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Indian Real Estate sector: Problems which are faced by Key Players and Proposed Solutions
(PRN # 08020841015)
Specialization: Finance Management
Under the guidance of
Prof. MVS Prasad
Symbiosis Institute of Business Management
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
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.
but despite such a high growth potential and contributing field. a global non-profit education and research institute. Thus. Considering both of these aspects of importance of real estate for Indian economy and problems it has faced in the recent years. Almost 5 per cent of the country's GDP is contributed to by the housing sector. 80 to 90 million housing dwelling units will have to be constructed with a majority of them catering to middle. According to the Tenth Five Year Plan. . this contribution to the GDP is expected to rise to 6 per cent. In the next five years.4 Objective of the Study The Indian real estate sector plays a significant role in the country's economy.and lower-income groups. 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. The real estate sector is second only to agriculture in terms of employment generation and contributes heavily towards the gross domestic product (GDP). India leads the pack of top real estate investment markets in Asia for 2010. over the next 10 to 15 years. 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. Indian real estate sector saw a reversal of sorts with the declining affordability of the end users and reducing funding options for the developers. financial meltdown and economic crisis of 2008 resulted in significant downturn in the Indian real estate sector. there is a shortage of 22. Looking at the demand and contribution. Moreover. according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute.4 million dwelling units in this sector.
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 asset classes and formats which it should adopt. initiative and potential demand. 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 the new market segments this sector should look focus upon considering Govt. Suggest the learning players should adopt from past and apply in future states of Indian economy. Suggest different cost effective innovative Business and Investment models for future operations.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.
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. which this sector can try along with possible measures to increase the return on investment. this report contains the conclusion of this analysis and final recommendation to industry players for the challenges till now or possible challenges. discussed are different operational models. Also done in it is the analysis of these companies to find out the reasons for few players‘ success and others failure. Of late. 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. Private Equity. The first part of this report focuses on this sectors‘ different phases of growth. In the end. Also. 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.6 Executive Summary The dissertation has been initiated to focus on the factors that do matter for this industry and its customers. FDI. The second part focuses on the various sources of finance which includes borrowing from banks. Real Estate Mutual Fund and Real Estate Investment Trust. 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. decline. IPO. 2007 with 11 scrips and which represents 95% of market capitalization of real estate development companies in BSE. .
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. Also. which areas/cities real estate companies should concentrate now. 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. This report ends with the conclusion and final recommendation to the Indian Realty players to have growth with least cost.7 The third part of this report contains the potential areas for growth i. Education Infrastructure and Low-cost housing. . Hospitality and Special Economic Zones as well as different asset classes and formats which can be named as Logistics and Warehousing. Healthcare Infrastructure. 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. Retail. Residence. However. 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. These areas are Tier II and Tier III cities and space in Commercial office.e.
Recession (FY 2008-09) c. Real Estate – In Different phases a.Different phases 20 3. 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. Boom (FY 2007-08) b.8 Index S. Problems being faced by Indian Realty sector and probable solutions 42 . Stability (FY 2009-10) d. No. Topic Page No. Growth (FY 2010-11) 21 4. for this sector Areas which claim the major chunk of growth pie in India 18 16 10 12 2. 1. Indian Economy .
Realty players should consider from consumers’ point of view 66 7.9 5. Conclusion 69 8. Bibliography 72 . Factors . Recommendations 71 9. Learnings Real estate players should adopt in different phases of Indian future economic state 63 6.
or an existing business building or buildings. multi-family apartments. or transferred together or separately. Commercial Properties can be further classified into: . The term real estate is often used interchangeably with the term real property. Generally the property size and price is quite large. sold. 2. Title to real estate normally includes title to air rights. condominiums.10 Real Estate . Vacant Land Vacant Land can be used for farm and ranch purposes. wells and other site improvements which are immovable. mineral rights. leased. but the term real estate emphasizes the asset itself. and surface rights which can be bought. Commercial Properties Commercial property can be empty land zoned for commercial use. fences. and co-ops. As long as the spread continues.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. such as buildings. the area one has to cover gets farther out from the city. and real property encompasses the legal issue of ownership. 3. Major Types of Real Estate Property 1. townhouses. Residential Properties Residential Property can be referred to as property which is zoned for single-family homes.
11 a. they are listed as commercial office rental 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. rather than methods using square footage and land value. with some listings shown as restaurant/retail. as well as malls. c. Office Buildings and Office Complexes: A single building designed for office use. The owner derives income from the rental payments of the office tenants. When offices are grouped in structures with single ownership. b. Retail Space Real Estate Properties: This category would include single buildings used as stores for clothing. and other construction for habitation by multiple family groups. electronics and other consumer products. but are normally listed and sold as single family residential units. . retail sales per square foot or other investment return calculations. Condominiums are frequently called multi-family because of their construction as a group. These can be valued based on the rental income return on investment. Valuations can be based on size and land value. Medical & Dental offices are a subset. Multi-Family Commercial Real Estate: Multi-family commercial real estate property types include duplex homes. Restaurant spaces are a specialty subset of the retail category. or a group of offices in a single building or cluster of buildings would fall into this category. strip centres and the like.
positive demographic trends in India are visible as middle class or the aspirers to show a CAGR of 10. Also. Also.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. driving demand for residential units. if there is easy availability of finance. Fiscal incentives offered on owing a residential house is also a significant demand driver. 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. more loans will be taken to purchase or build new homes.5% as per World Bank in 2010. Positive signs for the real estate are Double-digit income growth rate for the next 3-4 years which should improve affordability. (II) Demographics and Urbanization Indian household families are moving from joint families to nuclear families leading to more demand of households. (III) Favourable Interest Rate and Fiscal Incentive Interest rates affect the real estate prices because they affect the lending and borrowing by the investors. Currently. 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. The correlation between interest rates and home loans can be drawn from the fact that in 2008 the growth of real estate . GDP growth rate is predicted at 7. as.
Earlier it was 16% and in 2008 it was 25%. the prices of the affected company‘s stock adjust to reflect its current potential for earnings or losses. Information Technology. not only it takes its own time to adjust the real estate prices but also acquiring a property necessitates a complex process. (VI) Development of the special economic zones as real estate property Development of SEZs in various segments such as multi-product. (V) The Property Transfer Process In efficient markets. Real estate markets are not as efficient as stock markets. General purchasers do not have enough knowledge about the minutest details of legal aspects involved in acquisition of property. Textiles and technology intensive . Increase in FDI from 2006 to march 2007 is 10%. can introduce advanced technology in the construction business and can create a healthy and competitive market environment for both Indian and foreign investors. increases professionalism in the sector.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. Bio-technology.Increase in FDI limit for Indian Real Estate sector makes the real estate sector in India more organized. information flows so quickly among buyers and sellers that it is virtually impossible for an investor to outperform the average systematically. rules. Several laws. As soon as something good or bad occurs. Gems and Jewellery. and regulations cover the matter of property transaction. (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.
Mumbai/Navi Mumbai Mundra Haldia Coimbatore. as well. including DLF.14 industries attracts both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs). the SEZs also attract a number of real estate developers. Udipi. Bhopal Orissa Apart for the corporate clientele. Corporate Reliance Industries Adani Group TCG Refineries Suzlon Hindalco Genpact Vedanta Location Gurgaon. Ansals. Omaxe. IT/ITES sector . (VII) IT/ITES Growth The outsourcing and IT/ITES industry have contributed to the demand for quality office-space. ft. The estimated demand from IT/ITES sector alone is expected to be 150mm sq. Parsvnath. 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. As of now. Vadodara Sambalpur Bhubaneswar. Shipra Estate to name a few. Jaipur.
15 (VIII) Organized Retail and Hospitality Demand Organized retail penetration level right now is at 4. .1% which is lowest compared to other emerging markets. strong tourist arrivals should spur demand for hotels across India. Economic growth and changing demographics increase the retail penetration levels and with the opening of new malls. demand for land space also increases. At the same time.
the market capitalisation of FII investment in construction has gone up a whopping 422 per cent in the past six months. this contribution to the GDP is expected to rise to 6 per cent.16 Importance of Real Estate Sector for our economy Contribution heavily towards the gross domestic product (GDP). 2009. 51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-andcarry through the automatic route. In the next five years. . coupled with the Reserve Bank of India's (RBI) move allowing banks to provide special treatment to the real estate sector. according to the latest data given by the Department of Policy and Promotion (DIPP). Initiatives by Govt. is likely to impact the Indian real estate sector in a positive way. Almost five per cent of the country's GDP is contributed to by the housing sector. Second only to agriculture in terms of employment generation Average profit from construction in India is 18 per cent. Huge attraction for Foreign Institutional Investors (FIIs) as with BSE Sensex touching a 15-month high. for this sector The stimulus package announced by the government. which is double the profitability for a construction project undertaken in the US. RBI has decided to extend exceptional concessional treatment to the commercial real estate exposure and restructured it to June 30. 100 per cent FDI allowed in realty projects through the automatic route.62 billion approximately. 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.
At the same time. Urban Land (Ceiling and Regulation) Act.17 In case of integrated townships. Developers of affordable housing projects (units of 1. Such projects would have to be completed before March 1. respectively. provided the cost of the home is not more than US$ 41. has also given sops to the realty sector.500 sq ft) have been granted a tax holiday on profits from projects initiated in the 2007-08 financial year. . 2012. Reduction of time taken to develop Special Economic Zones by simplifying procedures to get the tax-free industrial enclaves notified. the minimum area to be developed has been brought down to 25 acres from 100 acres.382. 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. 1976 (ULCRA) repealed by increasingly larger number of states.691. Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million. Budget 2009-2010.000-1.
18 Areas which claims the major chunk of Growth pie The major primary cities in India. Cochin. Andheri-Kurla complex. Secondary cities like Pune. construction of larger floor plates and offers of custom-built facilities. Bangalore. This is not limited only to location factors. are preferred cities for locating IT-enabled services (ITES) ventures. Nagpur. Powai and Malad in the north. Mysore. primarily for companies in the . especially in the central and northern suburbs. Chennai and Hyderabad. Suburbs in Mumbai have seen an upsurge in commercial space supply over the past few years with IT/ITES companies driving the market. with Gurgaon has experiencing a substantial increase in 'A' grade office supply.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.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. namely Mumbai. Noida continues to witness the development of small buildings built on industrial and institutional lands. but also due to the presence of the support services. Vijayawada. These cities are also experiencing development activity due to greater availability of land. and Kolkata qualify with many of the required attributes but lack adequate support services. The primary cities in India which are sought-after destinations by corporations for locating business operations are briefly reviewed below: (a) Mumbai . Jaipur. Delhi. (b) Delhi .
. The IT/ITES sector continues to be the main demand driver in the city. (d) Chennai Chennai commercial market comprises the CBD of Gundy and the SBD of Old Mahabalipuram Road (IT Corridor). The city experienced rapid economic growth during the 1990s. Boston. a distinction shared with Salt Lake City.19 ITYITES sector. primarily due to IT and ITES sector. 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. 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. and Pune called India's 'Silicon Alley'. (e) Other cities Two other cities on the list for companies opening offices in India are Hyderabad. Bangalore is the fastest growing city in India.The Silicon Valley of Asia With a population of approximately 6 million. Tel Aviv and Singapore. Seattle. Demand for commercial office space continues to be for quality buildings and is concentrated around South Chennai. (c) Bangalore . Overall Gurgaon and Noida continue to remain the favoured location for IT/ITES companies. called India's 'Cyber City'.
20 Indian Economy .dipp.Different Phases Source: http://www.pdf .in/fdi_statistics/india_FDI_December2009.nic.
2007 with the base year for index – 2005 and index value – 1000. All the past.) 6. Govt. initiatives to help industry in that phase 4. Overall impact on the Realty Industry with the help of BSE Realty Index players’ performance. Type of phase 2. Areas which got impacted the most in that phase 5.nic. 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.21 Real Estate – In Different phases Source: http://pmindia. Factors responsible for that phase of Indian real estate Industry 3.in/Economic_Outlook_Final. (BSE realty index was launched on July 9. 11 scrips are included in this index with companies representing 95% of market capitalization of real estate development companies in BSE. current and expected phases of Indian real estate are being analysed in the pages given below on the basis of following parameters: 1. Reasons for Realty players success/ failure in that phase .pdf As shown in the chart above.
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. The residential segment too was closely IT-driven and reported robust 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. There was a situation of boom in this sector. more in line with the overall economic growth.625 crore. Insurance companies could invest in special economic zones (SEZs). Not to forget the he realty score in the capital market. . Non-IT commercial space too kept pace. Govt. contribution in this phase The home loans were easily available and RBI was following very liberal policies regarding the interest rates. Commercial banks exposure to the real estate sector almost doubled in last year. 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. It was estimated that the value of domestic India Real Estate Market 2007 was about US$ 14 billion. The market was on a high with the initial public offering of DLF raking in a record Rs 9.
2012. Great times were there for commercial office real estate at tier II and tier III cities. Delhi and Mumbai as their offices and shopping mall rentals continued their upward trend at a very vigorous pace. 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. In fact. Infosys. Especially. destinations like Bangalore and Gurgaon were categorized under fast growing metropolis and the locations witnessed spearheaded improvement in every phase. Developers have been given a tax holiday on profits arising from the projects that started backing 2007-08. All such projects should be complete prior to March 1. Contrary to this. Tier-III areas got attention of technology sector players who waited to expand their operations into these previously untapped areas and markets. Areas which benefitted Tier 1 cities focussed on the development of suburbs and peripheral locations. 2006 to March 31. and Lucknow were also predicted to get . Goa. Indore and Bhopal at that time. The property boom in Tier II and Tier III cities was further fuelled by the factors like opening up of financial sector. rationalization of income tax and loan policies in addition with well-paid IT jobs. Tier-III areas including Jaipur. The finance Ministry announced a 10-year tax holiday for developers of Industrial parks set up from April 1. Wipro and Satyam candidly launched their operations in frontline Tier II and Tier III cities like Mysore. Besides the sky-rocketing property prices and rentals. Coimbatore. Ahmedabad. IT giants like TCS.23 Encouragement by Indian government to the involvement of Foreign Direct Investments or FDIs in the India Real Estate Market 2007. 2009. Chandigarh.
Orange highlight shows the bottom lows at the parameters mentioned . Jaipur and Lucknow were likely to see huge growth in the coming years. Impact on the Realty Industry A) Financials Note: 1. Kochi. Tier III cities offered cost advantages of 15%-30% over Tier I and II cities through lower labour and real estate costs. and untapped manpower. These cities were characterized by low real estate costs. Green highlight shows the top highs at the parameters mentioned 2. Ludhiana. Nagpur. Some upcoming cities that turned to ‗growth centres‘ include Guwahati. making them one of the preferred investment destinations for overseas realty players especially for technology sector development. Of the leading Tier III cities. Mysore. Coimbatore. Vishakhapatnam. Indore. Bhubaneswar.24 a part of the boom. Surat. availability of large chunks of land for development.
. brokerage community and property managers. Anant Raj Industries: Focus on NCR. High-quality portfolio with a strong tenant base which ensures strong cash flows in the coming years. Diversified mix of projects. Strong relationships with local owners.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. ensuring flexibility and resources to take advantage of the emerging opportunities in a changing environment. Zero debt. buying at the right price and strong execution skills. strong liquidity and sanctioned debts limits available providing excellent options for future investment and returning value to shareholders.
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.
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.
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.
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.
sand. Banks and foreign investor started withdrawing their money from the market. Bank of America. Hike in housing finance interest rates. Govt. Lack of uniformity of land laws. slowdown and approval delays leading to the developers missing to complete their projects within the boom period. created a very fast drops/recession in financial industry and created a crisis in all over US economy. Many companies gave pink slip to the employees. which forced the employees to cancel their bookings and forego whatever deposit made by them to the builders. steel. It has allocated Rs . contribution in this phase Favourable policies for addressing the urban housing problem.29 Factors which led to Recession in Real estate business: High rate of inflation in Indian economy. labour has affected the real estate sector. it has rolled out a massive plan to build 5 million dwelling units in five years to house 6 crore slum dwellers. Bankruptcy of Lehman Brother and sell process of PE firm Merryl Lynch by the largest US bank. Affordable housing became the Indian government‘s new mantra and it introduced the Bharat Nirman project. to double the construction of low cost houses to 12 million units. RBI increased the Bank rate leading to the increase in the interest rates. Under the Rajiv Awas Yojna scheme. Increase in the price of cement. 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. Unaffordable property rates. Low rate of GDP growth rate.
2009). 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. 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. cement and construction material as part of its fiscal stimulus plan. Mumbai. Mumbai. Slowdown is biting the real bullet. showed a marked decline in demand during the quarter ending September. Bangalore and Hyderabad. In the Mumbai-Pune zone. lowering prices in key apartment zones in or around Delhi. Property prices in metropolitan areas dropped by 10%-15%.30 225. Seven major Indian cities. second was to boost the demand for steel. 2009) with two reasons: One was its vision for slum free India. It also earmarked housing loans up to Rs 20 lakh to qualify as priority sector lending (FM's new subsidy. Kolkata and Bangalore. including Delhi. 2009). Recession affected areas Real-estate prices across the country did fall by 10-40 per cent.
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.
Ackruti City Ltd.9 Joint Venture agreement with Monsoon Capital for development of an IT Park at Panchkula. A Co-Investment Right Agreement with the Govt. A 50. with all the modern facilities to fit into their budget.: Launching of the ‗Just Perfect Homes‘ series in the first week of January.32 Reasons for Realty players being gainer/Lagged Behind A) Players which did not lose much 1. The upwardly mobile urban family is on the lookout for a dream house. which are aesthetically designed. one of the biggest challenges will be providing affordable housing to city dwellers. Anant Raj Industries Limited: No land acquisition through Auctions. 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. with maximum optimization .1:49. of Singapore Investment Corporation (GIC) to pursue investment opportunities in infrastructure development and hospitality. Preference on rental/leasing income as opposed to outright sale ensured cash flow driven business model. Haryana. With this rapid urbanisation. Land for IT Parks acquired through government allotment having very low land cost FSI. 2. ‗Just Perfect Homes‘ are residential complexes. Focus on Low-cost Housing as urban population expected to reach 576 million in 2030 from the current 328 million.
APIL‘s stretched balance sheet and the general scenario of tight liquidity were primary concerns. B) Lagged Behind (Players which got affected the most) 1. well conceived to meet the aspirations of modern living. and benefits.33 of space. a slew of new projects and the return of private equity funds that had turned away proposals due to the global slowdown last year. . after the price correction and fall in interest rates. Affordability is expected to return to around 49% by the end of March 2010. The residential segment is expected to recover by the end of FY2009 with a 25-30 per cent renewal in demand. Rest most of the stocks found the recession as their reason for bad performance. 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. which hitherto was available only in high-end luxurious complexes.
5 million for setting up five-star business hotels and luxury residential properties over the next three years. IT companies accounted for ~80% of commercial demand and have been a significant driver of residential demand.02 billion in various residential and commercial projects. RBI has decided to extend exceptional concessional treatment to the commercial real estate exposure and restructured it to June 30. . with 4. This should result in improvement in sentiment and boost real estate demand.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. coupled with the Reserve Bank of India's (RBI) move allowing banks to provide special treatment to the real estate sector. Andhra Pradesh. the largest hotel chain in Europe. It is likely to impact the Indian real estate sector in a positive way. Accor Hospitality. Govt. Chennai and Hyderabad. is planning to invest around US$ 1.34 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. 2009. Renewed momentum in demand is expected in IT hubs like Bangalore. New Projects lined up To name a few. part of Chennai-headquartered diversified Shriram Group. Contribution in this phase The stimulus package announced by the government. Shriram Properties. Historically. Zuri Group Global is planning to invest about US$ 247. An investment of US$ 627.
and Pune property prices registered a gain of 14. provided the cost of the home is not more than US$ 41.691. 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. the finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on home loans up to US$ 20.5%.8% improvement.2% in property prices. India's fastest growing online real estate website by People group has launched the country’s first Property Index. At the city level. of 24. Mumbai has seen the maximum gain. Note 1: Makaan.500 sq ft) have been granted a tax holiday on profits from projects initiated in the 2007-08 financial year. during 2009. While most of the metros have recovered in terms of prices.7%.6%. .000-1. signalling a relatively modest rise in property prices. In Pune. experienced an 8.Dec‘09 the property prices in Pune gained by 9. things started picking up in the 2nd half of year. This subsidy is expected to give a further boost to the housing sector.35 Sops to the realty sector in Budget 2009-2010. Over the 12 months period from Jan.382. Such projects would have to be completed before March.7% during 2009. In fact Hyderabad has shown a decline of 7. from 957 points in July‘09 to 1096 in Dec‘09. Delhi on the other hand.Developers of affordable housing projects (units of 1. Hyderabad & Bangalore still continues to experience property prices lower than last year.At the same time. Christened Makaan. 2012.com. The Index is intended to serve as an objective tracker of property trends.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.
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.36 Impact on the Realty Industry A) Financials Note: 1. 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. . Green highlight shows the top highs at the parameters mentioned 2. as data only till Dec.
3 in June 2009 quarter to 1 in September quarter. Net debt to trailing four quarters EBITDA has decreased from 5.the power and SEZ space in India as well as New Project as the company bagged an order worth Rs 1.400 crore for the redevelopment of Mantralaya and ministerial homes in Mumbai. 2. Land prices in prime areas like Connaught Place. The credit ratios have also shown steady improvement. South Delhi and Gurgaon have corrected by more than 30-40%.37 Reasons for Realty players being gainer/Lagged Behind A) Gainers 1.521 sq ft to 62. This is a modernization project and scheduled to be finished in the next 3-5 years. Jasola. Prime land is now available at attractive rates. Indiabulls Real Estate: Strategy to develop macro foothold and encash opportunities for infrastructure development .4 in March 2009 quarter to 3.650 sq ft during the same period. . Sales have shown steady improvement from 16. Orbit Corporation: The balance sheet improvement with net debt-equity reducing from 1.7 in September quarter. Anant Raj Industries: Acquisition of high quality / prime land at attractive rates. Debtors have also shown a decline in September quarter. 3.
PIDB has also taken legal steps to ensure Ackruti gets no stay in any court without PIDB being heard.38 Ade-leveraged balance sheet and free cash reserve which can help in planning to show aggression in acquiring land at these prime locations. Phase-4 Growth (FY 2010-11) Demand in the Indian residential market is expected to turn positive in 2010. The demand outlook for . 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. The blacklisting order says Ackruti‘s methods of operation delayed the projects in question by eight months. Sobha Developers: Crunch for cash and Debt-ridden company leading to not so good a performance and lower Profit margins. 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. Low –Cost Housing serving as Demand Driver A) Lagged Behinds 1. National Stock Exchange (NSE) excluded the scrip from the F&O segment. 2.
Major growth is expected from affordable housing sector. Emaar MGF Land Ltd. Development of other asset classes like warehousing. This trend is expected to gain strength going into FY11. logistics. 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. These companies are set to raise over Rs 12. will also boost real estate activity. softening interest rates and price corrections along with improved economic conditions. 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. etc.. Factors leading to Growth in Real estate business: Improvement in affordability. Expected changes 2010 onwards 16 real estate initial public offerings (IPOs) set to hit the market in 2010. positive market sentiment and Growing corporate confidence is creating a positive outlook for real estate Industry in India. 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. hospitality. Sahara Prime City Ltd. tourism. by key IT companies. with indications of pick-up in hiring. Improved liquidity. The revival is expected to accelerate from activities both in the residential as well as commercial spaces.000 crore collectively. .
10) The government must look at reducing the property and related taxes along with the taxes on cement and steel.10 lakh (where the cost of the house does not exceed Rs. 8) Clarity on the introduction of a real estate regulator. Govt. 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). which together contribute to the growing infrastructure needs. 6) High-priority provisions from the government for laying down the necessary infrastructure to open up new areas. 9) Decreasing the excise duty to decrease the costs of infrastructural projects. 7) Flexibility in FDI norms. . which may not necessarily decide on rates. 2) Increase in housing loan deduction U/S 80 C to at least Rs. 4) Restriction of 5% for commercial space under Sec 80 IB (10) to be removed for affordable housing projects. 2 Lacs from the present Rs.40 Expectations for this Financial year by Indian Real estate Industry from Govt. Budget Proposal for Financial Year 2010-11 Analysis Budget Proposals One per cent interest subvention on housing loans up to Rs. 1) Permit of ECB for all FDI Compliant projects under PN-2 for real estate. 5) Stabilized bank interest rates and Reduced stamp duty. 2011.20 lakh) to be extended till March 31. but should put down firm principles in terms of property dealings and also quality parameters in terms of rating of constructions.
Increase in tax slabs for personal income tax. would mean additional business in terms of redevelopment projects for the real estate players.1.10. It will have a positive impact on the margins of the real estate players.000 crore for Indira Awas Yojana (IAY). Increase in excise duty structure for cement and steel.41 Under section 80-IB (10). These costs would mostly be passed on to the consumers. Increased disposable income due to reduced tax burden would spur spending for the housing sector. Increased outlay for IAY would benefit the construction contractors and small real estate developers. 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. a scheme for slum dwellers and urban poor. Developers catering to the affordable housing segment will be benefited. Increase in excise duty of cement as well as steel would increase the input cost for the developers.270 crore for Rajiv Awas Yojana (RAY) and Rs. . pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. would provide a breather to the industry affected by the downturn. Budget Impact: Industry Extension of one per cent interest subvention indicates continued support to the lower and middle income housing. Such projects usually have quite high margins. Implementation of RAY. Extension of tax holiday under 80-IB (10).
In the current growth scenario. For real estate companies higher interest rates environment is not suitable because customers avoid taking home loans (due to higher EMI) which . & volatility in Real estate share prices. IPO issue and Private Equity investment proceeds consumed for paying off debt rather than expansion 5. 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 Foreign Direct Investors interest 4. both making it tough to raise money 2. Banks had to increase interest rates to counter high inflation.5% (October 2008) which was quite high compared to 2007 figure of 3-4%.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. Oversupply of Costly and high-end products leading to lack of sufficient revenue 7. Lack of retail investors interest in Realty shares IPO due to mispricing 3. As we know inflation in India was around 11. High Investment and Low returns on projects 6. Lack of consistency in Interest rates by Govt. & 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.
43 decreases the demand for properties. 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.75 (28. A large number of financial institutions (Banks. Housing Development and Infrastructure (HDIL). the market to a large extent decides the fortune of these companies. After one week.44 per cent rise). seriously cutting down these companies expansion plans. global slowdown and heavy selling by financial institutions. At the month-beginning (November 3). One example in this regards. QIPs or FIIs. it closed at Rs 308. can be of Unitech.57 per cent from November 11 price).75. The investors in the stock market provide these developers cash for their projects by taking some stake in the company or projects. this is because of higher interest rates. A week later it went up to Rs 374. Solution 1: Look for other measures to reach out to investors like REMF/ REITs or look for different kind of investors like Private Equity. The stocks are very sensitive and react sharply to every small bit of news – good or bad. They got stuck with their existing projects while investors have pulled out. 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.9 (down 17. A bad prospect of growth in the earnings of the firms gets reflected in their stock prices. Hence. which had planned to raise money through Special Purpose Vehicle (SPV) to . it traded at Rs 291. For example. In fact.
‗Indian REITs. Are We Prepared'. according to a CRISIL paper.400 billion in the next 3 years. 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). 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. the size of which would turn to US$ 1. 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. this sector has $1. . 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.44 fund their projects after the fall of Lehman and now-a-days. In fact. real estate groups in India like Emaar. firms are seeking PEs help to raise capital. says that by 2010.
000 applications 16% of the total 42. The remaining fund of $1. In fact. Problem 2: Lack of retail investor’s interest in realty shares IPO due to mispricing DB Realty‘s IPO received just 23. Purvankara. Most of the projects are located in metro centres such as Delhi NCR. markets are witnessing a wide variety of PE Transactions with average deal size of over US$ 60 mn. which have caused equity products to perform very poorly. . Chandigarh. are reported to be planning to enter in to private equity (PE) deals for their residential property projects. This has set the alarm bells ringing for decision makers. It received a pathetic 457 applications from high net-worth individuals (HNIs). etc. Faridabad. while. Mumbai. Lucknow. Hyderabad. Reportedly.50 crore for its ads in The Times of India alone. a number of Tier 2 developers in the Delhi NCR. Jaipur.8 million shares reserved for the retail investors‘ category.000 applications for its Rs 1.2 billion is to come from international investors. after the company spent Rs13. Chennai.5 billion additional investment in the real estate sector in India in 2010-11. Pune. etc. Ambience. Goa.45 MGF. NTPC‘s FPO received just 80. The gross and continuous failure of issues to attract retail subscriptions has ringed alarm bells among decision makers. domestic contributors will put in to the tune of $400 million. 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. of late. Bhopal. Bengaluru. Kolkata. Bangalore and MMR regions are in negotiations regarding PE funds for their residential units at various locations in the country.500-crore issue. Gurgaon. Ghaziabad. Omaxe. Bhubeneswar.
927 321 39 71 3.46 Out of the 22 IPOs listed in 2009 and now.078 5.777 496 12.) Mahindra Holiday 278 48 114 3. This is in sharp contrast to the trend in 2007 when all the listings.158 487 12. 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 100.039 84 75 2.535 98 60 3.847 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 . some of which subsequently declined too. 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. returned between 82% and 175% on their debut.017 6.
starting from the highest bidder.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. 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. Allotment of shares would be done to those whose bids are at top prices. who used to play a major role in marketing IPOs to retail investors. Educate retail investors better about the financial markets and financial regulations. . Solution 2: Give incentives to sub-brokers. For the retail investor. One of the Govt. initiatives in this regards is having new SEBI IPO guideline where the regulator introduced the pure auction method of book building in share sales. Revise price band downwards and extended the date if failure to attract 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. Issue IPOs when the market is going up. Their commission income has declined substantially in the past few years.15 dirham (Rs 130) against the Emaar MGF price band of Rs 530-630. which creates their disinterest in promoting the IPOs. subscription figures from institutional and QIB investors may be one indicator of business fundamentals. so better to try and get good response from these investors first. Income tax policies and primary allotment prices should be in favour of retail investors.
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. . FDI cumulative inflows to the Indian realty sector have so far been very low at 6% considering the tremendous growth opportunity it has. Under the auction method. Although the new method sounds more democratic for institutional investors. or the book-building method.48 It gives the company the price it deserves. 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. The company could choose this. varying between 8% and 13% in different states. \ 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. the regulator has left it to the companies to decide on the number of shares it wants to allot a fund. which fail to generate foreign investor‘s interest. So. However. the auction method has not been mandated by the regulator. it runs the risk of getting rigged if a few funds corner the shares.
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 .
b) Private Equity Private Equity firms have been sending feelers of late to some developers. Though many realty companies may not be too keen to induct a private equity firm as a stakeholder. The bulk of the money would go towards meeting working capital requirements and paying loans of subsidiaries. . The flood of realty IPOs comes at a time when RBI has tightened norms relating to bank funding for the sector. 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.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. While a company has full discretion over the use of IPO proceeds. it may have a significant impact on the operating capabilities of many of the developers. as they have little room to raise further money through loans. as long as it makes full disclosures. which urgently need money to retire debt but may not be able to find buyers for their shares in IPOs in volatile markets. Though the move is primarily aimed at curbing any build up of asset prices. some of them could be forced to sell a stake to one. according to investment bankers. 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.
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. as the latter is considered expensive. thanks to the sharp decline in interest rates. as demand for office and residential property dropped in 2008 following the global financial crisis. developers have turned to share stake sale. which will find it difficult.51 While some developers may be able to sail through in difficult market conditions due to their superior land bank. some may not because of their low-quality assets. these developers were left with land bought at high prices. It will be the ones with land in Tier-2 and -3 towns. with their debt touching intolerable levels and rates showing signs of hardening. Most developers had aggressively bought land through debt when prices were at their peaks in 2006 and 2007 but. as a source of funding. The availability of money in the latter part of 2009. Real estate companies prefer raising money through IPOs to private equity funding. But.5% which in effect can help in rebuilding loan by changing in to a foreign currency loan at a lower rate. . enabled many of these firms to stay afloat.
o The SPVs are either sold to a REIT or are listed on a stock exchange (for example. However GPL has an asset-light business model wherein the land bank is shared with the original owners of land. real estate companies are evaluated on the quality of the land bank they own. Besides this. . 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. 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. 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. 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. holding low-cost land banks from years ago helps to earn superior profit margins for many companies.52 Problem 5: High Investment and Low returns on Projects Solution 5: Asset . o One effective means to recycle cash is to transfer a project or a group of projects onto a special purpose vehicle (SPV).Light Business Model Positives: Typically. a group company of K Raheja. was listed on AIM in November 2006). 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. Ishaan.
53 o Companies tend to adopt innovative ways to ensure the property developed can be bundled into an SPV. so that any unsettled claims. which can then be easily hived off into an SPV when the situation demands. o The foreign investor or fund wants to join hands with the local developer and an SPV is formed. where you have a clear shareholder agreement and control in the project and exits becomes easier. . or alternately. the developer ties up with a private equity fund who provides capital. o Many developers are diluting a minority stake in their entity organization or going in for specific FDI compliant SPVs for different projects. o It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity. One way is to provide a differentiation value by branding. 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. litigations with respect to the existing entity are not carried forward. o Developers tend to earn higher IRRs the faster they are able to sell properties to REITs. o SPVs are the only way out in FDI projects. SPV (Special Purpose Vehicle) o In an SPV.
It was evident that this premium segment . as per the industry sources the oversupply is 35-40%.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. After reducing prices by as much as 30% (DLF. which is based on optimum levels. Its failure to properly assess the situation like taking middle class into account and to build houses to suit their needs. real estate prices dropped even more significantly as the affordability of individuals (measured in terms of property cost to annual household income ratio) deteriorated. 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. was not as big as they thought it initially was. so the concentration of builders in and around big cities has contributed to oversupply of costly and high-end products. India is still a country of small towns and villages. Unitech slash. While household income fell. the middle income segment responded positively to the Rs 25 lakh price range. This has forced the IT employees to cancel their bookings and forego whatever deposit made by them to the builders. 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. 2008). The growth in realty sector is driven by India IT/ ITES sector. The oversupply is more in cities like Hyderabad. It became clear that the then target segment for the real estate companies – luxury segment.
in the range of Rs 6. 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. the country‘s largest real estate company. It initiated the second such survey in mid-August for the next phase of around 1. text messages and in some cases.000 per square foot whereas it sold close to 1.500 per square foot. using a process to test the market while pricing. Solution 6: Adopt New Property Price Model DLF. making personal visits.400 apartments during the first phase at Rs 5.500-Rs 7. Only the style is informal unlike in shares. in which a price band is set and formal offers are invited. The company which earlier used to set property price internally is now surveying buyers to arrive at a price for forthcoming projects. is adopting a pricing model that resembles book-building in initial public offers (IPOs) of shares. Talwar said. .400 apartments it plans to launch next week during the festive period. 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. Such surveys are going to be regular feature for upcoming residential projects.55 demand could not support their existing valuations and was highly dependent on market sentiments. 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.
where huge volumes could reap rewards. The total value of this unmet demand is a staggering Rs 13.000 crores (Monitor. 00. 2009).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. 2009. housing‖ p. Developers need to look at lower income segments right up to the bottom of the pyramid. . Customer Segmentation and Market Potential Source: Monitor.middle income segment (Rs 10-25 lakh) and low income segment (Rs 3-8 lakh). Different players are targeting different price points which has actually amounted to targeting two distinct segments . 4 Exhibits: Market Potential ―The recession proof business opportunity in low income.
The housing finance companies too have realized the magnitude of this opportunity. 2009). . This has ensured easy availability of construction finance as well as customer house mortgages for VBHDC‘s projects. 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. both for the customer and for construction. Many Micro-Finance Institutes (MFIs) are also venturing into this space to provide housing finance to buyers. As a trendsetter.
Delhi and Bangalore o Tier II cities. Jaipur Within the next three to six years. respectively.Kolkata.Nagpur. 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. Mysore. Jaipur. Hyderabad. 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. The price of land in Tier II and Tier III cities has been more moderate. By early 2009. in Tier II and Tier III cities. outsourcing. Coimbatore. Vishakhapatnam. many developers had adopted the obvious strategy of price correction in existing projects to clear mounting inventories and lure consumers back to the market. towns and cities such as Chandigarh. According to Nasscom‘s projections. which account for about 29% and 5% of the total commercial space in FY07. Lucknow. Tier II and Tier III cities.58 Problem 7: In the current growth scenario. . will increase to 44% and 20% at the end of FY17. Ahmedabad. etc are likely to see an increase in real-estate demand from the IT/ITES sector. Indore. IT and manufacturing to these cities. Pune o Tier III cities.Mumbai. supply was still inadequate to meet the demand arising from the spread modern retailing. During the period. While many micro-markets in metropolitan cities had saturated. Indore.
59 Recognizing that the end users were seeking homes that were affordable. to Rs 6. It has also plans to cut its debt by half. coupled with reduced home loan rates. put the real estate market on the path to recovery.200 crore. developers altered their product portfolio and launched affordable housing across India to revive demand by the end of the first quarter of 2009. IT/ITeS sector expected to require 150 million Sq. . 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. DLF. by the end of this fiscal year. India's largest realty firm. in major cities across the country. considering the demand where few private players have gone before. ft. of commercial office space by 2010. In fact. The affordable housing concept. which would cost less than Rs 20 lakh. is planning to build one lakh affordable houses.
ft. Current shortage close to 19. Organised retail expected to grow at a CAGR of 19 per cent over the next five years By 2010. of new retail space will be required. Expected to grow at a CAGR of 18 to 19 per cent up to 2010.4 million units. Mortgage finance is expected to increase penetration into the urban housing finance sector. 220 million sq. predominantly in middle and low income group. Increasing working age population (almost 64 per cent in 16-64 age group).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. Increasing income levels: per capita GDP increased by 66 per cent in last five years. .
wellness spas gaining popularity.8 per cent till 2013. Conventions and Exhibitions) destination. . Indian tourism industry expected to grow at an average rate of 8. hospitals.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. High potential for budget hotels Service apartments. Incentives.
offering immense potential for residential and supporting infrastructure.62 (V) Special Economic Zones (SEZs) Under the new SEZ Policy. As of June 2009. there are 322 notified SEZs and 146 have received in-principal approval. Missing Asset classes and formats . Policy allows usage of as high as 50 per cent of the area as non-processing zone. formal approvals have been granted to 578 SEZ proposals.
9.homes. 8. Low risk. robust model of DLF with a mix of development and rental earnings based on independent business verticals . The deployment of this cash to ramp up revenues through additional business. taking the ‗other income‘ component to a whopping amount. 5. listed as real-estate investment trusts in Singapore ensured a steady stream of revenues (in the form of dividends) from the rentals.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. entertainment and hospitality projects. 10. The projects. retail. 2. Diverse residential. strong liquidity and sanctioned debts limits available which gave excellent options for future investment and returning value to shareholders. A high-quality portfolio with a strong tenant base which ensured strong cash flows. offices.organized and . Ability to work and effectively liaise with Government agencies to ensure timely completion of projects. flexibility and resources to take advantage of the emerging opportunities in a changing environment. 3. commercial. Zero debt. Huge cash raised from warrant issues to promoters parked in interest-earning instruments. 6. retail and hotels . brokerage community and property managers. 4. Strong ties with financial institutions – ability to raise funds at competitive rates for large projects. 7. Focus on Capital Efficiency. Strong relationships with local owners.
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. reflecting the confidence of global institutions investing in DLF and the economic viability of the projects. Anant Raj Industries Limited did not acquire land through Auctions. Kochi. Joint Venture agreements with other companies helped in having wider access to land. 2. Recession (FY 2008-09) Factors responsible for Not so affected companies’ performance 1. Land for IT Parks acquired through government allotment having very low land cost. One of the companies. 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. Focus on Low-cost Housing. 11. Bangalore and Indore. Multibusiness. Preference on rental/leasing income as opposed to outright sale has ensured cash flow driven business model. 4. 3. Concentration in NCR and Tier III cities in the North.64 operating on an independent basis. multi-segment within business and operations across geographies mitigates risk to take care of cycles in the business. . 12. Aggressive launch of premium homes targeted at mid-income earners with specific focus on affordability and actual user. Factors responsible for Lagged Behinds bad performance 1. Chennai.
helping in aggression to acquire land at these prime locations. Catering to the upwardly mobile urban family‘s lookout for a dream house. Improved credit ratios. Reduction in debt-equity ratio. 2. Availability of Prime land at attractive rates with less leveraged balance sheet and free cash reserve. Stability (FY 2009-10) Factors responsible for Gainers good performance 1. . Crunch for cash and high Debt leading to not so good a performance. with all the modern facilities to fit into their budget. Ackruti City launched ‗Just Perfect Homes‘ series. 2. So. 3. Factors responsible for badly affected companies’ bad performance 1.65 5. direct cater to customer‘s demand as well as shift of focus to a new segment was there. 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. Factors responsible for Lagged Behinds 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. High net debt-to-equity ratio (incorporating the impact of outstanding land payments) as high as 165%.
depending on their presence in various segments. 2. This ensures that the business is diversified to the extent that if one segment is not . there are fears of job losses and as a result. In some quarterly reviews. 4.e. the first thing he observes is the diversification of business i. in December 2007.80 because the economy was buoyant. Reserve Bank of India’s policy measures: RBI policy related to FDI. commercial. FII allowed in realty sector decides the cost of capital accessibility by Real Estate company.66 Factors . This makes it difficult for banks to lend to builders. interest rate changes policy helps in deciding the availability of finance to consumers at cheaper or costlier rates. Economy: If the economic growth rate slows down. RBI has also increased risk weights for the sector. The central bank also cautions banks time and again on lending to developers.073. 3. which in turn impacts companies‘ profitability. the company‘s presence in verticals such as residential. the company‘ stock price plummeted almost 86 percent to Rs 151. Orbit Corporation‘s business. few people or companies are willing to purchase real estate. After recessions fears emerged. Lower rates induce buyers to purchase houses. some developers can get more impacted than the others.70 within three months. Diversification of business: When a long-term cautious investor looks at a real estate company. retail and hotels. Interest Rate: The hardening of interest rate affects the demand for houses. Also. 5. DLF‘s share price was quoting at a whopping Rs 1. Volatility in Real estate share prices: For instance. for instance. Also.Realty players should consider from consumers’ point of view 1. suffered more than diversified developers last year as it only builds luxury projects.
So. for example.67 doing well. companies raised huge amounts through public offers. Accounting & Financials: Companies in property business have two methods of accounting—project completion method and percentage completion method. In percentage completion. DLF. discounting it to the present value. Simply said. based on their land bank. come purely from residential properties. As a result. This is calculated by assuming the money that the company will generate in the future and then. the other one will. Further. Most of the companies follow the latter model. Land Bank: In 2007. NAV: The earnings of developers get inconsistent due to the changing price of their assets. 7. they look at net asset value (NAV). wherein the income is realised when the project is completed. these companies were hit. such as HDIL follows project completion method. such as Sobha Developers and Purvankara. when information technology (IT) companies suffered due to the global economic slowdown last year.000 acres and now not only the acreage of land that is important but the quality as well. 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. NAV shows the future cash-flow of the company. For instance. analysts say that revenues of listed entities in Bangalore. Importantly. the companies book revenues as and when the project is completed and sold. but at regions where development has not yet started. . Some companies. 6. The company having land reserves in better locations should be preferred than one who may have large reserves. the analysts/investors do not consider price-to-earnings as the right parameter to gauge the performance. 8. quarterly financials are of little importance. managed one of the biggest initial public offers of the country because it had a land bank of over 10. Instead.
68 9. but. many promoters privately hold stake in such subsidiaries that help them to garner profits from projects. Real estate companies are always starved of money as they first need to deploy money and build projects. This can result in project delays. This is because of their build-and-sell model. Also. 10. Transparency Issues: Many investors do not prefer to invest in realty companies as they have high cash component that developers cannot account for. a high debt-to-equity ratio also decreases the ability of the company to borrow more for further construction. all listed companies have several hundred subsidiaries. Even analysts find it tedious to track the financials of each of these subsidiaries. To top it. . revenues follow later. Debt: Most of the listed entities in the sector have a high debt burden. or even stalling of projects.
Interest rates and employment in the nation. 130000 crore is from the Low Income segment and Govt. importance of relationship with financial institutions. per capital income. local owners. The introduction of REITs in 2007. FDI. Indian Realty sector needs a stronger capital market base for property financing. 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. . Volatility in interest rate by RBI and share prices wide fluctuation has forced companies to look at alternative sources of finance like REITs. has given international investors in particular a familiar investment vehicle. Govt. 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. FDI is serving a very important source for funds but it needs different business and investment models to flourish. brokerage community and property managers cannot be undermined. is also promoting the focus on Middle and Low income affordable housing segment by providing interest subvention in the budget proposal. Private Equity and FDI. As far as demand in the new segments is considered. Private investors have also entered into indirect investment in real estate through Private Equity route. much better market size of around Rs.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. Along with right location and good relationships. agencies.
Customers look for less volatility in real estate prices (very important if IPO of any new company has to come). . good land bank. sound accounting and financials. If any company in this sector fails to provide this. diversification of business. it may become laggard or won‘t be able to garner a good share of the growing market. 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. 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.
Govt. For demand. 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. For IPO. Education Infrastructure and Low-cost housing. For sources of funds. Agencies. .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. Healthcare Infrastructure. leverage ratio and transparency. NAV. mutual funds can be a better route for retail investors who do not want to invest directly. owners. Have new business and investment models for FDI Look at different business models like Asset Light business model adopted by Godrej Properties Ltd. 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. real estate companies should consider these factors for laying out any strategy for growth.. brokerage community and property managers. look for alternative sources of money like REMF/REITs/ RE Funds.
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