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PRIVATIZATION OF URBAN DEVELOPMENT IN INDIA -An Indian Real estate Scenario

Sahul Reddy Kadarpeta, CME (0645762)

Abstract:
Growing urban population, booming economy, service sector outsourcing and inefficiency of public sector have lead to the privatization of housing sector in India. The Privatization in urban housing sector has unveiled great potential for commercial real estate investors and developers in India. Legal government incentives and changes in the rules governing foreign direct investment (FDI) in real estate have made the Indian market more favorable to foreign investors. However the lack of regulatory framework, unclear policies, weak contracts, political issues have lead to the domination of the developer putting customer expectations to backstage. Further with the economic slowdown, the ongoing developments have come to a standstill. Using the four major cornerstones of construction management and engineering this report identifies and explores some of the key issues concerning real estate development in present Indian scenario.

Keywords:
Privatization, Real estate, FDI, Gated community

1. Introduction
India is one of the fastest growing economies in the world, and it entered the 21st century with an urban population of about 300 million, which will further increase to over 400 million by the year 2011 and 553 million by the year 2021. As India grows, it faces problems in developing its infrastructure to meet the skyscraping demands of the businesses. Without significant investment in infrastructure, India will be unable to continue its astounding growth (Source: Aditya Jain, 2007). Rising income levels of a growing middle class along with increase in nuclear families, low interest rates, modern attitudes to home ownership (the average age of a new homeowner in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young working population from that of 'save and buy' to 'buy and repay' have all combined to boost housing demand. (Source: Indo-Italian chamber, 2008)

With growing prominence, the service sector companies started seeking more space to service the outsourcing boom. Salaries in industrial and service sectors increased leading to a rise in spending power, which in turn lifted other sectors as well, such as housing and real estate. (Source: Gandhi). At the same time India produces 2.5 million employable college graduates each year. Rising incomes, a fast-growing population, and younger Indians’ desire to live outside extended-family homes are driving retail and residential development. The booming economy also is fueling demand for much larger, more tech-savvy office and logistics facilities. The excessive pressure of population, lack of public funding for infrastructure development and maintenance, lack of proper enforcement and proper monitoring systems and management systems have resulted in privatization of development, operation and maintenance of urban infrastructures and facilities. The objectives of privatization in real estate in India are: (Source: Indian Real estate encyclopedia)

1. 2. 3. 4. 5. 6. 7.

Improved service quality. Lower project costs. Less risk. Framework conducive to innovation. More rapid project execution. Easier budget management. Source of additional revenue.

The development of real estate in India is estimated to be around USD 15 billion and it is growing at a rate of 30 per cent every year. Almost 90 per cent of real estate developed is residential space and the rest includes office, hotels shopping malls and hospitals. This kind of double-digit growth is primarily attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centers and programming houses, which in 2004 was estimated to have accounted for 12 million square feet of real estate development. Over the past decade real estate sector has had its highs and lows. Currently the pattern of residential and commercial development has been put under the scanner. The private developers have put the wrong step forward by selecting the quantitative development over the qualitative development. This in combination of present financial meltdown has resulted in a stagnation of numerous townships and housing projects in various cities of India. In the last two years the Indian real estate market ahs has hit the bubble. One of the big problems of real-estate market is that supply lags behind demand by about 5 years (Plan-Approve-Finance-Construct time).Lack of efficient signals to market participants means that there will be periods of mismatch between suppliers and buyers hence leading to cycles of booms and busts. As of May 1st 2008, the Indian housing market has already started declining. Prices have started to drop to some extent in few major cities. (Source: Wikipedia)

2. Background:
The Indian real estate sector has played a significant role in the country's economy. The real estate sector is second only to agriculture in terms of employment generation and contributes heavily towards the gross domestic product (GDP). Almost five per cent of the country's GDP is contributed to by the housing sector. Almost 80 per cent of real estate developed in India is residential space. (Source: IBEF, 2009). The rapid population growth, rising incomes, decreasing household sizes and a housing shortage of currently 20 million units has lead to increasing demand for extensive residential construction. (Source: Deutsche bank research, 2006). Housing Sector in India holds tremendous potential and has positive impact on the social and economic development of the country. In 2006-07 this sector contributed about 4.5% of country’s Gross Domestic Product and comprised approximately 7% of the total urban workforce. Housing is the largest component of the construction sector and central to economic growth. (Source: Regulation of real estate India, 2009). With privatization at its peak, real estate sector found its base with a strong force of private developers flocking the country.

Fig.1. Residential construction growth drivers, (Source: CRISIL research)

The beginning of 2008 saw a strong real estate market with luxury residential projects being launched by both established and new developers. However, demand witnessed a serious setback across markets in the country with constrained consumer spending in light of the downturn. The initial signs of weakness were seen in third quarter of 2008, with the consumers being courted with discounts and freebies such as free cars, parking space, fit-outs, pre-EMI payments, gold and even free vacations. The astute individual investors seeing the first signs of weakness started to exit the realty market and the gap widened further in the Indian housing sector. As exiting investors started to off-load projects, there was an apparent disparity in the rates being offered by developers and the ones available in the secondary market. At present the realty sector is facing significant trouble on declining housing sales and unavailability of finances. Under the circumstances, as investment capacity gets impacted, large volumes of high-priced residential stock (as also, the supply chain) will need to re-align pricing. There is a likelihood of continued delay in execution of on-going projects as well as postponement of newer developments in the housing sector. (Source: Cushman & Wakefield, 2009)

3. Methodology
In reflection to the documentary “I am Gurgaon” I have analyzed Indian real estate sector using the knowledge of four major cornerstone courses of construction management & engineering.

Project Management: The growth of Indian real estate sector has often been compared to that of a roller coaster ride. There are a lot of uncertainties that it has to deal with and there is never a steady growth. The course on project management has heavily stressed on uncertainties involved in any given project. Indian real estate sector over the years has been subjected to dynamic economic changes, increasing population, varying human resources, changing political scenarios etc. The private developer’s lack of insight into these uncertain factors has lead to the non linear growth pattern of Indian real estate. In my report I have tried to assess these factors to give a clear picture for the current dismal figure of Indian real estate. I have also assessed the demand and supply aspects with relation to Indian real estate in the current report. Process Management: The knowledge of Process management proved vital for my research as I was interested in finding the flaws in the realization phase of private developments. Design, Modeling, execution, monitoring and optimization summarize process management. I tried to relate the problems shown in “I am Gurgaon” with these aspects of process management. This provides a strong analysis for the shortcomings in construction and maintenance process of townships and other real estate developments in India. Legal Systems and Governance: An insight into the framework of laws of Indian government was easily understood with the basic concepts of the course legal and governance. Understanding the legal acts, laws, frameworks, policies and restrictions helped me to restrict my research to the scope of a construction Industry. Collaborative Engineering: The concept of privatization involves numerous number of stake holders as discussed in the report. The stakeholder’s analysis has been the most knowledgeable part of collaborative design course. So I have used the power interest mapping concept to analyze the actors in the Indian real estate scenario.

4. Residential real estate:
Indian real estate is majorly concentrated in two areas namely commercial and residential real estate. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs. For the scope of this report we concentrate on the residential real estate sector which is a frontrunner of urban housing development in India

Demand & Supply: In residential real estate, which constitutes 75% of India’s real estate market, demand is being intensified by urbanization and easier credit access. Statistics are complicated by India’s large homeless population, but estimates of the current housing shortage run as high as 20 million homes annually, half in urban areas. Despite the construction of about 4.5 million new homes annually, demand estimates spiral further upward in coming years. An intriguing investment opportunity opened up for developers in new, mixed-use “townships” that combine residential, office and retail facilities. Indian developers are embracing the concept of these self-contained communities, particularly in the vicinity of smaller and mid-size cities, that may each house thousands of residents. (Deloitte, India). As of 2006 the housing sector was growing at 30-35% per annum. (Source: DTZ, Indian story). From 2005 till the first half of 2008, the Indian real estate sector enjoyed almost three years of boom and unprecedented growth. During this period, demand for various asset classes remained buoyant, leading to a sharp rise in real estate prices. Simultaneously, supply across certain asset classes like the commercial and luxury residential sectors also increased markedly. (Source: Knight Frank, 2009)

Fig.2. Residential real estate demand in Indian cities (Source: CRISIL research) Till the first half of 2008, end-users were very insistent on purchasing houses. Easy credit availability and rising income levels resulted in higher aspirations that were well beyond the means and actual affordability of many individuals. This led to a continuous flow of transactions for developers and a spiraling of house prices. According to the National Housing Bank (NHB)) Residex, which is the only housing market index in the country, house prices have registered a year-on-year rise of 20-40% in cities like Mumbai, Delhi and Kolkata between 2007 and 2008 (Source: Knight frank, 2009). The large shortage in the housing sector will continue to fuel the growth in the residential market. The real demand is not in the high end residential market but in the affordable housing segment and this will be the driver for the residential market. In the luxury segment, there is already an oversupply in some pockets of the country Major development within the residential real estate segment is the development of integrated townships. The demand for quality lifestyle and walk-to-work concept are some of the drivers of demand for integrated townships that offer commercial, retail, residential, and leisure facilities within a given area. Approximately, 400 townships are expected to be developed over the next five years around 30-35 major cities in the country. Hiranandani Gardens (Mumbai), JP Nagar

(by Keppel Land Development in Bangalore), DLF's 9,178-acre township at Bidadi near Bangalore, and Magarpatta City near Pune are some of the examples of integrated townships. (Source: Demand -supply) Government Legal incentives: In residential real estate, the government has repealed restrictive land ownership laws, rolled back property taxes and revised rent control policies that had been weighted against owners. Inconsistent local urban renewal policies have been replaced by cohesive regional frameworks. And where development scale often has been limited by lack of institutional financing, perception of real estate as a risky investment, and fragmented land ownership, new regulations squarely aim to encourage large projects. (Source: Deloitte, 2007) They have employed a stimulus package coupled with the reserve bank of India (RBI), allowing banks to promote special treatment to real estate sector. Under this package the following incentives are provided for private investors. (Source: IBEF, 2009)  100% FDI allowed in realty projects through automatic route  In integrated townships, minimum area to be developed by the developer has been brought down from 100 acres to 25 acres  Urban Land (Ceiling and regulation) Act, 1976 (ULCRA) repealed by increasingly large number of states.  Minimum capital investment for wholly –owned subsidiaries and joint venture stands at US$ 10 million and US$ 5 million respectively.  Full repatriation of original investment after 3 years. FDI: With the issuance of Press Note 2/2005 in March 2005, the federal government substantially relaxed restrictions on FDI in real estate. Press Note 2/2005 authorized FDI to comprise 100 percent of the financing for housing, built-up infrastructure, township (mixed-use development that includes residential plots, townhouses and villas along with retail, office and recreational areas) and construction-development projects, including residential buildings, offices, resorts and city and regional infrastructure under the automatic route. When investing under the automatic route, foreign investors are not required to seek any prior approval from the government or the Reserve Bank of India before investing, so long as the development meets certain size, timeframe and capitalization requirements. Although Press Note 2/2005 significantly broadens FDI in real estate, it still prohibits foreign investors from directly investing in fully developed existing properties under a pure rental model. (Source: Thompson Thine& Burges salmon, 2009)

Fig.3. FDI flows into Indian real estate (Source: CREDAI, 2009) Real Estate Exposure of Banks: Commercial banks exposure to the real estate sector almost doubled in the first 10 months of 2005-06 over the March 31, 2005 level. In real estate, banks advances for 2005 were Rs. 26,600 crore against Rs. 17,355 crore the year before. The total outstanding loans to real estate rose by 84.4% as on January 20, 2006, according to RBI’s report on macroeconomic and economic developments in 2005-06 released. In the meantime, the housing finance industry started to expand rapidly, making home loans easily available to everyone. (Source: Vandana singh & Komal, 2009)

Economic slowdown: Over successive years, the Private developers have completely chosen to ignore
the middle-income segment of the market and only chose to cater to the demand of the high end customers. The reason being higher profits can be gained with high-end housing projects within the same time span middle-segment housing projects. As a result all the private real estate developers in the country are focused on the NRI (Non-Resident Indian) customers. Targeting this group of people, the private developers have only invested in ‘high end’ homes which can be afforded only by the NRIs or the extremely rich people in the country. This has led to a highly focused real estate housing industry catering to a singular stream of supply-absorption. In the current situation of global meltdown, the excessive dependence on one market segment has made things difficult for the developers. (Source: PSN. Rao, NAR-India) During the second half of 2008, the onset of the economic slowdown led both buyers as well as developers to sit up and take stock of the real estate scenario. In the residential sector, end-users became apprehensive about taking up long term loan obligations due to job market uncertainties. Moreover, they adopted a 'wait and watch' policy to take advantage of consistent price declines. On the

supply side, developers became concerned about increasingly limited funding options and a substantial decline in aggregate demand. To mitigate the adverse consequences of this declining demand, developers started showing a keen interest in asset classes that are yet to be tapped into. But with the dawn of economic slowdown, the residential real estate sector hit a dead end. The greedy unscrupulous developers failed to deliver the proposed residential facilities, confident that they will never be prosecuted by India's slow moving legal system. (Source:Amelia Gentleman, 2007) 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 capitalization 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. A slump in the profits (in crores of rupees) of DLF has been shown in figure 4. This scenario is ascertained by the fact that finding buyers is also proving to be a challenge. Increasing input costs has led to margin shrinkages; in fact, companies with ordinary supply chain management have stalled their projects. (Source: Grant Thornton, IRE, 2009)

5. Major concerns for Indian real estate:
It is often argued that the main reason for the degradation of real estate in India is the international financial crisis. Realty firms piled up debt as they rushed to launch projects amidst a three-year bull run in the sector. But, sales began slumping in 2008 amid a global meltdown and reluctance among buyers at higher prices, leading to a severe cash crunch. But a closer examination of the industry as it is organized in the country reveals that there are other reasons too. These factors have been classified based on their occurrence in the process of real estate developments.

Design phase:

Unclear Policies: In almost all states of the country, the state governments have chartered their own ways of handling the real estate sector by creating state level policies and partnerships, often ignoring the overall market or social requirements and catering more to the narrow and short term interests of revenue mobilization. As a result, we have many state governments which promote luxury housing, shopping malls, IT/ITES projects, without taking a comprehensive view of the overall requirements of the city and society at large. Private developers directly supported by public initiatives and strategies may end up developing housing for more affluent income groups than initially planned. Another key set of objections that critics of enabling raise, focus on the challenges faced by planners and policymakers interested in enabling housing delivery by market actors. According to them, it is neither easy nor evident what policymakers should do. First it is unclear what the appropriate level of government involvement should be - whether the role should be “minimal” or “medium” (Pugh, 1994; 1997). Conventional wisdom seems to suggest a very hands-off role, focused on privatization, decentralization,

deregulation, and demand-driven development, but research suggests the need for a more engaged government involvement in framing successful policies (Mukhija, 2001). Other critics of enabling argue that the central issue is not the level of government involvement but whether it should be responsible for housing provision or not (Marcuse, 2001). Thus carefulness in uncritically embracing the enabling paradigm and planners and policymakers to explore complementary and alternative courses of action is needed. Lack of Regulated framework: India woefully lacks a national real estate regulator which can holistically see the entire real estate market and industry in a comprehensive manner and can advise national, state and local stakeholders to appropriately structure policies, resources and business practices so as to steer the industry in a path of safe navigation. In the absence of the above, real estate in India happens in as many ways as it can, in an unstructured, disorganized and incongruent manner. Often, course correction becomes next to impossible because the multitude of stakeholders chart courses independently and have little answerability. For safe guarding the interests of various stake holders, it is essential that a national level regulator be created. (Source: PSN. Rao, NAR-India)

Modeling phase

Orthodox urban planning systems: Although it is now a well accepted notion in India that centralized comprehensive town planning is a necessity for orderly, healthy and sustainable development of human settlements, the activity of urban/town planning is given little priority. Most settlements do not have comprehensive master plans and those that have, do not have revisions in place; often revised master plans take several years to get prepared and approved. Further, town planners and town plans are not given the due importance they deserve. Often, development proceeds giving scant cognizance to master plans. The orthodoxy is more in the place that town planning has in the contemporary socio-economic political scheme of things rather than in the way urban planning is done. Weak contracts: Usually project developers get the assistance from law firms during the phases of the government approval process. The firm represents clients in connection with preparing and submitting site plans and subdivision applications for office buildings, shopping centers, industrial parks and residential complexes to various concerned authorities in India. Such firms also represent clients before India planning and India zoning boards of adjustment and redevelopment authorities in India. Due to such intermediate agencies, there are no strong direct contract terms between the real developer and the government. Due to such cases the private developers enjoy the freedom to build according to their will without following any strict rules and regulations. (Source: Law firm Delhi)  Execution phase

Skewed risk allocation: As a result of this we can say that the Indian real estate industry has been moving on a model of inappropriate / skewed allocation of resources and as a consequence, risks. On account of a lack of appropriate risk allocation policy in place, real estate markets, particularly

developers, have been highly over-leveraged. 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.

Politics: Local politics have created a big conspiracy in Indian real estate market. With corruption as a
medium of initiation, local small scale private developers have been availing political support in getting contracts. This combined with poor quality of construction has left the whole system of real estate vulnerable to political influences. The existing consumers are facing the difficulties and the new buyers are reluctant to buy such properties. There have been numerous such cases identified so far in different cities. But no steps have been taken so far by governments to curb such illegal activities. Example: In Magarpatta city, Pune the apartment building quality is average whereas the commercial buildings are above par. The reason for the difference is simple. The commercial buildings were constructed by reputed construction firms like JMC/Vascon whereas the apartment buildings were constructed by builders who had proximity to the politicians.

6. Conclusions
The Indian real estate market is still largely unorganized and dominated by a large number of small players, with very few corporate or large players having national presence. The Indian real estate market, as compared to other more developed Asian and Western markets is characterized by smaller size, lower availability of good quality space and higher prices. Supply of urban land is largely controlled by state-owned development bodies like the Delhi Development Authority (DDA) and Housing Boards levying very limited developed space free, which is controlled by a few major players in each city. As a student of CME, after conducting my research on Indian real estate scenario, I am very keen to summarize the role of numerous stake holders involved in Indian real estate sector. The different actors, stakeholders in Indian real estate sector are:  The Local Government Units (Municipal Corporation)  Small private developers.  the state government (Housing Board),  Investors (Foreign & Domestic)  The National Line Agencies, HUDCO  Banks and financial institutions (Housing and urban development  Politicians corporation ltd)  Media  Big private Building Developers (foreign &  Customers (Inhabitants) domestic)

The role of these actors can be assessed using a power- interest mapping method. This mapping is based on the financial resources available and the commitment of the actors to the growth of real estate. This will be helpful to provide an overview of the present real estate scenario. From the analysis it is clear that most of the important stakeholders have shown Politicians State government high interest towards the growth of real Media estate sector. The main front runners like National Line agencies (HUDCO) Local Municipalities the governments and municipalities have the interest and the power. But only the current financial situation and absence of Big private developers strict regulatory framework have resulted Small developers in current turmoil of real estate housing Customers industry. So by providing incentives and Private Investors creating a strong real estate approval Banks &Financial institutions process, they can pump up the participation of big developers and financial investors in real estate industry. HIGH LOW INTEREST With such steps being taken by the governments in order to safe guard the interest of the stakeholders, buyers and sellers alike, market turnaround may not be very far. So we can conclude that the current Indian real estate bubble is a short term phenomenon. The Indian real estate market has shown a secular upward trend, except for the past two years. Transparency is the key to take Indian real estate to the next level. This underlines a need for a federal regulator which will enable to bring best practices with a promise to be clued on to innovation. Entry of global players is bringing greater transparency in the sector.

7. Discussion
The courses of CME have played an important role in this research. The knowledge of process management was very useful in determining the responsible factors affecting the Indian real estate scenario. However the project management has very less input in the field of urban development. Project management course was more oriented towards the Industrial sector. The current topic of Real estate is based on urban development. So a course on Real estate management would have been more beneficiary. I had worked over an assignment based on the Building bye laws of Indian construction Industry with the course Legal and Governance. This proved quite useful for my current research. Collaborative design has given a more practical approach to the urban development process. I could easily understand the real life problems prevailing between the various stake holders of real estate. This was very vital as the Indian real estate market is complicated with a large number of actors.

LOW

HIGH

I would like to see real estate management as a part of CME course for the next coming academic years. Private city development is all about managing resources, stakeholders, marketing and maintenance of integrated townships in urban areas.

8. References:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Aditya Jain, “Privatizing infrastructural development in India, a dream turning into a reality?” June 2007 Indo-Italian chamber of commerce and industry, “Construction industry in India”, April 2008. Sagar S. Gandhi, Large-Scale Urban Development in India - Past and Present, November 2007. Indian real estate encyclopedia, Link: http://www.scribd.com/doc/9949189/Real-EstateEncyclopedia-India Wikipedia, Indian property bubble. Indian brand equity foundation (IBEF), Real estate, September 2009. Deutsche bank research, Building up India-Outlook for Indian real estate markets, May 8 2006. CRISIL City View- A Real Estate perspective. Cushman & Wakefield, Indian real estate overview, Outlook March 2009. Debenham Tie Leung (DTZ), “The India story”-A real estate overview. Knight Frank, Affordable housing-understanding the drivers, 2009. Demand-supply of Indian real estate, Link: http://www.scribd.com/doc/17673545/DemandSupply-of-Real-Estate Deloitte-India, Real estate investing in India-Why now? 2007. Thompson Thine & Burgess Salmon, Real estate update, January 2009. CREDAI- Confederation of Real Estate Developers Association of India, Real estate update, July 2009. Vandana singh & Komal, Prospects and Problems of Real Estate in India, International research journal of finance and economics, Finance and Economics ISSN 1450-2887 Issue 24, 2009. Prof. Dr. P.S.N.Rao, India (NAR-INDIA ), Real estate market in India, 2009. Amelia Gentleman, “Real India seeps into gated villas”, August 2007. Grant Thornton, Indian Real Estate: Sustaining and building businesses during economic slowdown, July 2009. PUGH, C. (1994) The Idea of Enablement in Housing Sector Development: The Political Economy of Housing for Developing Countries, Cities, 11, pp. 357-371. PUGH, C. (1997) International Urban and Housing Policy: A Review of the ‘Cambridge Studies’, 1989-95, Environment and Planning A, 29, pp. 149-167. MARCUSE, P. (2001) The Liberal/Conservative Divide in the History of Housing Policy in the United States, Housing Studies, 16, pp. 717-736.