new construction lags. According to surveys, therewas a shortage of 19.4 million units (12.7 million units in rural areas and 6.7million units in urban areas) in the country about three years ago, which willrequire real estate in IndiaIt is invariably seen as the most lucrative sector with the booming land pricesand higher profitability all across the country. More and more internationalconstruction companies are viewing it as a great opportunity with the newregime in terms of the growth prospective and saturation of their respectivelocal markets. The factors favoring the real estate market in India, which currently is on ahigh growth curve, are several – a booming economy, favorabledemographics, government’s spending on infrastructure and a liberalized FDIregime. Though there are still certain issues – land reforms and absence of substantial tax incentives for real estate development - that need to beaddressed.
 
Factors affecting the growth:
The development of real estate in India focusses on two primary areas: retailand residential. Growth opportunities are explored to a great extent in boththe area especially in the housing area where the low interest rates act as acatalyst in the growth whereas in the retail sector binding FDI norms act as abarrier. Inspite of those things are very lucrative, infact the gobal real-estateconsulting group Knight Frank has ranked India 5th in the list of 30 emergingretail markets and predicted an impressive 20 per cent growth rate for theorganised retail segment by 2010. The organised segment is expected togrow from a mere 2 per cent to 20 per cent by the end of the decade, it said.Some years back, real estate would bring in mind shady images of brokersbut now with reputed builders and international property consultants joiningthe fray, this image has strengthened and evolved into a professionalcorporate image. It has been a great confidence building tool for the Indianconsumers especially the middleclass people.The Indian middle class, which numbered around 92 million by 2005-06 andcross the 153 million mark by 2009-10 (Source: NCAER) Thus, the demandfor quality housing is expected to keep rising in the years ahead. Fuelling thisgrowth is - attitudinal shift towards a higher marginal propensity to consume,changing consumption patterns and the advent of nuclear families.Gurgaon is set to get the biggest mall of the world — a large US$ 89.78 sq ftsprawling property that is being developed by DLF Universal. It will be knownas Mall of India.
Major Government Policies/Changes in the past three years:
The role played by the government in developing the prospects of this sectorcannot be overemphasized. The changes brought about by the current UPAled alliance has thrown open this sector to develop and evolve as a significantcontributor to the nation’s GDP.The decision to liberalise the FDI norms in the construction sector is perhapsthe most significant economic policy decisions taken by the Government.Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin(PIOs) were permitted to invest in the housing and the real estate sectors.Foreign investors other than NRIs were allowed to invest only indevelopment of integrated townships and settlements either through a whollyowned subsidiary or through a joint venture company in India along with alocal partner. The guidelines prescribed via Press Note 2 (2005) series hasfurther opened out FDI in townships, housing, built-up infrastructure andconstruction development projects.
 
The relaxation of the FDI ceiling saw big names like Dubai-based EmmarProperties -- the largest listed real estate developer in the world -- joininghands with the Delhi-based MGF Developments to announce India's largestFDI in the realty sector amounting to over US$ 500 million in projects havingcapital outlay of US$ 4 billion.The other major event is the introduction of REIT (Real Estate InvestmentTrusts). Currently mutual funds are not allowed to have direct exposure inReal estate but they can make debt and equity investments in the company.The Indian version of REIT- REIS (Real Estate Investment Schemes) wouldenable investments by the small investor in the real estate sector and thusearn dividends on the rental income being paid.Housing loans have been a boon to this sector and the easing of norms in thehousing loans segment has been of great help. Infact, the Government hasmade it mandatory that 3% of the incremental deposits of the banks wouldbe deployed to the housing industry. The budget of 2003-04 allows for a taxdeduction exemption of 1.5 lakhs in the interest payable on housing loans.With many banks like IDBI Bank, CanFin Homes, HDFC and PNB Housinghaving slashed down- it is extremely beneficial for the consumers. This hasprovided a boost to residential sales. Again the easing up of bank finance fordevelopers has acted as important catalysts for the sector. The governmenthas also helped by permitting banks to advance home loans to NRIs.
Some critical news:
Real estate in india has a bright future. Some reports point out certain issueswhich need to be addressed by the government to ensure rapid growth. Someof the issues are: absence of large listed companies in the sector, which hasaffected fund flow; foreigners still cannot buy and sell undeveloped land; andreassessment of the legal aspects relating to stamp duty and rent control.There are some suggestions on the FDI guidelines which are enumerated asfollows:
FDI for existing companies and projects:
Presently FDI is allowed onlyin the case of greenfield projects. In this relation, the policy assumes settingup of a SPV by the foreign investor for undertaking real estate developmentactivities in India. FDI should be permitted in companies which are otherwiseengaged in real estate development companies and own properties, some of which may be developed, partly developed and/ or undeveloped.This would assist in providing the necessary finance to the companies whichface shortage of finance for funding their projects.
 
FDI for the Hotel and Tourism Industry:
A clarification is requiredstating that FDI in Hotel and Tourism Industry would continue to be governed

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