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Indian Real Estate sector: Problems which are faced by Key Players and Proposed Solutions

Submitted By

Harshit Garg
(PRN # 08020841015)
Specialization: Finance Management

Under the guidance of

Prof. MVS Prasad
Associate Professor
SIBM, Bangalore

Symbiosis Institute of Business Management
Bangalore

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STUDENTS’ DECLARATION

I, Harshit Garg, hereby declare that the dissertation work titled ―Indian Real Estate sector: Problems which are faced by Key Players and Proposed Solutions‖ has been carried out by me under the guidance and supervision of Prof. MVS Prasad, SIBM, Bangalore.

I further declare that this dissertation is the result of my own efforts and that it has not been submitted to any other university or institute for the award of a degree or diploma or any other similar title of recognition.

Place: Bangalore Roll No: 11015 MBA, 4th SEM

Signature of Student Name of Student: Harshit Garg

Signature of Guide Name of Guide: Prof. MVS Prasad

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ABSTRACT
The research on the topic - ‗Indian Real estate sector - Problems being faced and proposed solutions’ focuses on the situation of the Indian Real estate sector and companies in different economic phases, tries to identify factors which affect this sector, the factors realty players should consider from consumers‘ point of view and Problems being faced by this sector along with probable solutions. This report has been done to advise Indian real estate companies about the measures they should be taking provide this sector more growth opportunities with least cost along with new potential customer segment & different operating models. The method adopted for this report is the secondary research method which has helped in analysis and final recommendations to the Indian Realty companies as result for the future scenario point of view.

According to the Tenth Five Year Plan. Looking at the demand and contribution. this contribution to the GDP is expected to rise to 6 per cent. Thus. Considering both of these aspects of importance of real estate for Indian economy and problems it has faced in the recent years. 80 to 90 million housing dwelling units will have to be constructed with a majority of them catering to middle. Moreover. In the next five years. . there is a shortage of 22.4 Objective of the Study The Indian real estate sector plays a significant role in the country's economy.and lower-income groups. Indian real estate sector saw a reversal of sorts with the declining affordability of the end users and reducing funding options for the developers. India leads the pack of top real estate investment markets in Asia for 2010.4 million dwelling units in this sector. according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute. a global non-profit education and research institute. Realty sector makes to the Indian economy one can easily say that this sector is one of the most promising sectors for Indian economy growth and development. but despite such a high growth potential and contributing field. financial meltdown and economic crisis of 2008 resulted in significant downturn in the Indian real estate sector. The real estate sector is second only to agriculture in terms of employment generation and contributes heavily towards the gross domestic product (GDP). this report tries to meet the following objectives:  Provide an insight on the various factors that impact this sector along with factors that Realty players should consider from consumer‘s point of view. Almost 5 per cent of the country's GDP is contributed to by the housing sector. over the next 10 to 15 years.

initiative and potential demand. .  Study the problems which have been faced by the whole sector or few of its players during different phases of the Indian economy and find out the reasons behind them.  Suggest the appropriate growth potential areas in India where investment should be made.  Suggest the new market segments this sector should look focus upon considering Govt.  Study the problems real estate sector has faced in finding the cost-effective and stable source of finance and suggesting the various alternative sources of finance. Suggest different cost effective innovative Business and Investment models for future operations.   Suggest the new asset classes and formats which it should adopt.5  Study the impact of various phases on the Indian real estate sector and its player‘s Profit margin and Market capitalization with the help of BSE Realty index.  Suggest the learning players should adopt from past and apply in future states of Indian economy.

this report contains the conclusion of this analysis and final recommendation to industry players for the challenges till now or possible challenges. Private Equity. decline. Of late. . The second part focuses on the various sources of finance which includes borrowing from banks. Also. FDI. Also done in it is the analysis of these companies to find out the reasons for few players‘ success and others failure. Alternatives have been suggested for different kind of finance along with various potential business and investment models to generate positive response from retail investors and FDI. stability and potential growth from 2010 onwards as in all these different phases this sector‘s companies (either all or few) have got impacted in terms of Profit Margin as well as Market Value of shares which has been highlighted with the help of BSE realty index was launched on July 9. 2007 with 11 scrips and which represents 95% of market capitalization of real estate development companies in BSE. IPO. Real Estate Mutual Fund and Real Estate Investment Trust.6 Executive Summary The dissertation has been initiated to focus on the factors that do matter for this industry and its customers. different phases of growth rate Indian real estate has seen till now and challenges that are being faced by Indian real estate sector in terms of either demand from customers (either commercial or residential property) or identifying appropriate source of finance. discussed are different operational models. Real Estate industry has faced various challenges related to looking at the best and stable source of raising money as instability of these sources has led to high cost with no guarantee of future availability. The first part of this report focuses on this sectors‘ different phases of growth. which this sector can try along with possible measures to increase the return on investment. In the end.

Healthcare Infrastructure. this can be taken as a guide to gain insight or a starting point to have alternative solutions to problems in Indian real estate sector. Education Infrastructure and Low-cost housing. . These areas are Tier II and Tier III cities and space in Commercial office. This report ends with the conclusion and final recommendation to the Indian Realty players to have growth with least cost. Hospitality and Special Economic Zones as well as different asset classes and formats which can be named as Logistics and Warehousing. this report focuses on few of the real life problems being faced by this sector along with probable solution hence this report should not be considered one stop-shop for all the problems and final solutions for the Indian realty sector. The data for this report has been taken from secondary resources which are mentioned in Bibliography at the end and hence this data is as accurate as given in these sources.e. Finally mentioned are the various learning that Real estate players should adopt in different phases of Indian future economic state and factors that Realty players should consider from consumers‘ point of view. Residence. Also. However. which areas/cities real estate companies should concentrate now. Retail.7 The third part of this report contains the potential areas for growth i.

1. Recession (FY 2008-09) c.Different phases 20 3. No. Indian Economy . Topic Page No. Growth (FY 2010-11) 21 4. Problems being faced by Indian Realty sector and probable solutions 42 . Introduction to Indian Real Estate Sector    What is real estate?? Factors that impact Real Estate Sector Importance of Real estate sector for our economy and Initiatives taken by Govt. Real Estate – In Different phases a. Stability (FY 2009-10) d.8 Index S. Boom (FY 2007-08) b. for this sector  Areas which claim the major chunk of growth pie in India 18 16 10 12 2.

Learnings Real estate players should adopt in different phases of Indian future economic state 63 6. Conclusion 69 8.Realty players should consider from consumers’ point of view 66 7. Bibliography 72 . Recommendations 71 9. Factors .9 5.

and co-ops. 2. multi-family apartments. Commercial Properties Commercial property can be empty land zoned for commercial use. Residential Properties Residential Property can be referred to as property which is zoned for single-family homes. As long as the spread continues. condominiums. and real property encompasses the legal issue of ownership. Generally the property size and price is quite large. 3. wells and other site improvements which are immovable. mineral rights. leased. the area one has to cover gets farther out from the city. fences. or an existing business building or buildings. such as buildings.10 Real Estate . townhouses. Title to real estate normally includes title to air rights. or transferred together or separately. sold. Vacant Land Vacant Land can be used for farm and ranch purposes. but the term real estate emphasizes the asset itself. Commercial Properties can be further classified into: . and surface rights which can be bought. Major Types of Real Estate Property 1.Introduction What is Real Estate? Real estate also called real property or realty would refer to not only land but also improvements to the land. The term real estate is often used interchangeably with the term real property.

Duplex homes are also frequently listed and sold as residential units to a buyer that lives in one side and rents out the other. electronics and other consumer products. Condominiums are frequently called multi-family because of their construction as a group. but are normally listed and sold as single family residential units. Restaurant spaces are a specialty subset of the retail category. . The owner derives income from the rental payments of the office tenants. strip centres and the like.11 a. c. Valuations can be based on size and land value. rather than methods using square footage and land value. or a group of offices in a single building or cluster of buildings would fall into this category. b. retail sales per square foot or other investment return calculations. Office Buildings and Office Complexes: A single building designed for office use. These can be valued based on the rental income return on investment. Multi-Family Commercial Real Estate: Multi-family commercial real estate property types include duplex homes. and other construction for habitation by multiple family groups. Medical & Dental offices are a subset. with some listings shown as restaurant/retail. as well as malls. When offices are grouped in structures with single ownership. they are listed as commercial office rental property. Retail Space Real Estate Properties: This category would include single buildings used as stores for clothing.

more loans will be taken to purchase or build new homes. (III) Favourable Interest Rate and Fiscal Incentive Interest rates affect the real estate prices because they affect the lending and borrowing by the investors. (II) Demographics and Urbanization Indian household families are moving from joint families to nuclear families leading to more demand of households. UNDP forecasts that urban population will constitute about 40% of total population by 2030 from the current about 28% leading to more demand by population for urban households. The correlation between interest rates and home loans can be drawn from the fact that in 2008 the growth of real estate . Real estate prices also increases with increase in the per capita income as there is high degree of positive correlation between these two also.4% to each 124m in 2013 compared to 46m in 2003.12 Factors that impact Indian Real Estate Sector (I) Economic Growth 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. Also. GDP growth rate is predicted at 7. if there is easy availability of finance. Currently. Positive signs for the real estate are Double-digit income growth rate for the next 3-4 years which should improve affordability. Also.5% as per World Bank in 2010. driving demand for residential units. positive demographic trends in India are visible as middle class or the aspirers to show a CAGR of 10. Fiscal incentives offered on owing a residential house is also a significant demand driver. as.

Information Technology. Increase in FDI from 2006 to march 2007 is 10%.13 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. (V) The Property Transfer Process In efficient markets.Increase in FDI limit for Indian Real Estate sector makes the real estate sector in India more organized. (IV) Influx of FDI in Real Estate business The FDI into the country affects the real estate FDI and real estate having a positive correlation which can lead to the boom in this sector. Textiles and technology intensive . (VI) Development of the special economic zones as real estate property Development of SEZs in various segments such as multi-product. Earlier it was 16% and in 2008 it was 25%. Bio-technology. can introduce advanced technology in the construction business and can create a healthy and competitive market environment for both Indian and foreign investors. rules. As soon as something good or bad occurs. not only it takes its own time to adjust the real estate prices but also acquiring a property necessitates a complex process. the prices of the affected company‘s stock adjust to reflect its current potential for earnings or losses. increases professionalism in the sector. Real estate markets are not as efficient as stock markets. information flows so quickly among buyers and sellers that it is virtually impossible for an investor to outperform the average systematically. General purchasers do not have enough knowledge about the minutest details of legal aspects involved in acquisition of property. Several laws. and regulations cover the matter of property transaction. Gems and Jewellery.

The estimated demand from IT/ITES sector alone is expected to be 150mm sq. ft. Vadodara Sambalpur Bhubaneswar. the SEZs also attract a number of real estate developers. including DLF. Shipra Estate to name a few. Jaipur. Udipi. Parsvnath. Corporate Reliance Industries Adani Group TCG Refineries Suzlon Hindalco Genpact Vedanta Location Gurgaon. Bhopal Orissa Apart for the corporate clientele. of space across the major cities by 2010 and this strong IT/ITES growth should drive demand for commercial space with FY07-10 CAGR of 23% leading to indirect contribution to residential demand consumes about 75% of the commercial space. Omaxe. (VII) IT/ITES Growth The outsourcing and IT/ITES industry have contributed to the demand for quality office-space.14 industries attracts both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs). IT/ITES sector . As of now. Mumbai/Navi Mumbai Mundra Haldia Coimbatore. as well. Ansals.

. At the same time. Economic growth and changing demographics increase the retail penetration levels and with the opening of new malls.1% which is lowest compared to other emerging markets. demand for land space also increases. strong tourist arrivals should spur demand for hotels across India.15 (VIII) Organized Retail and Hospitality Demand Organized retail penetration level right now is at 4.

this contribution to the GDP is expected to rise to 6 per cent. according to the latest data given by the Department of Policy and Promotion (DIPP).62 billion approximately.   100 per cent FDI allowed in realty projects through the automatic route.16 Importance of Real Estate Sector for our economy  Contribution heavily towards the gross domestic product (GDP). In the next five years. 51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-andcarry through the automatic route.  Huge attraction for Foreign Institutional Investors (FIIs) as with BSE Sensex touching a 15-month high. 2009. . coupled with the Reserve Bank of India's (RBI) move allowing banks to provide special treatment to the real estate sector. the market capitalisation of FII investment in construction has gone up a whopping 422 per cent in the past six months. Almost five per cent of the country's GDP is contributed to by the housing sector. RBI has decided to extend exceptional concessional treatment to the commercial real estate exposure and restructured it to June 30.   Second only to agriculture in terms of employment generation Average profit from construction in India is 18 per cent. is likely to impact the Indian real estate sector in a positive way. which is double the profitability for a construction project undertaken in the US. for this sector The stimulus package announced by the government. Initiatives by Govt.  Huge attraction for Foreign Direct Investment as well as FDI into India in the real estate sector for the fiscal year 2008-09 has been US$ 12.

 Urban Land (Ceiling and Regulation) Act.691. the minimum area to be developed has been brought down to 25 acres from 100 acres. respectively.  Budget 2009-2010. provided the cost of the home is not more than US$ 41. Developers of affordable housing projects (units of 1. Such projects would have to be completed before March 1.  At the same time.382. 2012.000-1. has also given sops to the realty sector. .  Reduction of time taken to develop Special Economic Zones by simplifying procedures to get the tax-free industrial enclaves notified.17  In case of integrated townships.  Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million.500 sq ft) have been granted a tax holiday on profits from projects initiated in the 2007-08 financial year. 1976 (ULCRA) repealed by increasingly larger number of states. the finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on home loans up to US$ 20. This subsidy is expected to give a further boost to the housing sector.

Powai and Malad in the north. (b) Delhi . Vijayawada.18 Areas which claims the major chunk of Growth pie The major primary cities in India. Jaipur.The financial capital of India The Mumbai commercial real estate market comprises the Central Business District (CBD) of Nariman Point in south and the suburban business districts of Bandra-Kurla complex. Chennai and Hyderabad. primarily for companies in the . Secondary cities like Pune. Mysore. Cochin. The primary cities in India which are sought-after destinations by corporations for locating business operations are briefly reviewed below: (a) Mumbai . This is not limited only to location factors.The political capital and power centre The Delhi commercial market comprises largely of the CBD of Connaught Place and secondary Business Districts (SBD) of Gurgaon and Noida. are preferred cities for locating IT-enabled services (ITES) ventures. Nagpur. Suburbs in Mumbai have seen an upsurge in commercial space supply over the past few years with IT/ITES companies driving the market. but also due to the presence of the support services. namely Mumbai. especially in the central and northern suburbs. and Kolkata qualify with many of the required attributes but lack adequate support services. Andheri-Kurla complex. Bangalore. Noida continues to witness the development of small buildings built on industrial and institutional lands. construction of larger floor plates and offers of custom-built facilities. with Gurgaon has experiencing a substantial increase in 'A' grade office supply. These cities are also experiencing development activity due to greater availability of land. Delhi.

Tel Aviv and Singapore. The city experienced rapid economic growth during the 1990s.The Silicon Valley of Asia With a population of approximately 6 million. (d) Chennai Chennai commercial market comprises the CBD of Gundy and the SBD of Old Mahabalipuram Road (IT Corridor). The IT/ITES sector continues to be the main demand driver in the city.19 ITYITES sector. and Pune called India's 'Silicon Alley'. called India's 'Cyber City'. Boston. (c) Bangalore . (e) Other cities Two other cities on the list for companies opening offices in India are Hyderabad. Overall Gurgaon and Noida continue to remain the favoured location for IT/ITES companies. a distinction shared with Salt Lake City. where the liberalisation of the economy has since transformed the city from a retirement destination to a business powerhouse that is arguably the leading information technology centre in Asia and one of the top 10 hi-tech cities in the world. Demand for commercial office space continues to be for quality buildings and is concentrated around South Chennai. primarily due to IT and ITES sector. Bangalore is the fastest growing city in India. Seattle. Both cities have also experienced substantial growth in the commercial real estate sector during the past couple of years. . and companies have established offices in areas where ready-to-move-in office space is available.

Different Phases Source: http://www.20 Indian Economy .nic.pdf .dipp.in/fdi_statistics/india_FDI_December2009.

Factors responsible for that phase of Indian real estate Industry 3.nic. Overall impact on the Realty Industry with the help of BSE Realty Index players’ performance. 2007 with the base year for index – 2005 and index value – 1000. Reasons for Realty players success/ failure in that phase .in/Economic_Outlook_Final. current and expected phases of Indian real estate are being analysed in the pages given below on the basis of following parameters: 1.pdf As shown in the chart above. initiatives to help industry in that phase 4. (BSE realty index was launched on July 9. Areas which got impacted the most in that phase 5.21 Real Estate – In Different phases Source: http://pmindia. Govt.) 6. past few financial years in India have seen various phases in the Indian Real estate and the next financial year is starting off with new phase in this industry. All the past. Type of phase 2. 11 scrips are included in this index with companies representing 95% of market capitalization of real estate development companies in BSE.

particularly in infrastructure such as roads and power plants and other facilities  Private equity (PE) players keen interest in including Indian real estate investment in their overall investment portfolio.  Insurance companies could invest in special economic zones (SEZs). .22 Phase-1 Boom (FY 2007-08) Up to the end of FY2008 real estate sector in India was growing at a very high rate. It was estimated that the value of domestic India Real Estate Market 2007 was about US$ 14 billion. more in line with the overall economic growth. Factors which led to boom in real estate business  IT sector was one of the major grosser with large volumes generated in IT office space. Commercial banks exposure to the real estate sector almost doubled in last year.625 crore. Govt. The residential segment too was closely IT-driven and reported robust growth. contribution in this phase  The home loans were easily available and RBI was following very liberal policies regarding the interest rates. Not to forget the he realty score in the capital market. There was a situation of boom in this sector. Non-IT commercial space too kept pace. The market was on a high with the initial public offering of DLF raking in a record Rs 9.

Wipro and Satyam candidly launched their operations in frontline Tier II and Tier III cities like Mysore. 2012. IT giants like TCS.  Great times were there for commercial office real estate at tier II and tier III cities. In fact.  The finance Ministry announced a 10-year tax holiday for developers of Industrial parks set up from April 1. Coimbatore. Tier-III areas including Jaipur. All such projects should be complete prior to March 1. Chandigarh. Indore and Bhopal at that time. rationalization of income tax and loan policies in addition with well-paid IT jobs.  Tier-III areas got attention of technology sector players who waited to expand their operations into these previously untapped areas and markets. Ahmedabad. 2009. Contrary to this. 2006 to March 31. destinations like Bangalore and Gurgaon were categorized under fast growing metropolis and the locations witnessed spearheaded improvement in every phase. human resource issues like employee attrition and rising CTC have surfaced up as a major force to drive IT and ITES companies to smaller cities. Areas which benefitted  Tier 1 cities focussed on the development of suburbs and peripheral locations. and Lucknow were also predicted to get . Besides the sky-rocketing property prices and rentals.23  Encouragement by Indian government to the involvement of Foreign Direct Investments or FDIs in the India Real Estate Market 2007. The property boom in Tier II and Tier III cities was further fuelled by the factors like opening up of financial sector. Infosys. Delhi and Mumbai as their offices and shopping mall rentals continued their upward trend at a very vigorous pace. Especially.  Developers have been given a tax holiday on profits arising from the projects that started backing 2007-08. Goa.

Tier III cities offered cost advantages of 15%-30% over Tier I and II cities through lower labour and real estate costs. Of the leading Tier III cities. and untapped manpower. Coimbatore.24 a part of the boom. Vishakhapatnam. Green highlight shows the top highs at the parameters mentioned 2. Jaipur and Lucknow were likely to see huge growth in the coming years. Mysore. Surat. These cities were characterized by low real estate costs. making them one of the preferred investment destinations for overseas realty players especially for technology sector development. Indore. availability of large chunks of land for development. Ludhiana. Some upcoming cities that turned to ‗growth centres‘ include Guwahati. Impact on the Realty Industry A) Financials Note: 1. Nagpur. Kochi. Bhubaneswar. Orange highlight shows the bottom lows at the parameters mentioned .

25 B) Percentage increase in Share Price and PAT in last one year Reasons for Realty Index players being gainer/Lagged Behind A) Gainers 1. . strong liquidity and sanctioned debts limits available providing excellent options for future investment and returning value to shareholders. brokerage community and property managers.  High-quality portfolio with a strong tenant base which ensures strong cash flows in the coming years. Diversified mix of projects. buying at the right price and strong execution skills. Strong relationships with local owners. Anant Raj Industries:    Focus on NCR.  Zero debt. ensuring flexibility and resources to take advantage of the emerging opportunities in a changing environment.

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2. India Bulls Real Estate Limited:  Huge cash raised from warrant issues to promoters parked in interestearning instruments, taking the ‗other income‘ component to a whopping Rs 624 crore, bolstering total income. Deployment of this cash can be expected to ramp up revenues through additional business.  Projects listed as real-estate investment trusts in Singapore, ensuring a steady stream of revenues (in the form of dividends) from the rentals.  Cash and investments, amounting to over Rs 5,700 crore on IBREL‘s books, are a source of comfort at a time when most realty developers witnessed a funds crunch and are able to raise funding only at prohibitive rates.  IBREL‘s main advantage due to its possession of mall space in key spaceconstrained areas in Mumbai, apart from less penetrated markets.

3. Unitech:  Unitech‘s focus on Capital Efficiency enabling it to grow to a US 21 billion market cap company with an external capital of under US 10 million.  Diverse residential, commercial, retail, entertainment and hospitality projects.  Strong ties with financial institutions – ability to raise funds at competitive rates for large projects.  Ability to work and effectively liaise with Government agencies to ensure timely completion of projects.

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Undertaking large mixed-use projects like integrated townships in the suburbs of main cities.

4. DLF:    Completion of initial public offering and listing on NSE and BSE. Low risk, robust model with a mix of development and rental earnings. Multibusiness, multi-segment within business and operations across geographies mitigates risk due to cycles in the business.  DLF's successful business model based on independent business verticals homes, offices, retail and hotels - organized and operating on an independent basis.  Aggressive launch of premium homes targeted at mid-income earners in this year with specific focus on affordability and actual user.  Attraction of private equity investment amounting to Rs 16,750 mn from Merrill Lynch & Brahma Investments in 8 residential projects in Chandigarh, Chennai, Kochi, Bangalore and Indore, reflecting the confidence of global institutions investing in DLF and the economic viability of the projects which also enabled DLF to partially monetise the value of its land resource at a premium and significantly improve the rate of returns from these projects.

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B) Lagged Behind
1. Ansal Properties and Infrastructure Ltd.:  Concentration in NCR and Tier III cities in the North, where the risk of prices softening was high.  High dependence on plotted development and risk of delays in large township projects, particularly Dadri (27% of NAV value), was high as land was still being acquired.

Phase-2
Recession (FY 2008-09)
Share Market Depression. In 2008, things got changed; there was uncertainty in the market as share market did show depression. People, who invested in real estate from earning of share market, wanted an exit to pay off the liabilities created by them in the share market. Also, the buying power got reduced.

Drop in PE fund flow. PE investors, who had been happily picking realty deals earlier, did tighten their purse strings, with September witnessing only two transactions worth just $12 mn compared with August, when PE funds pumped in $427 mn into Indian realty sector. According to data compiled by Grant Thornton, while the number of deals during JanuarySeptember was higher at 45 against last year‘s 39 deals, the average ticket size of the transactions has come down substantially in the first three quarters of 2008, reflecting softening valuations across the crisis-ridden real estate sector.

29 Factors which led to Recession in Real estate business:       High rate of inflation in Indian economy. slowdown and approval delays leading to the developers missing to complete their projects within the boom period. labour has affected the real estate sector. Hike in housing finance interest rates. RBI increased the Bank rate leading to the increase in the interest rates. All of these changes in the US economy have affected Indian economy as well as real estate segment as most of the Indian players have their liquidity funded by both of these firms. Bankruptcy of Lehman Brother and sell process of PE firm Merryl Lynch by the largest US bank.  Under the Rajiv Awas Yojna scheme. sand. Unaffordable property rates. Many companies gave pink slip to the employees. Bank of America. contribution in this phase  Favourable policies for addressing the urban housing problem. which forced the employees to cancel their bookings and forego whatever deposit made by them to the builders. Affordable housing became the Indian government‘s new mantra and it introduced the Bharat Nirman project. steel. created a very fast drops/recession in financial industry and created a crisis in all over US economy. Govt.  Banks and foreign investor started withdrawing their money from the market. Low rate of GDP growth rate.  Lack of uniformity of land laws. It has allocated Rs . it has rolled out a massive plan to build 5 million dwelling units in five years to house 6 crore slum dwellers. to double the construction of low cost houses to 12 million units.   Increase in the price of cement.

2009). 2009) with two reasons: One was its vision for slum free India. second was to boost the demand for steel. Mumbai. lowering prices in key apartment zones in or around Delhi. Bangalore and Hyderabad.  Property prices in metropolitan areas dropped by 10%-15%.  Government introduced an interest subsidy of 1 per cent for one year on loans up to Rs 10 lakh for properties worth less than Rs 20 lakh (FM's new subsidy. Slowdown is biting the real bullet. . Seven major Indian cities. Mumbai.30 225. Recession affected areas  Real-estate prices across the country did fall by 10-40 per cent. showed a marked decline in demand during the quarter ending September. It also earmarked housing loans up to Rs 20 lakh to qualify as priority sector lending (FM's new subsidy. cement and construction material as part of its fiscal stimulus plan. realty prices for ongoing projects already crashed by 25 to 40 per cent in the past six to nine months and buyers in Mumbai and Pune already expected a further 10 per cent reduction in prices.000 crore for this purpose (Rajiv Gandhi Yojna.  In the Mumbai-Pune zone. including Delhi. 2009). Kolkata and Bangalore.

Orange highlight shows the bottom lows at the parameters mentioned B) Percentage increase in Share Price and PAT in last one year .31 Impact on the Realty Industry A) Financials Note: 1. Green highlight shows the top highs at the parameters mentioned 2.

of Singapore Investment Corporation (GIC) to pursue investment opportunities in infrastructure development and hospitality. with all the modern facilities to fit into their budget. ‗Just Perfect Homes‘ are residential complexes. Anant Raj Industries Limited:  No land acquisition through Auctions. with maximum optimization .:  Launching of the ‗Just Perfect Homes‘ series in the first week of January.  Preference on rental/leasing income as opposed to outright sale ensured cash flow driven business model. These families are willing to pay for the value derived in providing them the appropriate ambience to come home to from a hard day‘s work and the environment in which they can raise their families. Land for IT Parks acquired through government allotment having very low land cost FSI.  A Co-Investment Right Agreement with the Govt. 2.  Focus on Low-cost Housing as urban population expected to reach 576 million in 2030 from the current 328 million. Haryana.  A 50. Ackruti City Ltd. which are aesthetically designed.9 Joint Venture agreement with Monsoon Capital for development of an IT Park at Panchkula.1:49. one of the biggest challenges will be providing affordable housing to city dwellers. The upwardly mobile urban family is on the lookout for a dream house.32 Reasons for Realty players being gainer/Lagged Behind A) Players which did not lose much 1. With this rapid urbanisation.

B) Lagged Behind (Players which got affected the most) 1. Affordability is expected to return to around 49% by the end of March 2010. and benefits.  APIL‘s stretched balance sheet and the general scenario of tight liquidity were primary concerns. . Ansal Properties:  Net debt-to-equity ratio (incorporating the impact of outstanding land payments) stood at 165% which does not include any impact of offbalance sheet financing. Phase-3 Stability (FY 2009-10) 2009 saw at least 12 public offerings. after the price correction and fall in interest rates. well conceived to meet the aspirations of modern living.33 of space. which hitherto was available only in high-end luxurious complexes. Rest most of the stocks found the recession as their reason for bad performance. a slew of new projects and the return of private equity funds that had turned away proposals due to the global slowdown last year. The residential segment is expected to recover by the end of FY2009 with a 25-30 per cent renewal in demand.

coupled with the Reserve Bank of India's (RBI) move allowing banks to provide special treatment to the real estate sector. is planning to invest around US$ 1. It is likely to impact the Indian real estate sector in a positive way. 2009. the largest hotel chain in Europe. . RBI has decided to extend exceptional concessional treatment to the commercial real estate exposure and restructured it to June 30. IT companies accounted for ~80% of commercial demand and have been a significant driver of residential demand. Renewed momentum in demand is expected in IT hubs like Bangalore. Chennai and Hyderabad.3 million will be made by industries in the Aeropsace and Precision Engineering Special Economic Zone at Adibatla.000 hotels in 90 countries will invest US$ 130 million to come up with 50 hotels in India by 2012. Andhra Pradesh. An investment of US$ 627. Shriram Properties. This should result in improvement in sentiment and boost real estate demand. part of Chennai-headquartered diversified Shriram Group.  New Projects lined up To name a few. Historically.02 billion in various residential and commercial projects.5 million for setting up five-star business hotels and luxury residential properties over the next three years. Contribution in this phase  The stimulus package announced by the government. Zuri Group Global is planning to invest about US$ 247. Accor Hospitality. with 4.34 Factors leading to Stability in Real estate business:  Improvement in IT sector outlook positive for RE companies Leading IT companies including Infosys have announced salary hikes and promotions. Govt.

382. Note 1: Makaan.  In Pune.com Property Index (MPI) the tool is aimed at empowering homebuyers and the real estate industry with up-to date information related to movement in residential property prices. the finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on home loans up to US$ 20. Over the 12 months period from Jan.At the same time. This subsidy is expected to give a further boost to the housing sector. Delhi on the other hand. . Hyderabad & Bangalore still continues to experience property prices lower than last year. of 24. Christened Makaan. Such projects would have to be completed before March.Developers of affordable housing projects (units of 1.7% during 2009.com. provided the cost of the home is not more than US$ 41.000-1. 2012. India's fastest growing online real estate website by People group has launched the country’s first Property Index. At the city level. during 2009.500 sq ft) have been granted a tax holiday on profits from projects initiated in the 2007-08 financial year. Impact of Stability on various Indian cities and states Observation of MPI1 during the second half of 2009 shows that MPI has moved from 946 levels (June‘09) to 1128 (Dec‘09) signalling an improvement of 19.6%.2% in property prices. things started picking up in the 2nd half of year.Dec‘09 the property prices in Pune gained by 9.8% improvement.  While most of the metros have recovered in terms of prices.691.5%. signalling a relatively modest rise in property prices. and Pune property prices registered a gain of 14.   Mumbai has seen the maximum gain. The Index is intended to serve as an objective tracker of property trends. In fact Hyderabad has shown a decline of 7.7%. from 957 points in July‘09 to 1096 in Dec‘09. experienced an 8.35  Sops to the realty sector in Budget 2009-2010.

as data only till Dec. Green highlight shows the top highs at the parameters mentioned 2. . Orange highlight shows the bottom lows at the parameters mentioned B) Percentage increase in Share Price in last 9 months Note: Did not compare March 2009 & Dec 2009 data on Profit Margin parameter.36 Impact on the Realty Industry A) Financials Note: 1. 2009 is available and it is not considered appropriate to compare FY closing with Quarter end December 2009 or 9 month aggregation till same date.

Jasola. Land prices in prime areas like Connaught Place. Anant Raj Industries:  Acquisition of high quality / prime land at attractive rates.4 in March 2009 quarter to 3. This is a modernization project and scheduled to be finished in the next 3-5 years. Net debt to trailing four quarters EBITDA has decreased from 5.521 sq ft to 62. Sales have shown steady improvement from 16. 2. South Delhi and Gurgaon have corrected by more than 30-40%. Prime land is now available at attractive rates. 3. .37 Reasons for Realty players being gainer/Lagged Behind A) Gainers 1.the power and SEZ space in India as well as New Project as the company bagged an order worth Rs 1.7 in September quarter. Indiabulls Real Estate:  Strategy to develop macro foothold and encash opportunities for infrastructure development .   Debtors have also shown a decline in September quarter.3 in June 2009 quarter to 1 in September quarter.650 sq ft during the same period. Orbit Corporation:  The balance sheet improvement with net debt-equity reducing from 1.   The credit ratios have also shown steady improvement.400 crore for the redevelopment of Mantralaya and ministerial homes in Mumbai.

2. Phase-4 Growth (FY 2010-11) Demand in the Indian residential market is expected to turn positive in 2010.38  Ade-leveraged balance sheet and free cash reserve which can help in planning to show aggression in acquiring land at these prime locations.  National Stock Exchange (NSE) excluded the scrip from the F&O segment. Sobha Developers:  Crunch for cash and Debt-ridden company leading to not so good a performance and lower Profit margins. The demand outlook for .  The blacklisting order says Ackruti‘s methods of operation delayed the projects in question by eight months.  Low –Cost Housing serving as Demand Driver A) Lagged Behinds 1. Akruti City:  It was asked to explain why PIDB should not bar the company due to the latter‘s unfair trade practices while bidding for contracts for the development of bus terminals at Mohali and Bathinda. while Commercial and retail markets will continue to see erosion of lease rentals in the next two years as per Crisil research report on the real estate sector. PIDB has also taken legal steps to ensure Ackruti gets no stay in any court without PIDB being heard.

000 crore collectively. Lodha Developers Ltd. DB Realty India Ltd and 12 other realty firms have filed with the market regulator to raise funds through IPOs this year. This trend is expected to gain strength going into FY11.  The revival is expected to accelerate from activities both in the residential as well as commercial spaces. tourism.  Improved liquidity..  Development of other asset classes like warehousing. positive market sentiment and Growing corporate confidence is creating a positive outlook for real estate Industry in India. Sahara Prime City Ltd. Emaar MGF Land Ltd. These companies are set to raise over Rs 12. Major growth is expected from affordable housing sector.  Developments in the IT sector will also be a prime contributor to the real estate sector as most of the demand of commercial property comes from this sector only. . hospitality. softening interest rates and price corrections along with improved economic conditions. logistics. by key IT companies. will also boost real estate activity. Factors leading to Growth in Real estate business:      Improvement in affordability. etc. steady economic growth and greater liquidity Lower Home loan interest rates Better Job Security due to higher growth in the economy Improvement in IT sector outlook Occupancy levels in existing office and retail properties are likely to plunge to 6070% and 30-40% in new projects.39 commercial offices from IT companies is also improving. Expected changes 2010 onwards  16 real estate initial public offerings (IPOs) set to hit the market in 2010. with indications of pick-up in hiring.

1 Lac which will substantially boost housing. 3) No Service tax on rentals from immovable properties and Extension of benefits under Sec 80 IA to LLP (Limited Liability Partnership). 6) High-priority provisions from the government for laying down the necessary infrastructure to open up new areas. 7) Flexibility in FDI norms. 8) Clarity on the introduction of a real estate regulator. 9) Decreasing the excise duty to decrease the costs of infrastructural projects. 2) Increase in housing loan deduction U/S 80 C to at least Rs. 10) The government must look at reducing the property and related taxes along with the taxes on cement and steel. 2 Lacs from the present Rs. which may not necessarily decide on rates.10 lakh (where the cost of the house does not exceed Rs. Govt.20 lakh) to be extended till March 31. which together contribute to the growing infrastructure needs. . 2011. 1) Permit of ECB for all FDI Compliant projects under PN-2 for real estate. but should put down firm principles in terms of property dealings and also quality parameters in terms of rating of constructions. 4) Restriction of 5% for commercial space under Sec 80 IB (10) to be removed for affordable housing projects. 5) Stabilized bank interest rates and Reduced stamp duty. Budget Proposal for Financial Year 2010-11 Analysis Budget Proposals  One per cent interest subvention on housing loans up to Rs.40 Expectations for this Financial year by Indian Real estate Industry from Govt.

Such projects usually have quite high margins.  Extension of tax holiday under 80-IB (10). pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits.  Relaxation of norms for built-up area of shops and other commercial establishments in housing projects (earlier 5%) to enable basic facilities for their residents.  Allocation of Rs.000 crore for Indira Awas Yojana (IAY). Increased outlay for IAY would benefit the construction contractors and small real estate developers.  Increased disposable income due to reduced tax burden would spur spending for the housing sector. It will have a positive impact on the margins of the real estate players. Developers catering to the affordable housing segment will be benefited.  Implementation of RAY. a scheme for slum dwellers and urban poor.   Increase in tax slabs for personal income tax. Budget Impact: Industry  Extension of one per cent interest subvention indicates continued support to the lower and middle income housing. . These costs would mostly be passed on to the consumers.10.270 crore for Rajiv Awas Yojana (RAY) and Rs.  Increase in excise duty of cement as well as steel would increase the input cost for the developers. would provide a breather to the industry affected by the downturn.41  Under section 80-IB (10). Increase in excise duty structure for cement and steel. would mean additional business in terms of redevelopment projects for the real estate players.1.

Lack of consistency in Interest rates by Govt. Oversupply of Costly and high-end products leading to lack of sufficient revenue 7. In the current growth scenario.5% (October 2008) which was quite high compared to 2007 figure of 3-4%. & volatility in Real estate share prices. As we know inflation in India was around 11. & Volatility in Real estate share prices making it tough to raise money  Some macroeconomic factors such as inflation and economic growth affect companies and their stock prices. High Investment and Low returns on projects 6. IPO issue and Private Equity investment proceeds consumed for paying off debt rather than expansion 5. Lack of Foreign Direct Investors interest 4. Banks had to increase interest rates to counter high inflation.42 Problems being faced by Indian Realty sector and probable solutions Problems being faced Various problems which are being faced by Indian realty sector of late can be classified into following headings: 1. which areas to focus on for maximum growth? Problems description with analysis and probable solution Problem 1: Lack of consistency in Interest rates by Govt. Lack of retail investors interest in Realty shares IPO due to mispricing 3. For real estate companies higher interest rates environment is not suitable because customers avoid taking home loans (due to higher EMI) which . both making it tough to raise money 2.

57 per cent from November 11 price). the market to a large extent decides the fortune of these companies.9 (down 17. For example.75. One example in this regards.  The stocks are very sensitive and react sharply to every small bit of news – good or bad. Hence. Mutual Funds and Hedge Funds) buy or sell these companies‘ securities on the exchange but these companies are not yet fit as a long-term investment as the sector is cyclical and stocks have high beta.43 decreases the demand for properties. In fact. this is because of higher interest rates. it closed at Rs 308. A large number of financial institutions (Banks. Solution 1:  Look for other measures to reach out to investors like REMF/ REITs or look for different kind of investors like Private Equity.75 (28. After one week. can be of Unitech. global slowdown and heavy selling by financial institutions.44 per cent rise). At the month-beginning (November 3).  The companies are too complicated to make an investment decision as per analysts despite the listed entities in the sector giving an annual net profit-to-sales ratio of 36 per cent till September-end even in the face of an economic slowdown.  The investors in the stock market provide these developers cash for their projects by taking some stake in the company or projects. it traded at Rs 291. A week later it went up to Rs 374. Housing Development and Infrastructure (HDIL). QIPs or FIIs. A bad prospect of growth in the earnings of the firms gets reflected in their stock prices. seriously cutting down these companies expansion plans. They got stuck with their existing projects while investors have pulled out. which had planned to raise money through Special Purpose Vehicle (SPV) to .

 Potential sources of raising money RBI intervention can lead to curb in domestic lending Restriction can be imposed on External Commercial Borrowing Weak Market sentiments can lead to depressed valuations. Are We Prepared'. Sub-prime meltdown can lead to credit crunch Great appetite due to long-term and shortterm funding  Go for REITs/REMFs/ RE Funds: The real estate sector is also likely to get a boost from Real Estate Mutual Funds (REMFs) and Real Estate Investment Trusts (REITs). In fact. the size of which would turn to US$ 1. according to a CRISIL paper.  Have more focus on Private Equity: In the context of real estate India.5 billion additional investment in 2010-11. the REITs would have the potential to hold at least 5 per cent share of the total global real estate market by 2010. firms are seeking PEs help to raise capital. REITs alone would hold a market size of US$ 70 billion of the total real estate market as its concept is gaining ground in countries like India and other developing nations. . The paper titled.400 billion in the next 3 years.44 fund their projects after the fall of Lehman and now-a-days. ‗Indian REITs. real estate groups in India like Emaar. this sector has $1. says that by 2010.

Gurgaon. a number of Tier 2 developers in the Delhi NCR. of late. Problem 2: Lack of retail investor’s interest in realty shares IPO due to mispricing  DB Realty‘s IPO received just 23.8 million shares reserved for the retail investors‘ category.500-crore issue.000 applications for its Rs 1. Most of the projects are located in metro centres such as Delhi NCR. domestic contributors will put in to the tune of $400 million. NTPC‘s FPO received just 80. after the company spent Rs13. Ghaziabad. markets are witnessing a wide variety of PE Transactions with average deal size of over US$ 60 mn. Hyderabad. Lucknow.  Poor retail participation is the result of years of poor regulation and malpractices by market participants.  Growing importance of foreign investors: Of the additional $1. Ambience. Purvankara. etc. The remaining fund of $1. This has set the alarm bells ringing for decision makers.45 MGF.50 crore for its ads in The Times of India alone. etc. Jaipur. Reportedly. Mumbai. are reported to be planning to enter in to private equity (PE) deals for their residential property projects. Bhubeneswar. which have caused equity products to perform very poorly. while. Faridabad. Bengaluru.5 billion additional investment in the real estate sector in India in 2010-11. It received a pathetic 457 applications from high net-worth individuals (HNIs). Goa. Bhopal. Omaxe.  The gross and continuous failure of issues to attract retail subscriptions has ringed alarm bells among decision makers.2 billion is to come from international investors. In fact. Pune. Kolkata.000 applications 16% of the total 42. . Chennai. Bangalore and MMR regions are in negotiations regarding PE funds for their residential units at various locations in the country. Chandigarh.

Pricing pressure: IPOs launched in 2009 failed to perform on the bourses because of aggressive pricing and low retail interest Amount Name of the issue Current value (Rs Cr.847 15 -18 -38 2 -8 16 -20 14 -2 -1 Profit Loss Loss Profit Loss Profit Loss Profit Loss 4 5 Excel Infoways Raj Oil Mills Adani Power NHPC Jindal Cotex Globus Spirits Oil India Pipavav Shipyard Total Source: SMC Capitals .777 496 12.078 5.158 487 12. This is in sharp contrast to the trend in 2007 when all the listings.039 84 75 2.) Mahindra Holiday 278 48 114 3.46  Out of the 22 IPOs listed in 2009 and now. some of which subsequently declined too. returned between 82% and 175% on their debut.535 98 60 3.927 321 39 71 3. 13 returned between 4% and 27% while the rest led to losses between 3% and 20%.) Current MTM return (%) Profit Loss invested (Rs Cr. about 100.017 6.

47 Not only higher price can be issue but also mismatch in price quoted can lead to issue failure like in case of Dubai-based Emaar Properties which quoted at about 12. Income tax policies and primary allotment prices should be in favour of retail investors. Mutual funds can be a better route for retail investors who do not want to invest directly like one mutual fund is IDFC Real Estate Equity Mutual Fund NFO aimed at investing 65%-100% of money in Equity and related instruments of companies engaged in real estate related activity. starting from the highest bidder. so better to try and get good response from these investors first.  One of the Govt.15 dirham (Rs 130) against the Emaar MGF price band of Rs 530-630. Solution 2:  Give incentives to sub-brokers. initiatives in this regards is having new SEBI IPO guideline where the regulator introduced the pure auction method of book building in share sales. . who used to play a major role in marketing IPOs to retail investors. Educate retail investors better about the financial markets and financial regulations. subscription figures from institutional and QIB investors may be one indicator of business fundamentals. Their commission income has declined substantially in the past few years. Issue IPOs when the market is going up. Allotment of shares would be done to those whose bids are at top prices. in which institutional bidders could bid at any price above the floor price instead of restricting them to bid in a band fixed by investment bankers.      Revise price band downwards and extended the date if failure to attract investors.  For the retail investor. which creates their disinterest in promoting the IPOs.

So. which fail to generate foreign investor‘s interest. Under the auction method. \ Problem 3: Lack of Foreign Direct Investors interest  The biggest problems in attracting the FDI in the real estate sector are the lack of clarity of titles or transparent ownership records and the high stamp duties that are prevalent across India.48 It gives the company the price it deserves. The company could choose this. retail and high net worth investors will surrender their choice to play a part in the price discovery as they would be allotted shares at the floor price discovered in the auction. Although the new method sounds more democratic for institutional investors. varying between 8% and 13% in different states. However. the auction method has not been mandated by the regulator. . or the book-building method. it gives the institutional investor the number of shares at the price they want and reduces the hassles of price discovery for retail investors who will now only get a fixed price option. it runs the risk of getting rigged if a few funds corner the shares. the regulator has left it to the companies to decide on the number of shares it wants to allot a fund. FDI cumulative inflows to the Indian realty sector have so far been very low at 6% considering the tremendous growth opportunity it has.

49 Solution 3: Choice of Business and Investment Models for FDI Problem 4: IPO issue and Private Equity investment proceeds consumed for paying off debt rather than expansion .

it may have a significant impact on the operating capabilities of many of the developers. according to investment bankers. some of them could be forced to sell a stake to one.  An example can be of infrastructure developer Ashoka Builcon is also planning to raise Rs 225 crore but has allocated a meagre Rs 14 crore from the proceeds for buying capital equipment.  Though many realty companies may not be too keen to induct a private equity firm as a stakeholder.  The flood of realty IPOs comes at a time when RBI has tightened norms relating to bank funding for the sector. The bulk of the money would go towards meeting working capital requirements and paying loans of subsidiaries. as they have little room to raise further money through loans. as long as it makes full disclosures.50 a) IPO issue  Nearly a dozen developers have announced plans to raise a large amount of capital from the primary market and most of them are raising equity to pay off debt rather than use the proceeds to fund growth. which urgently need money to retire debt but may not be able to find buyers for their shares in IPOs in volatile markets. .  While a company has full discretion over the use of IPO proceeds. hitting the market to raise money to settle debt primarily is a sign of the precarious financial health of some of the real estate developers. b) Private Equity  Private Equity firms have been sending feelers of late to some developers. Though the move is primarily aimed at curbing any build up of asset prices.

which will find it difficult.5% which in effect can help in rebuilding loan by changing in to a foreign currency loan at a lower rate. some may not because of their low-quality assets. as the latter is considered expensive. Most developers had aggressively bought land through debt when prices were at their peaks in 2006 and 2007 but. thanks to the sharp decline in interest rates. But. with their debt touching intolerable levels and rates showing signs of hardening. as demand for office and residential property dropped in 2008 following the global financial crisis. Solution 4:   Sell bond or go for a foreign currency loan to support to enclose high debt cost Companies can also look at one of the method which has been adopted by DLF where DLF seems to refinance of high cost debt mixing the part of a 17 billion rupees loan taken from PNB [Punjab National Bank] at an interest rate above 13. It will be the ones with land in Tier-2 and -3 towns. these developers were left with land bought at high prices.51  While some developers may be able to sail through in difficult market conditions due to their superior land bank. developers have turned to share stake sale.  The availability of money in the latter part of 2009. . Real estate companies prefer raising money through IPOs to private equity funding. as a source of funding. enabled many of these firms to stay afloat.

real estate companies are evaluated on the quality of the land bank they own. Also Holding land parcels has also allowed a number of developers to sell plots to tide over the fund crunch and meet their construction costs on other ongoing projects. Negatives: In the joint development model revenues would have to be shared with the land owner whereas the entire construction cost of developing the land would have to be borne by the developer. Ishaan. was listed on AIM in November 2006). o The SPVs are either sold to a REIT or are listed on a stock exchange (for example. This model helps to spread risk in an overheated market as the company need not lock up funds upfront to buy property at sky-high prices. o One effective means to recycle cash is to transfer a project or a group of projects onto a special purpose vehicle (SPV). This model involves entering into development agreements with the owners of land that are typically entitled to a share in the developed property or revenues/profits arising from the same or a combination of the two. holding low-cost land banks from years ago helps to earn superior profit margins for many companies. a group company of K Raheja.Light Business Model Positives: Typically. .  Structuring projects – an important element in effective cash recycling o Project structuring is an effective mechanism to recycle capital and in the process earn higher IRRs.52 Problem 5: High Investment and Low returns on Projects Solution 5:  Asset . However GPL has an asset-light business model wherein the land bank is shared with the original owners of land. Besides this.

o SPVs are the only way out in FDI projects. o The foreign investor or fund wants to join hands with the local developer and an SPV is formed.53 o Companies tend to adopt innovative ways to ensure the property developed can be bundled into an SPV. litigations with respect to the existing entity are not carried forward. ties up with foreign developers who not only have capital but also bring in technical and execution capabilities leading to lower cost and higher returns.  SPV (Special Purpose Vehicle) o In an SPV. . o Developers tend to earn higher IRRs the faster they are able to sell properties to REITs. or alternately. which can then be easily hived off into an SPV when the situation demands. the developer ties up with a private equity fund who provides capital. o It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity. so that any unsettled claims. where you have a clear shareholder agreement and control in the project and exits becomes easier. One way is to provide a differentiation value by branding. o Many developers are diluting a minority stake in their entity organization or going in for specific FDI compliant SPVs for different projects.

so the concentration of builders in and around big cities has contributed to oversupply of costly and high-end products.54 Problem 6: Oversupply of Costly and high-end products leading to lack of sufficient revenue  As per the CRISIL research 2008-2010 the supply of residential apartments is to the tune 727 million sq ft whereas the demand is only 614 million sq ft resulting in the oversupply. as per the industry sources the oversupply is 35-40%. which is based on optimum levels. was not as big as they thought it initially was. Bangalore which have seen boom period in the recent past due to information technology and subsequent developments in the same sector due to recession around the world. After reducing prices by as much as 30% (DLF. This has forced the IT employees to cancel their bookings and forego whatever deposit made by them to the builders. real estate prices dropped even more significantly as the affordability of individuals (measured in terms of property cost to annual household income ratio) deteriorated. It became clear that the then target segment for the real estate companies – luxury segment. the middle income segment responded positively to the Rs 25 lakh price range. The oversupply is more in cities like Hyderabad.  Its failure to properly assess the situation like taking middle class into account and to build houses to suit their needs. The IT/ITES sector has increased the salaries of their employees by 21% but at present these companies have frozen the salaries and also shown pink slips to their employees. It was evident that this premium segment .  The growth in realty sector is driven by India IT/ ITES sector. 2008).  India is still a country of small towns and villages.  While household income fell. Unitech slash.

is adopting a pricing model that resembles book-building in initial public offers (IPOs) of shares. The results of the survey are expected by the end of the week and DLF is likely to launch the project at a premium of around 20 per cent.400 apartments it plans to launch next week during the festive period.500-Rs 7. Talwar said. text messages and in some cases. Such surveys are going to be regular feature for upcoming residential projects.400 apartments during the first phase at Rs 5. DLF‘s authorised brokers and property consultants are collecting feedback from prospective buyers on what should be the price of a project by sending out mailers. . The company had for the first time conducted such a survey before launching the first phase of its Capital Greens project in West Delhi‘s Shivaji Marg area in April this year. Solution 6:  Adopt New Property Price Model DLF. making personal visits.000 per square foot whereas it sold close to 1. Only the style is informal unlike in shares. the country‘s largest real estate company.500 per square foot. using a process to test the market while pricing.55 demand could not support their existing valuations and was highly dependent on market sentiments. The company which earlier used to set property price internally is now surveying buyers to arrive at a price for forthcoming projects. in which a price band is set and formal offers are invited. It initiated the second such survey in mid-August for the next phase of around 1. in the range of Rs 6.

4 Exhibits: Market Potential ―The recession proof business opportunity in low income. Customer Segmentation and Market Potential Source: Monitor. Different players are targeting different price points which has actually amounted to targeting two distinct segments . where huge volumes could reap rewards. Developers need to look at lower income segments right up to the bottom of the pyramid. The total value of this unmet demand is a staggering Rs 13. 2009.middle income segment (Rs 10-25 lakh) and low income segment (Rs 3-8 lakh).000 crores (Monitor.56  Look for different Market Segment: There is huge unmet demand for housing in India across middle and lower income customer segments even as the premium segment was witnessing an oversupply. housing‖ p. 2009). . 00.

2009). HDFC has picked up 10% in low cost housing developer Value and Budget Housing Development Corporation‘s (VBHDC) housing projects (Jerry Rao's Fourth.57 Low Cost Housing Business Framework Availability of finance for Low Cost Housing Another important factor in the success of low-cost housing projects is availability of finance. Many Micro-Finance Institutes (MFIs) are also venturing into this space to provide housing finance to buyers. . both for the customer and for construction. This has ensured easy availability of construction finance as well as customer house mortgages for VBHDC‘s projects. The housing finance companies too have realized the magnitude of this opportunity. As a trendsetter.

which account for about 29% and 5% of the total commercial space in FY07.58 Problem 7: In the current growth scenario. etc are likely to see an increase in real-estate demand from the IT/ITES sector. which areas to focus on for maximum growth Solution 7:  Concentrate on Tier II/III cities Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations o Tier I cities. will increase to 44% and 20% at the end of FY17. Indore. . Coimbatore.Mumbai. Vishakhapatnam. respectively. Mysore. Tier II and Tier III cities. supply was still inadequate to meet the demand arising from the spread modern retailing. Indore. Jaipur. While many micro-markets in metropolitan cities had saturated.Kolkata. According to Nasscom‘s projections. During the period. towns and cities such as Chandigarh. there was another paradigm shift as many developers realized that the market had converted from an investor driven one to an end-user dominant one. outsourcing. IT and manufacturing to these cities. Lucknow. in Tier II and Tier III cities. Ahmedabad. Pune o Tier III cities. Hyderabad. By early 2009. The price of land in Tier II and Tier III cities has been more moderate. many developers had adopted the obvious strategy of price correction in existing projects to clear mounting inventories and lure consumers back to the market. Jaipur Within the next three to six years.Nagpur. Delhi and Bangalore o Tier II cities.

It has also plans to cut its debt by half. by the end of this fiscal year. which would cost less than Rs 20 lakh.  IT/ITeS sector expected to require 150 million Sq. . India's largest realty firm. of commercial office space by 2010. ft. considering the demand where few private players have gone before. In fact. is planning to build one lakh affordable houses. Opportunities in Market: (I) Commercial office space  Commercial market expected to grow at a Compound Annual Growth Rate (CAGR) of 20 per cent to 22 per cent over the next five years. coupled with reduced home loan rates. put the real estate market on the path to recovery.200 crore.59 Recognizing that the end users were seeking homes that were affordable. DLF. The affordable housing concept. developers altered their product portfolio and launched affordable housing across India to revive demand by the end of the first quarter of 2009. to Rs 6. in major cities across the country.

4 million units.60 (II) Residential space     Number of rich household growing at CAGR of 21 per cent. (III) Retail space       Rising consumerism with doubling of disposable income Growth in organised retailing Entry of international retailers Government is exploring the possibility of a relaxation in FDI norms. Mortgage finance is expected to increase penetration into the urban housing finance sector. of new retail space will be required. Current shortage close to 19. Increasing working age population (almost 64 per cent in 16-64 age group).ft. Organised retail expected to grow at a CAGR of 19 per cent over the next five years By 2010.   Expected to grow at a CAGR of 18 to 19 per cent up to 2010. predominantly in middle and low income group. . Increasing income levels: per capita GDP increased by 66 per cent in last five years. 220 million sq.

8 per cent till 2013.    Indian tourism industry expected to grow at an average rate of 8.61 (IV) Hospitality space    India acquiring recognition as a medical tourism destination International events such as Commonwealth Games expected to drive growth Emergence of India as a MICE (Meetings. wellness spas gaining popularity. Conventions and Exhibitions) destination. hospitals. Incentives. . High potential for budget hotels Service apartments.

Missing Asset classes and formats . formal approvals have been granted to 578 SEZ proposals.  Policy allows usage of as high as 50 per cent of the area as non-processing zone. offering immense potential for residential and supporting infrastructure. there are 322 notified SEZs and 146 have received in-principal approval.  As of June 2009.62 (V) Special Economic Zones (SEZs)  Under the new SEZ Policy.

2. 7. Ability to work and effectively liaise with Government agencies to ensure timely completion of projects. robust model of DLF with a mix of development and rental earnings based on independent business verticals . 6. strong liquidity and sanctioned debts limits available which gave excellent options for future investment and returning value to shareholders. 3. Focus on Capital Efficiency. Low risk.homes. commercial. offices. brokerage community and property managers. Zero debt. 5. entertainment and hospitality projects. 9. A high-quality portfolio with a strong tenant base which ensured strong cash flows. Strong relationships with local owners.organized and . 10. taking the ‗other income‘ component to a whopping amount. retail. retail and hotels . flexibility and resources to take advantage of the emerging opportunities in a changing environment. listed as real-estate investment trusts in Singapore ensured a steady stream of revenues (in the form of dividends) from the rentals. Huge cash raised from warrant issues to promoters parked in interest-earning instruments. 4. 8. Strong ties with financial institutions – ability to raise funds at competitive rates for large projects. Diverse residential.63 Learnings Real estate players should adopt in different phases of Indian future economic state Boom Period (FY 2007-08) Factors responsible for Gainers good performance 1. The deployment of this cash to ramp up revenues through additional business. The projects.

Attraction of private equity investment amounting to Rs 16. These also enabled DLF to partially monetise the value of its land resource at a premium and significantly improve the rate of returns from these projects. Factors responsible for Lagged Behinds bad performance 1. reflecting the confidence of global institutions investing in DLF and the economic viability of the projects. Recession (FY 2008-09) Factors responsible for Not so affected companies’ performance 1. Kochi. where the risk of prices softening is high and high dependence on plotted development. .750 mn from Merrill Lynch & Brahma Investments by DLF in 8 residential projects in Chandigarh. Bangalore and Indore. Concentration in NCR and Tier III cities in the North. One of the companies. Chennai. 2. Multibusiness. 11. 3. Joint Venture agreements with other companies helped in having wider access to land. Preference on rental/leasing income as opposed to outright sale has ensured cash flow driven business model. Focus on Low-cost Housing. Aggressive launch of premium homes targeted at mid-income earners with specific focus on affordability and actual user.64 operating on an independent basis. multi-segment within business and operations across geographies mitigates risk to take care of cycles in the business. Land for IT Parks acquired through government allotment having very low land cost. Anant Raj Industries Limited did not acquire land through Auctions. 4. 12.

2. So. These urban families are willing to pay for the value derived in providing them the appropriate ambience to come home to from a hard day‘s work and the environment in which they can raise their families. Ackruti City launched ‗Just Perfect Homes‘ series. Improved credit ratios. Availability of Prime land at attractive rates with less leveraged balance sheet and free cash reserve. Reduction in debt-equity ratio. Factors responsible for Lagged Behinds bad performance 1. 2.65 5. helping in aggression to acquire land at these prime locations. Factors responsible for badly affected companies’ bad performance 1. Stretched balance sheet and the general scenario of tight liquidity was also one of the primary concerns. Most of the stocks found the recession as their reason for bad performance. direct cater to customer‘s demand as well as shift of focus to a new segment was there. Crunch for cash and high Debt leading to not so good a performance. Stability (FY 2009-10) Factors responsible for Gainers good performance 1. Catering to the upwardly mobile urban family‘s lookout for a dream house. High net debt-to-equity ratio (incorporating the impact of outstanding land payments) as high as 165%. . with all the modern facilities to fit into their budget. 3.

for instance. Interest Rate: The hardening of interest rate affects the demand for houses. retail and hotels. Also. Also. Orbit Corporation‘s business. The central bank also cautions banks time and again on lending to developers. Lower rates induce buyers to purchase houses. This ensures that the business is diversified to the extent that if one segment is not . Economy: If the economic growth rate slows down. suffered more than diversified developers last year as it only builds luxury projects.66 Factors . 2. RBI has also increased risk weights for the sector. in December 2007.e. the first thing he observes is the diversification of business i. DLF‘s share price was quoting at a whopping Rs 1. there are fears of job losses and as a result. which in turn impacts companies‘ profitability. Diversification of business: When a long-term cautious investor looks at a real estate company. 4. 5. After recessions fears emerged. depending on their presence in various segments. FII allowed in realty sector decides the cost of capital accessibility by Real Estate company. interest rate changes policy helps in deciding the availability of finance to consumers at cheaper or costlier rates. In some quarterly reviews. few people or companies are willing to purchase real estate. the company‘s presence in verticals such as residential. This makes it difficult for banks to lend to builders. Volatility in Real estate share prices: For instance. the company‘ stock price plummeted almost 86 percent to Rs 151.70 within three months.073.Realty players should consider from consumers’ point of view 1. 3. commercial.80 because the economy was buoyant. Reserve Bank of India’s policy measures: RBI policy related to FDI. some developers can get more impacted than the others.

DLF. discounting it to the present value. they look at net asset value (NAV). Instead. companies raised huge amounts through public offers.000 acres and now not only the acreage of land that is important but the quality as well. Some companies. the analysts/investors do not consider price-to-earnings as the right parameter to gauge the performance. Most of the companies follow the latter model. the other one will. This is calculated by assuming the money that the company will generate in the future and then. The company having land reserves in better locations should be preferred than one who may have large reserves. For instance. Accounting & Financials: Companies in property business have two methods of accounting—project completion method and percentage completion method. Further. but at regions where development has not yet started. quarterly financials are of little importance. the companies book revenues as and when the project is completed and sold. the cost of acquiring the bank is also very important because it gives an idea whether the company has been able to acquire land cheap to make huge profits when properties hit the market. for example. NAV: The earnings of developers get inconsistent due to the changing price of their assets. managed one of the biggest initial public offers of the country because it had a land bank of over 10. such as HDIL follows project completion method. analysts say that revenues of listed entities in Bangalore. Simply said. wherein the income is realised when the project is completed. these companies were hit. such as Sobha Developers and Purvankara. Land Bank: In 2007. NAV shows the future cash-flow of the company. come purely from residential properties. 7. Importantly.67 doing well. 8. 6. So. As a result. when information technology (IT) companies suffered due to the global economic slowdown last year. In percentage completion. . based on their land bank.

or even stalling of projects. a high debt-to-equity ratio also decreases the ability of the company to borrow more for further construction. 10. To top it.68 9. many promoters privately hold stake in such subsidiaries that help them to garner profits from projects. all listed companies have several hundred subsidiaries. . Real estate companies are always starved of money as they first need to deploy money and build projects. Transparency Issues: Many investors do not prefer to invest in realty companies as they have high cash component that developers cannot account for. Even analysts find it tedious to track the financials of each of these subsidiaries. Also. Debt: Most of the listed entities in the sector have a high debt burden. This is because of their build-and-sell model. This can result in project delays. revenues follow later. but.

The introduction of REITs in 2007. The most important factor in the case of Real Estate is location which affects the value and returns from the Real Estate and companies which have diversified holdings in most of the segment wise location seem to be benefitted the most but at the same time. FDI. much better market size of around Rs. Private investors have also entered into indirect investment in real estate through Private Equity route. brokerage community and property managers cannot be undermined. Govt. per capital income. As far as demand in the new segments is considered. agencies. . Indian Realty sector needs a stronger capital market base for property financing. importance of relationship with financial institutions. Along with right location and good relationships. FDI is serving a very important source for funds but it needs different business and investment models to flourish. 130000 crore is from the Low Income segment and Govt. is also promoting the focus on Middle and Low income affordable housing segment by providing interest subvention in the budget proposal.69 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. Interest rates and employment in the nation. has given international investors in particular a familiar investment vehicle. This industry also need to try out new business models like new Property Price model and new ways of operating like structuring projects and creating SPV which will help in low cost high return with more business opportunities. Private Equity and FDI. local owners. Volatility in interest rate by RBI and share prices wide fluctuation has forced companies to look at alternative sources of finance like REITs.

diversification of business. Lower leverage and transparency in financials.70 Opportunities are also booming in Tier-II and Tier-III cities and Hospitality space and SEZs are providing good potential as market. High Net Asset Value. If any company in this sector fails to provide this. Customers look for less volatility in real estate prices (very important if IPO of any new company has to come). sound accounting and financials. it may become laggard or won‘t be able to garner a good share of the growing market. . All these opportunities and alternative solutions to problems look good but what use this all can be if it is not able to attract customers finally either as a source for raising finance or for generating commercial and residential demand of property. good land bank.

Govt. focus on Middle income and lower income group with affordable housing  Keep a track of demand in tier II and III cities and for all over India track Hospitality space and SEZ demand. . Private Equity and Foreign Direct investments to avoid losses due to interest rate and share price fluctuations. Agencies.  For sources of funds.  For demand. NAV. Education Infrastructure and Low-cost housing..71 Recommendations The following recommendations are made by this paper  Real estate companies should try and have a diversified mix of projects The companies should focus on strong relationship with financial institutions.  Since customers are paying attention to good quality land bank. Property Price model adopted by DLF  Have structuring of projects to recycle capital and earn high IRRs or go for Special Purpose Vehicle  Need for different asset classes and formats like Logistics and warehousing.   Have new business and investment models for FDI Look at different business models like Asset Light business model adopted by Godrej Properties Ltd. brokerage community and property managers. owners. leverage ratio and transparency. Healthcare Infrastructure. look for alternative sources of money like REMF/REITs/ RE Funds. mutual funds can be a better route for retail investors who do not want to invest directly. real estate companies should consider these factors for laying out any strategy for growth.  For IPO.

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