Professional Documents
Culture Documents
Vandna Singh
Head-MBA Department
Seth Jai Prakash Mukand Lal Institute of Engeenring &Technology (JMIT)
Radaur, Yamunanagar
Komal
Lecturer, Institute of Technology & Management (ITM), Gurgaon
E-mail: komal29m@rediffmail.com
Abstract
The present paper entitled “Prospects & Problems of Real Estate in India” is an
attempt to reveal the issues concerned with real estate investment sector in India. This
paper is concerned with the investment on real estate in India and the trends in the
concerned industry. The paper has been divided into three sections. Section one deals with
the fundamental factors affecting the real value like demand, supply, property, restrictions
to use and site characteristics. Section two and three explains the causes and the constraints
to the present real estate boom respectively in India. The paper also presents the
suggestions and future prospects of real estate in the country.
Objectives
The paper aims to examine the present scenario of real estate in India. In this broader framework, an
attempt has been made to achieve the following specific objectives:-
1. To study the fundamental factors affecting the real estate value.
2. To examine the present factors of real estate boom.
3. To present the future constraints of real estate investment in India.
Sample Size
Out of the total companies working in India in the field of real estate 50 major players have been
selected for the purpose of the study.
Research Methodology
The present study is of analytical and exploratory nature. Accordingly the use is made of secondary as
well as primary data. The secondary data is collected mainly through various newspapers, magazines,
Internet and RBI review. To supplement the secondary data, some primary data has also been used
which is collected through interviews and personal visits to the various companies to know the present
situation of the market.
International Research Journal of Finance and Economics - Issue 24 (2009) 243
The present study is dependent more on secondary data. Primary data is not used due to the
reliability of the data. 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 draw the meaningful results. To analyze the data tables, percentage and graphs
were used.
Independent Variables
Prices, features of flat, material used and advertising.
Dependent Variables
Customer awareness, presences and their perception about property.
Introdection
Real estate or immovable property is a legal term (in some jurisdictions) that encompasses land along
with anything permanently affixed to the land, such as buildings. Real estate is often considered
synonymous with real property (also sometimes called reality), in contrast with personal property (also
called personality). However, in technical terms, real estate refers to the land and fixtures themselves
and real property are used primarily in over real estate. The term real estate and real property are used
primarily in common law, while civil law jurisdiction refers instead to immovable property. In law, the
word real means relating to a thing as distinguished from a person. Thus the law broadly distinguishes
between real property (land and anything affixed to it) and personal property (everything else e.g.
clothing, furniture, money).
Real Estate Business Includes: With the development of private property ownership, real estate has
become a major area of business. Purchasing real estate requires a significant investment and each
parcel of land has unique characteristics, so real estate industry has evolved into several distinct fields.
Some kind of real estate businesses include-
• Appraisal – Professional valuation services
• Brokerage – Assisting buyers and sellers in transactions
• Development – Improving land for use by adding or replacing buildings
• Property Management – Managing a property for its owner(s)
• Real Estate Marketing – Managing the sale side of the property business
• Relocation Services – Relocating people or business to difficult country
Types of Ownership Interests: Real property (immovable property) can refer to the real estate
itself or to various types of ownership interests in real estate, including:
• Freehold: Provides the owner the right to use the real estate for any lawful purpose and sell
when and to whom the owner wishes.
• Life estate: An interest in real estate which is granted to a life tenant until that person dies. The
interest terminates upon the death of the life tenant.
• Estate for years: Similar to life estate but term are a specified number of years.
• Leasehold: The right to posses and use real estate pursuant to the terms of a use.
• Reversion: The right to posses the free interest in real estate after the expiration of a life estate,
estate for years or leasehold.
• Concurrent or co-tenancy: The ownership of an interest in real property by more than one
party. Rights of any single party may be limited in various ways depending on the jurisdiction
and type of concurrency.
Participants of Real Estate Market: The main participants in the real estate markets are-
244 International Research Journal of Finance and Economics - Issue 24 (2009)
Owner/User: These people are both owners and tenants. They purchase houses or commercial
property as an investment and also to live in or utilize as a business.
Owner: These people are pure investors. They do not consume but rent out or lease the property to
someone else.
Renter: These people are pure consumers.
Developers: These people prepare raw land for building which results in new product or the market.
Renovators: These people supply refurbished buildings to the market.
Facilitators: This includes banks, real estate grocers, lawyers and others that facilitate the purchase
and sale of real estate.
The owner/user, owner and renter comprise the demand side of the market, while the
developers and renovators constitute the supply side. In order to apply the simple demand and supply
analysis to real estate markets a number of modifications need to be made to standard microeconomic
assumptions and procedures.
Real estate can divided into three categories: These are
• Commercial
• Residential
• Agricultural
We can invest into all the given areas and can make return by capital appreciation, rental
income, agricultural produce, lease and commercial use.
The following factors influence the price and cost of the real estate:
1. The physical characteristics of the property
2. The property rights
3. The time horizon of holding the property
4. Geographical area
5. The development rate
Features of Real Estate Markets: In particular, the unique features of the real estate market must be
accommodated. These include:
• Durability
• Heterogeneous
• High transaction costs
• Long time delays
• Both an investment good and consumption good
• Immobility
Demand
Demand refers to people’s willingness and ability to buy or rent a given property. In part demand stems
from a market area’s base. In most real estate markets, the source of buying power comes from jobs.
Property values follow an upward path when employment is increasing. The real estate market in India
has seen remarkable changes in the past few years. The rapid expansions of information technology,
especially BPOs, spurt in the middle class income and 8% growth in GDP are the potential key factors
for the growth.
India is the 4th largest economy in the world, and has the 2nd highest GDP among the
developing countries based on purchasing power parity. IT and IT enable services sector in India is still
in its growing stage due to increasing demand for business processing units in India and is estimated to
grow by 107% to $583 million in revenue. This could lead to a space requirement of 20-25 million sq.
International Research Journal of Finance and Economics - Issue 24 (2009) 245
ft. per annum, according to a Merrill Lynch report. Taking this factor into consideration, the Total
value of real estate created by the IT and ITES sector in the next three years will be Rs.132000.
Supply Analysis
Supply analysis means sizing up the competition. Nobody wants to pay more for a property than the
price they can pay for competing property. An integral part of value analysis requires identifying
sources of potential competition and then inventorying them by price and features. An analysis of
supply should not limit potential competitors to geographically and physically similar properties. In
some markets, for example, low priced single family houses might compete with condominium units,
manufactured homes and even with rental apartments.
The Property
In real estate the property itself is also a key ingredient. The price that people will pay is governed by
their needs and the relative prices of the properties available to meet those needs. To try to develop a
property’s competitive edge, an investor should consider five things:
1. Restrictions on use
2. Location
3. Site characteristics
4. Improvements
5. Property management
has the distinction to be an excellent option. It gives returns higher than that received with office space
and much higher than the rental returns from residential space.
30%
26.5%
25%
20%
16.0%
15%
10.6%
10%
4.5%
5%
0%
2003-04 2004-05 2005-06 2006-07
Investment by IDFC
The Infrastructure Development Finance Company (IDFC) plans to invest Rs.1,000 crore every over
five years on township projects, InfoTech parks, hotels, retail and transport sectors.
Commercial Boom
According to an expert to a real estate consultancy, there are currently 18 malls in New Delhi,
Gurgaon, Nodia and Faridabad, with approximately built up space of 3 million sq. ft. While 66 new
mall projects have been announced, the crush in the meantime is on the existing space. Abhijit Das,
head, Ansalplaza Mall Management Company, confirms the rental increase. Shops on the first and
second floors of the mall, he says which were being leased at rates between Rs. 175 and Rs. 225 per sq.
ft. two months ago are now being out at a minimum of Rs. 250 per sq. ft.
20000
15000
10000
5000
0
2002-03 2003-04 2004-05 2005-06
As depicted by fig. 2 per capita income is increasing in India, which has increased the
purchasing power of the people. Due to this over the last year (2006-07) houses prices have raised by
10-90% and commercial property prices by 10-30% in different area of India. Correlation .996 is found
between PCI and real estate prices. Thus there is a positive correlation between per capita income and
real estate prices.
4000000 3529240
3121414
3500000
2760224
3000000 2463324
2500000
2000000
1500000
1000000
500000
0
2002-03 2003-04 2004-05 2005-06
GDP, the indicator of the national growth, from the past 2-3 years is increasing by 6.5%
to7.5%. Every rupee spend on the construction add to nearly 60% of GDP. As shown by the fig. 3 the
GDP has increased from the 2463324 crore to 3529240 crore from 2002-03 to 2005-06, so it indicates
that how the spending on the construction sector helps the real estate prices to increase.
International Research Journal of Finance and Economics - Issue 24 (2009) 249
It is clear from the above tables that in real estate prices are touching heights. In some areas the
prices are increased by 90-100%. In Gurgaon and Noida prices has jumped by as much as 200%. The
cheapest DLF apartment in Gurgaon costs Rs. 1 crore.
50%
45% 49%
37%
40%
35%
28%30%
30% 24%
25%
18% India
20%
US
15%
10% 5%
3%
5%
0%
Land Material Labor Prof it
Costs Costs Costs
International Research Journal of Finance and Economics - Issue 24 (2009) 251
Clear Title
90% of the lands in India do not have clear title. The ownership is unclear, thereby creating a scarcity
of land. This is due to poor record keeping and outdated complaint processes. All updated records must
be computerized to increase transparency in land ownership. And special fast track courts must be set
up to clear all legal land disputes in a short period of time.
Rental Laws
Obsolete tenancy and rental control laws keep a large part of the urban properties off the market. The
rental laws must be revised to protect the owner and his/her property from the tenant. The tax laws
must be revised to make renting of properties a financially viable option. Some states like Maharashtra,
Goa, Bengal and Karnataka have already made amendments to the rent act.
Foreclosure Laws
Though the level of foreclosure for the housing finance companies are relatively low at around 1.5 to
2%, these must be revised and made up-to-date to suit the current context. The laws for non-payment
of Equated Monthly Installments (EMIs) and consequent foreclosure and repossession of the property
law must be revised so that the financing companies have the final rights on the property, which is
collateral for the housing loan.
Status Quo
Gro wth, 5.50%
P ro duct M kt
B arriers, 2.30%
Land M kt
B arriers, 1.30%
P rivatizatio n,
Lack o f
0.70% Labo r M kt
Infrastructure,
B arriers, 0.20%
0.10%
Findings
Findings of the paper are as under-
• As the GDP increases the real estate prices also increases because there is a high degree of
positive correlation between the real estate prices and GDP.
• Real estate prices also increases with increase in the per capita income as there is high degree of
positive correlation between these two also.
International Research Journal of Finance and Economics - Issue 24 (2009) 253
• The infrastructure of India is also growing day by day so it adds to the better facility to different
sectors which affect the real estate prices.
• The FDI into the country affects the real estate FDI and real estate having a positive correlation
leads to the boom in this sector. Increase in FDI from 2006 to march 2007 is 10%. Earlier it was
16% and now in 2008 it is 25%.
• The interest rate also affects the real estate prices because it affects the lending and borrowing by
the investors.
• The growth in the real estate sector is between 25-30% in a residential sector, 10-15% in
commercial sector and agriculture sector.
• Housing sector constitute 80% of real estate in terms of value and 20% by commercial sector.
• In residential segment, availability of easy home finance and rising purchasing power has driven
the growth. Builders are launching high-end, life style residential products to cater to the growing
bunch of high net worth individuals.
• In 2008 the growth of real estate sector is going down due to high inflation and hike in home loan
rates by the banks following the increase in bank rate and SLR by the RBI.
• The outsourcing and IT/ITES industry have contributed to the demand for quality office-space.
The estimated demand from IT/ITES sector alone is expected to be 150mm sq. ft. of space across
the major cities by 2010.
Suggestions
The following recommendations are made by this paper-
• Due to high prices the lower income group is not able to purchase the land, so govt. should take
measures to protect the lower income group.
• The agriculture land covered into the commercial and residential purpose. But the population is
also increasing day by day. So govt. should steps for the same.
• The investors should analyze the type of land in which they are going to invest and the potential
returns from it.
• Privatization of Airports and ports needs to be speed up.
• There is a lack of proper data and management of the real estate sector so govt. should take the
corrective steps in this regard so that the proper estimation and management of the real estate
can be made possible.
• Commonwealth is scheduled for 2010. Hotels, sport stadiums and other infrastructure to have
successful games need to be expedited. This is another great opportunity for foreign developers
and investors to step in India. Thus more and more encouragement should be given to foreign
investors.
• Stamp duty is extremely high and must be rationalized and brought down to 2-3% as per global
practice, which is now in India varies from 13-14%.
• Due to lot of investment avenues in real estate in India, fraud cases are also increasing day by
day like in Delhi deconstruction of buildings. Thus careful measures and laws should be
enacted to deal with these types of situations.
254 International Research Journal of Finance and Economics - Issue 24 (2009)
Conclusion
After studying all the factors of the real estate it can be concluded that the Real Estate is a very wide
concept and it is highly affected by the macro-economic factors like GDP, FDI, per capital income,
Interest rates and employment in the nation. The most important factor in the case of Real Estate is
location which affects the value and returns from the Real Estate.
India needs a stronger capital market base for property financing. The debate on the potential
introduction of REITs and real estate funds points in the right direction. The introduction of REIT s in
2007, will give international investors in particular a familiar investment vehicle. Private investors
could also enter into indirect investment in real estate. Although interest in new projects is most likely
to come primarily from institutional investors, the rising middle class is likely to seek new instruments
aside from direct property investments in the medium term.
So, in the end we can say that the investment in Real Estate in India is a very good investment
opportunity. But one should be very careful while taking decision in this direction due to rising
inflation and interest rates. Legal issues should also be kept in mind while choosing a property.
References
[1] Seiler, J. Michael (1999), “Diversification Issues in Real Estate Investment”, Journal of Real
Estate Literature, Vol. No. 07, Page 163 to 179.
[2] Jackson, O. Thomas (2001), “The Effects of Environmental Contamination on Real Estate”,
Journal of Real Estate Literature, Vol. No. 09, Page 91 to 116.
[3] Benjamin, D. John (2003), “The Environment and Performance of Real Estate”, Journal of Real
Estate Literature, Vol. No. 11, Page 279 to 324.
[4] Malpezzi, Stephen, ````The role of Speculation in Real Estate Cycles”, Journal of Real Estate
Literature, Vol. No. 13, Page 141 to 164.
[5] Focke, Christian, “The Development of German Open-Ended Estate Funds”, Journal of Real
Estate Literature, Vol. No. 14, Page 39 to 56.