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Agenda

Sr.No1.Industry Analysis2.Opportunity Analysis3.Key growth drivers45.Segmental AnalysisKPIs of Industry5.Market Dynamics6.Critical Success Factors7.8.9.10.RegulationsAnalysis of Cost and profitabilityFuture OutlookRecommendations

IntroductionHas a huge multiplier effect on the economy2nd largest employment generating sector after agricultureGrowing at a rate of 20% per annumContributes about 6.3% to Indias GDPStimulates demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, consumer durables etc.Source: www.ficci.com

IntroductionWitnessed a boom due to increasing globalization and allowance of FDI in real estate in 2005 with the involvement of both domestic and foreign players.Evidently, due to global economic downturn the growth has taken a U turn.Still, FDI is expected to touch $ 25 billion in the next 10 years from its current $ 4 billion.

Source: www.ficci.com

Indian Market DynamicsRapid growth in residential, commercial and industrial segmentsOnce restricted only to bigger cities, now expanding in smaller cities and towns due toAvailability of bank loansImproved earnings andHigher standard of livingProjected revenue of the sector is $ 180 billion by 2020 against $66.8 billion in 2011, with a CAGR of 11.6%

Source: www.ibef.com

Indian Market DynamicsDemand is expected to grow at a CAGR 19% in the period 2012-2016.Tier I cities expected to account for about 40% of this growth which will later shift to Tier II and Tier III cities.Currently, about 30% of total mall supply in India is in Delhi-NCR.About 67% of total mall space is projected to come from Kolkata, Pune, Chennai, Hyderabad, Lucknow and Jaipur in the period of 2012-2016

Source: www.ibef.com

Indian Market DynamicsThe FDI attracted by this sector has fluctuated through year 2010, 2011, 2012, 2013 by 8.9%, 10.3%,11% and 6% respectively.But, the focus on affordable housing has helped the sector to survive through the financial crunchNon consistent real estate price and policies has pressurized the industry immensely.Source: www.indiatoday.in

Indian Market DynamicsThe market is very localized, each location having its own dynamics.Ex: in Hyderabad, prices have fallen due to political turmoil, while in Kochi has been seeing a fall in money repatriated by NRIs.Prime locations in South Delhi saw a 10-12% fall in prices, where as in Noida and Greater Noida there has been a 5% price rise.In Mumbai, though the prices fluctuated internally, but overall it remained same.

Source: www.indiatoday.in

Real EstateReal estateis "Property consisting of land and the buildings on it, along with its natural resourcessuch as crops, minerals, or water; i.e. any immovable property of this nature.Segments in the Indian real estate sectorResidential CommercialRetailHospitality

The real estate sector in India has come a long way by becoming one of the fastest growing markets in the world. It is not only successfully attracting domestic real estate developers. Real estate in India continues to be a favored destination globally for investors, developers and non-resident Indians (NRIs), driven largely by investor-friendly government policies and increasing globalizationThe growth of the industry is attributed mainly to a large population base, rising income level, and rapid urbanization. The cities and towns in India are expanding and the space requirement for education, healthcare and tourism provides opportunities in the real estate sector.

The industry in India contributes about 6.3 percent to the country's Gross Domestic Product. It is recognized as one of the key sector contributing to the country's economic development. Playing an important role in the Indian economy, as it is the second largest employer after agriculture. The size of the Indian real estate market is expected to touch 180 billion USD by 2020.The foreign direct investment (FDI) in the sector is expected to touch US$ 25 billion in the next 10 years from its current US$ 4 billion

Market Dynamics

The real estate sector in India is witnessing rapid growth in the residential, commercial and industrial segments. Real estate development, once restricted to bigger cities, have shown progress in smaller cities and towns due to availability of banks loans, higher earnings and improved standard of living.The real estate sector of India is projected to post annual revenues of US$ 180 billion by 2020 against US$ 66.8 billion in 201011, a compound annual growth rate (CAGR) of 11.6 per cent. The demand is expected to grow at a CAGR of 19 per cent in the period 20102014, with Tier I metropolitan cities expected to account for about 40 per cent of this growth.

Residential sectorIt is a fragmented market with fewer players and has demand of more than 300000 units in seven major cities of India.Major categories of houses in India are:Co-operative Housing Societies (CHS)Condominiums (row houses)Builder flatsChawlsVillasKothisHavelisLal DoraThe size is measured in Gaz (square yards), Quila, Marla, Beegha, and acre.

Average price trends in 7 major citiesin residential sectors

The urban housing shortage is estimated at 18.8 million in 2012 The housing shortage in rural India stood at 47.4 million as of 2012 The housing shortage in urban and rural India will be around 21.7 and 19.7 million units respectively in 2014 Significant increase in real estate activity in cities like Indore, Raipur, Ahmadabad, Jaipur and other two-tier citiesThis has opened new avenues of growth for the sector

Housing shortage

Source: Ministry of Housing and Urban Poverty Alleviation, RBI, CRISIL, Aranca Research

Facts about residential propertyResidential property prices have breached affordability limits in cities like Mumbai. Nevertheless, developers will have to factor in the ground realities of the business while debating the lowering of prices to catalyze sales in 2013. Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders are already beset with the increased costs of license costs and cost of construction.

However, it became evident in 2012 that homes are not selling at the current price points, and developers do need to re-calibrate their bottom lines while still remaining viable as businesses. The only way to catalyze healthier sales at this point is offering buyers tangible financial relief.It is seen that drastic trimming of frills in projects are done to make them more marketable from a pricing point of view, and innovative payment schemes.Developers will also offer buyers attractive pre-launch benefits in a bid to accelerate sales momentum in the initial months following a launch.Although most of the cities of India will see an increase in residential launches in 2013, the southern cities of Bangalore and Chennai will witness a decline in launches as compared to 2012YTD.

Commercial and retail sectors are fragmented and have fewer national players.The commercial sector had a demand of 38.2 million sq.ft in 2011.The retail industry has a demand of around 15million sq.ft in major citiesFDI is observed in retail sector so as to boost the demand.Unlike residential properties, commercial office and retail spaces need big-ticket investments due to the size of the units.

Commercial & Retail sector

In 2010, average cost of commercial space was around Rs 10,000 per sq. ft in the Delhi-National Capital Region (NCR). In Mumbai, the average cost was around Rs 14,000 per sq. ft. Assuming that you plan to invest in an office unit of 5,000 sq. ft in an upcoming location with a purchase rate of Rs 5,000 per sq. ft, you would need Rs 2.5 crore.With several new shopping malls slated to complete in 2011, the vacancy rate for retail spaces is expected to increase significantly

"In the absence of investment vehicles such as real estate investment trust, retail investors have not been able to invest in commercial real estate at a scale similar to residential properties (which involve low investment and easy availability of credit). Commercial real estate offers a good investment opportunity and the risks are minimal. "The risk attached with investments in commercial office projects is not high now. The economy is projected to grow at a faster pace and business activities in the country are headed towards a high-growth trajectory," Samantak Das, national head, research, Knight Frank India.

Facts on retail sectorIn 2013, new organized retail project completions will increase significantly (by 109% ). Chennai, Hyderabad, Kolkata and Pune will be among the major contributors to this increase, with a 53% share of the countrys overall mall supply for 2013. The primary reason is that a sizable amount of supply that was expected to reach completion in 2012 has been being pushed to 2013. Altogether, India`s major cities like Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million square feet of mall space in 2013.

Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70% of the total retail space absorption. Other cities like Pune , Hyderabad and Kolkata will account for the remaining 30%. The Government`s nod to FDI in multi-brand retail will be a major driving factor for increased activity in 2013. Since the policy opens the portals to major MNC retail brands in India, the organised retail sector will see a major transformation in terms of its overall contribution in the mid-term. This, in turn, will positively impact the absorption of retail space over the next 1224 months. The absorption is forecast to touch 6.8 million square feet and 7.1 million square feet in 2013 and 2014 respectively.

Hospitality spaceThe hospitality space has a competitive market with many playersThere are around 121,000 hotel rooms in the country as of 2011 The hotel industry grew 13 per cent during 201112 NCR and Mumbai are by far the biggest hospitality markets in India, followed by Bangalore , Hyderabad and Chennai

Hospitality spaceBesides hotels, the hospitality market comprises serviced apartments and convention centers. The recent trends observed areServiced apartments appear particularly attractive within the hospitality space Government initiatives to promote tourism in Tier 2 and Tier 3 cities is generating significant demand for hotels in such cities, especially for budget hotels

Source: Knight Frank India, Aranca Research Notes: FSI - Floor Space Index

Future estimated Growth

The Indian retail realty sector is projected to grow at around 15 per cent year-on-year over the next 35 years as against a 1213 per cent nominal growth of Indias GDP estimated by the International Monetary Fund (IMF). If the sector manage the above mentioned growth, it will touch Rs 34 trillion (US$ 544.73 billion) by 2016.Indias office space stock is estimated to rise by 40 per cent to 642.2 million sq ft by 2017, according to a report by real estate consultancy Knight Frank India. The share of luxury retail space in India will be 1.4 per cent by 2015, according to a report by real estate services firm Cushman & Wakefield. NCR and Mumbai, areas that have embraced the mall culture, are the two most favored destinations for luxury retailers.

India's real estate sector is estimated to have a total supply pipeline of close to 3.6 billion sq.ft lined up for completion in the year 2013, with about 98 per cent of this being concentrated in the residential segment.It is expected to generate over 17 million employment opportunities across the country by 2025, thereby making a significant contribution to the GDPThe total economic footprint generated by construction of this real estate pipeline will require a total investment of about Rs 254,000 crore adding that it will help generate revenues worth Rs 370,000crore and provide jobs to about 7.6 million people across the country in 2013.

Investment destinations in India

According to the existing FDI policy, 100 per cent FDI in the construction development sector is permitted through the automatic route.Department of Industrial Policy and Promotion (DIPP) is looking at relaxing FDI norms further to encourage investment. DIPP also proposed a reduction in the minimum capitalization for wholly-owned subsidiaries from US$ 10 million to US$ 5 million, and from US$ 5 million to US$ 2.5 million for joint ventures with Indian partners.Government Initiatives

One of the major initiatives of the Ministry of Housing and Urban Poverty Alleviation (MHUPA) is to provide affordable housing for poor people living in urban areas. India needs to invest US$ 1.2 trillion over next 20 years to modernize urban infrastructure and keep pace with the burgeoning urbanization, as per a report (India's urban awakening) released by McKinsey Global Institute (MGI).

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is one its flagship schemes, a reform driven investment programme which started with the objective of creating economically productive, efficient, responsive and inclusive cities.The Real Estate (Regulation and Development) Bill, 2013, as approved by the Union Cabinet is a pioneering initiative aimed at delivering a uniform regulatory environment to protect the consumer, help in quick verdicts of disputes and ensure systematic growth of the sector.

Top 10 Indian competitorsDLF Ltd.Jaypee Infratech Ltd.Oberoi RealtyAnsal Properties & Infrastructure Ltd.Parsvnath Developers Ltd.UnitechMerlin GroupGodrej PropertiesOmaxe Ltd.DB Realty

Construction sector can be broadly classified into 2 sub-segments: Real estate Residential Commercial/Corporate IndustrialSpecial Economic Zones InfrastructureTransportationUrban developmentUtilities)Industry Segmentation

Indian Construction Industry Landscape

The Real Estate segment contributes around 24% to the Construction GDP of India while Infrastructure segment contributes around 76%.

The contribution of thereal estate sector to India'sGDPhas been estimated at 6.3 per cent in 2013 The segment is expected to generate 7.6 million jobs in the same period. India's real estate sector is estimated to have a total supply pipeline of close to 3.6 billion sq.ft. lined up for completion in the year 2013, with about 98 per cent of this being concentrated in the residential segment.Source: CBRE reportReal Estate Sector

The potential for development and growth in the real estate sector is tremendous. It is expected to generate over 17 million employment opportunities across the country by 2025, thereby making a significant contribution to the GDPThe sector has been growing at a CAGR of 12%. It is constituted of the Residential, Commercial and real estate activities of Special Economic Zones. The total economic footprint generated by construction of this real estate pipeline will require a total investment of about Rs 254,000 crore, it said, adding that it will help generate revenues worth Rs 370,000 crore.Source: CBRE report

The Indian real estate sector can be classified into two major categories;

Residential Non-ResidentialOfficeHospitalityIndustrial (SEZ)RetailMalls and MultiplexesStandalone outlets

Real Estate Segments

The Commercial/Retail sector still occupies a very small pie in the big scenario of Real Estate in India with a measly 8-9%While Residential commands the biggest pie of the lot with 82%.

The reasons for this can be :Rising Urbanisation in IndiaGrowth Drivers* Increasing working age population (Almost 64% in 16-64 age group)* Increasing income levels: Average salary levels increased by 13.5% in 2005* Easier access to mortgage, long tenure loans and tax incentivesMarket Structure* Highly fragmented and unorganized* Regional players are expanding to achieve a Pan-India presenceReal Estate Segments

The shortage of housing across several states, as illustrated in the graph, amounts to about 25 million houses in the period of the Eleventh Five Year Plan.

Residential Segment Scenario

We can infer that housing shortage during the 11th plan period including the backlog is estimated at 26.53 Mn.

As per the Ministry of Housing & Urban Poverty Alleviation, around 97% of the total housing requirement (25.73 mn units) is required for poor and low income households in urban areas.

Favorable demographics Second highest populated country in the world after China. Average age of Indians is 26 years. The demographic profile indicates that India's working population forms around 61% of the total population. Youngest countries in the world Strong economic growth led to sharp income generation, which led to rise in middle class segment. Around 260 million persons in the middle class segment. Robust macro-economic scenarioDemand drivers for Residential Sector

Majority of the population (around 57%) as of 2009 is estimated to fall under 30 years of age, of which nearly 30% is male population and the rest constitutes females. This trend is expected to continue in the near future, with nearly 52% of the total population anticipated to fall under 30 years of age by 2020.

Urbanisation and MigrationThe decadal growth rate of urban population (20% between 1991-2001) in India is higher than the rural population (18% during the same period). Average annual rate of change (AARC) of the total population in India during 2000-2005 is estimated at 1.41% with 2.81% for urban and 0.82% for rural sectors. AARC for urban areas by 2025 will increase to 2.25% whereas the AARC for rural population will decline to -0.4% showing a clear shift of population from rural to urban areasAverage household size has been estimated by the National Sample Survey Organisation as being around 4.47 in urban areas and only 67% of the houses are pucca units. Investment over the long term will be primarily led by housing, which is expected to account for nearly 90% of the total real estate sector.

The rapid growth of the Indian economy has had a significant impact on the demand for commercial property to meet the needs of business, by way of offices, warehouses, hotels and retail shopping centres. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organised retail.

Commercial/Retail Construction

Commercial Office Space Absorption by locationSize of Commercial/Retail Construction

Sharp growth in organized retailingAt the moment, commercial real estate market is facing tough times, with office space absorption across India's seven largest cities dropped to 12%.The trend is likely to continue for the next few quarters, with absorption of office space expected to drop by 10-15% for 2014 due to lower demand from the information technology sector. Demand drivers for Commercial/Retail Sector

Demand from IT/ITES sector has dropped from the peak of 68% in 2005 to 35% at present due to increasing cost pressures faced by these firms.But organised retail, is expected to grow at over 20% in the next few years, and is likely to drive demand in the commercial real estate sector. With the new growth avenues in IT/ITES sector providing growth at 30% annually the investments in commercial Construction are expected to grow faster than investments in housing mainly due to the spurt in office space construction driven by IT/ITES industry.

Infrastructure related to SEZs is of two types: 1. Facilitating internal functioning of SEZs (power generation plants and distribution network, internal water supply, sanitation and sewerage, and internal roads) with direct implications on productivity; 2. Linking SEZs with non-SEZs through a supply chain (railway tracks, roads and bridges, airport facilities, telephone lines and telecom network). Special Economic Zones

South India is ahead of other regions in taking advantage of the tax-free special economic zones scheme as 91 of 143 operational SEZs are located in the four southern states. Geographical Distribution

Andhra Pradesh leads with a maximum number of 36 operational SEZs followed by Tamil Nadu (28), Karnataka (20) and Kerala (7), according to latest government data. The sector-wise data shows that out of 143 operational SEZs a significant majority relate to IT/ITES and electronic hardware. One of the reasons for the rush of these sectors in SEZs was stated to be the sunset clause on earlier schemes like Software Technology Parks of India (STPI).

Status wise SEZs in INDIA

Over the next five years, growth in investments in Indian Industry will be driven by strong capacity additions, led by strong growth in demand and high existing operating rates. Special Economic Zones (SEZs) will be at the forefront of this growth. According to the Ministry of External Affairs3, in addition to seven Central Government SEZs and twelve State/private-sector SEZs set up prior to the enactment of the SEZ Act 2005, formal approval has been accorded to 587 proposals out of which 381 SEZs have been notified.

Growth Drivers

Regulatory FrameworkReal Estate

K Pis of Real Estate

Residential Lots SalesIt measures the number of residential lots sold in a period.Commercial Tract SalesIt measures the number of commercial Tract sold in a period.Revenue per square meter soldRevenue earned per square meter soldRevenue per clientMeasures the average revenue generated by customer or client serviced.Properties sold per real estate agentMeasures the average properties sold per real estate agent.% Commission Margin Measures the value of the sales commission express as a percentage from the sales completed.Number of ProjectsMeasures the number of successful projects handled in the past & number of ongoing projects.

Key Performance Indicators

Annual return on investment in percentageConstruction/purchaser rate: New constructed or purchased units over timeCost per square footEquity value growth in percentageLease events coverage ratio: Number of lease inquiries over number of available unitsManagement efficiency: Number of leased spaces over number of staff

COMMERCIAL PROPERTY MANAGEMENT KPIs

Monthly return on investment as percentageOccupancy cost: Cost per occupied unitOperation cost to rent income ratioPercentage of rent collectedPrice to income as percentageMarket rental demands

COMMERCIAL PROPERTY MANAGEMENT KPIs

Renting cost: Renting cost per square footRenting return on investment: Rent income over costMarket share growthRevenue per square footRental value growth rate ROIUtilization (vacancy) rate: Rented square feet over total square feet, or rented units over total units

COMMERCIAL PROPERTY MANAGEMENT KPIs

Measures how much profit a company makes. Indicating the operational efficiency and the entity's ability to control costs and its pricing policy.% Net Profit Margin

Its the scorecard. You might have increased your sales by 20% last year, but the rest of the market could have increased by 40% in which case, youve really gone backwards. Quarterly reviews are good enough, market share is hard to shift. Significant increases normally come with significant change - which takes time.Market Share

Net Asset Value is a key measure for real estate companies. The most common definition is;Net Asset Value = Assets less all liabilities (except equity) adding back any deferred tax for revaluation gains and showing debt at historic cost

Net Asset Value

Competitive Dynamics of Real Estate

Real Estate Sector is a high cost sectorThe sector is fraught with high precedence of entry barriers Regulatory barriers Financial risk High capital cost of entry Marketing entry barriersTechnical entry barriers Economies of scale

Mumbai, Delhi-National Capital Region (NCR) and Bangalore cater for 46 per cent of total office space demand in India. This demand is expected to be rise sharply in Tier II cities such as Kolkata and Chennai in the period 201014.

Today, Delhi-NCR accounts for about 30 per cent of the total mall supply in India. About 53 per cent of demand for total mall space is projected to come from the countrys top seven cities, namely Delhi-NCR, Bangalore , Mumbai, Kolkata, Pune, Hyderabad, and Chennai, in the period 20102014.

International players who have made a name for themselves in India include

HinesTishman SpeyerEmaar PropertiesAscendasCapitalandPortman Holdings Homex

Price Fluctuations across Cities

Porter Five Forces Analysis

Application Of Porters 5 Forces Model To Indian Real EstateThe analysis of 5 Forces model has been done to determine whether the Indian Real Estate sector will remain profitable in the years to comeIt is important to consider the impact of the Euro zone Crisis as well as the Subprime Crisis

Threat Of New EntrantsThere will be decrease in profitability due to increase in the number of entrants.

As a result of the economic downturn around the globe, it has been difficult for the new entrants to get a hold because of cost reduction in expansion plans by corporates in real estate, little scope in commercial construction, and strong rivalry between existing firms.

Result: Relatively weak threat of new entrants

Bargaining Power Of BuyersPowerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.Customers significantly influence the business operations in real estate.Customers do possess a threat of integrating backwards.Consequently, the bargaining power of the buyers is strong.

Bargaining Power Of SuppliersAn important category of suppliers is the bank. They have the power to decide whether to fund a venture or not and at what rate.Banks have now become highly conservative especially after the economic downturn.Are significantly affected by the monetary regulations like the Repo rate & CRR formulated by the Central Bank of the country. This is in turn affects the real estate sector.Consequently the bargaining power of suppliers is very strong

Threat Of Substitute Products And ServicesIn real estate business, substitute might be some type of totally new retail space, some new location for office space or rehabilitation instead of new construction.The threat of substitute in real estate business and its impact on profitability of the industry is quite ambiguous and difficult to establish given the economic downturns and the recovery mode of the real estate business cycle.

Rivalry Among Existing CompetitorsRivalry is strong due to the large no. of real estate firms operating in India (65 in total) and the difficulty to differentiateThe services offered by real estate companies cannot be differentiated because these firms dont offer a product, other than the facilities they lease and this itself is very difficult to quantify.In the current economic crisis, there is minimal profitability and only companies with large cash reserves are likely to survive.

AnalysisConsidering all the 5 forces, it can be said that the real estate industry is not very profitable at this stage as it was before the subprime crisis of US in 2008But considering the fact that the real estate cycle is in the recovery stage right now and given that the demand for real estate is growing at a CAGR of 19%, it can be said that there are still bright prospects ahead in a country like India.

20:80 Scheme

With sales drying up, developers are attempting to lure homebuyers through the lucrative 20:80 home loan scheme.

It involves the buyer having to just pay just 20% of the total amount up front, and put in the remaining 80% after getting possession.

Differentiation Strategy

Source- www.cci.in

Sr. NoStateStamp Duty1Andhra Pradesh8%2Gujarat8% and 6% rural3Bihar5%4Haryana8% and 6% rural5Himachal Pradesh5%6Karnataka8%7Madhya Pradesh10%8Kerala13.5% and 10% rural9Maharashtra5%10Odishha11%11Punjab8%12Rajasthan7%13Tamil Nadu8%14Uttar Pradesh10%15Uttaranchal10%

WaiverSome builders waive Stamp duty charges in order to attract buyers.Charges are around 4% to 8% of total price.

Offering Small FlatsInstead of 2/3 BHK flats now to lure potential flat owners by building 1 BHK flats.Small flats are which most of the middle class can afford.

Free Gifts Some realtors offer free gifts such as gold coin , cars. Gifts also include foreign tours.

Early Bird Early investors can avail of discounts. Most real estate projects are developed in phases. Even before the basic approvals are in place, developers start marketing projects to brokers and some buyers at a discount.

Developers offer 10% to 20% discount to attract buyers and generate cash-flow.Investors can earn quick profit by flipping after the projects formal launch.Brokers use pre-launches to offer clients a lower rate.For soft-launch sale, the builder signs an agreement with the buyer to sell at a later date. The final terms and conditions of sale may not be clear at this stage.

Soft Launch

The MMR (Mumbai Metropolitan Region) There is huge latent demand but exorbitant prices make property unaffordable for most buyers. The price level here is way above the average price level of India but the annual acceleration is not very steep; in fact, it has been almost stagnant for quite some time. The realty cycle in MMR follows a long drawn pattern and has a low theta (angle of correction)Real Estate Scenario in MMR

After that, the MMR market with sky-high price levels and declining sales velocity was considered an unproductive arena and the funds inflow reduced. By sales velocity , the ratio between monthly sales and total supply. The price rise after this, though persistent, has been comparatively slow.It is also interesting to note that even after a slow growth rate of prices, the pace of off-take has been slowing.

NCR (National Capital Region, which includes New Delhi), on the other hand, is an entirely investor-driven market.A lot of property is being sold in sectors which may remain uninhabitable for a long time.The price rise post FY 2010-11 continued to be sharp and persists even today.After touching the threshold of 27 percent year-on-year in the second quarter of FY 2012-13, the growth rate has started to peter out.One can already see the correction in the secondary market in NCR.

Real Estate Scenario in NCR

Critical Success Factors

Brand EquityEasy access to financeGovernment RegulationUtilitiesReal Estate

According to report by Jones Lang-lasalle the outlook of Indian real estate industry is positive.People perceive it worthy to invest in real estate properties now and are increasingly going for properties owned by branded companies.Reduction in frauds due to computerized registration process has helped build customer confidence.Brand Equity

Easy access to housing loans with flexible interest payment options.Financing for homes is done by large commercial banks as well as credit unions and co-operative societies.Application and processing fees for loan has drastically come down.

Easy Access to Finance

Reduction in stamp-duty and registration charges has helped industry to grow.Computerization of legal procedures from government authorities

Government Regulations

Basic utilities like availability of waterelectricity infrastructure alternative power resources have been critical for the real estate industry.

Utilities

Regulation that effect the industry

FDI of 100 percent in township, housing, built-up infrastructure and construction development projects to increase investments, economic activity, employment opportunityMinistry of housing & Urban poverty Alleviation Single window system clearance which decreases approval time from 196 days to 45-60 daysGovernment of India has sanctioned projects worth Rs 41,723 crore for building 1,569,000 houses/dwelling units for weaker / low income groupsHousing finance are becoming feasible with housing loans limit being raised to US $52080 for priority sector lending

Government initiatives

Development of services plots and construction of built up residential premises.Investment in real estate covering construction of residential and commercial premises including business centers and officesDevelopment of townships.city and regional level urban infrastructure facilities, including both roads and bridgesInvestment in manufacture of building materials.Investment in participatory venturesInvestment in housing finance institutions.

Regulations for NRI to invest in Real Estate

For homes and flats with area of 2,000 square feet or more or of value of Rs 1 crore or more, which are high end construction, rate of abatement reduced from 75 to 70 percentRs 6,000 crore were given to Rural Housing FundNational Housing Bank plans to set up Urban Housing Fund, Rs 2,000 crore will be provided to the fund in the current financial year

Initiatives taken in the Union Budget 2013-14

The Real Estate (regulation and Development) Bill, 2013 approved on June 4, 2013.This Bill aimed to create a Real Estate Regulatory Authority and an Appellate TribunalAct as a watchdog for the housing sector, primarily towards protecting consumer interests while creating an alternative redress mechanism for any disputes that may arise.

Till recent 2012, up to a certain percentage, local corporation can bring about changes in the regulatory within its geographical limits.

Laws and Regulatory Authority

Major Highlights of Real Estate Bill,2013

provisions restricting launch of projects or advertisements unless all approvals are receivedAll the agents are not expected to facilitate the sale of immovable property which are not registered with the AuthorityTo maintain books of accounts, records and documents.

Prior approval before launch and advertisement

promoters to deposit 70 per cent or such lesser percent as notified by the governmentto cover the construction cost of the project of funds in a separate bank account to ensure timely completion and prevent fund diversion.

Mandatory deposits of fund

mandatory registration of real-estate projects and real-estate agents with the Authorityexcept when the land proposed to be developed is less than 1000 square metersprovide another level of protection to buyerspreventing concerns regarding money laundering by the non-organised broker community.

Registration of real estate project and real estate agent

disclose material information such as details of the promoters, project, layout plan,plan of development works, land status, carpetarea and number of the apartments booked, status of the statutory approvals disclosure of proforma agreements, names and addresses of the real estate agents, contractors, architect,structural engineer etc on the Authority's websiteDisclosing of mandatory information

Prohibition on taking more than ten percent as advance from the buyers without a written agreementDevelopers/ agents are required to refund to buyers the full amount in case of delay of projects.

Restriction on taking advance

Civil and criminal liability for the contravention of various provisions of theBill.Imprisonment up to three years or a penalty up to ten per cent of the estimated cost of the real estateproject For projecting out misleading information in advertisements or prospectus

Liability/ Penalty

The Bill give the power to establish one or more Real Estate Regulatory Authority in each State/UTappoint adjudicating officers to settle disputes between parties, and to impose penalty and interest

Real estate regulatory authority

Private Equity(PE) investments in real estate investment, revels that approximately Rs 118.54 billion is available with PE to be deployed in real estate, even though a drop in PE investment in the first half of 2013PE investment in residential sector Rs 9.3 billion, in 2013Office segment Rs 7 billion, in 2013Ready office space Rs 77.05 billion in last three years

Investments

Region wise investment in 2013Pune Rs 7.8 billion Mumbai- Rs 4 billionNCR - Rs 2.3 billionBangalore Rs 1 billionMr. Akhilesh yadav, Chief minister of UP has inaugurated and laid the fountain of development projects worth Rs 3,337 crore pertaining to Noida, Greater Noida and Yamuna Expressway

Ashiana Housing Ltd plans to foray into Gujarats real estate with first project worth Rs 100 Crore at Halol.Wave Infratech plans to invest Rs 500 crore in Delhi national Capital region(NCR) area.

Some Major InvestmentsGodrej Properties Ltd plans to invest US$ 1.44 billion in 15 new real estate projects in India over the next 10 years.NRI billionaire Mr. Ravi Pillai plans to purchase stake worth about US$ 100 in a special purpose vehicle floated by Pune-based realtor, Panchshil Realty. The investment will go into the construction of Trump Towers and World Trade Centre in Pune, Maharashtra.Infrastructure Leasing & Financial Services (IL&FS) Ltd has claimed a project worth Rs 244.46 crore (US$ 39.17 million) from realty firm Emaar MGF for construction work at the latters residential project at Gurgaon, Haryana.French luxury hotel chain Sofitel, which is managed by Accor Group, is targeting 10 properties in India, mainly in major luxury destinations, in the next few years.One of the worlds top manufacturers of elevators, US-based Otis, is setting its sights on the Indian real estate market. The company will be working with the Delhi and Hyderabad Metro projects. The former has placed an order for 222 escalators for its Phase III project, according to Otis.Source: www.businesstoday.in

Mahindra Life Space Developers has bought the stake of private equity Arch Capital in its joint venture residential project at Chennai for around Rs 70croreGodrej Properties Ltd(GPL) has signed a development management agreement with United Oxygen Company Pvt. Ltd to develop residential housing project in Bangalore for approximately 1,000,000 Sq.ft developed as residential housing project.

Mergers & Acquisition

TargetAcquirerValue($ million)Year

Caraf BuildersDLF Assets Ltd696.52009

Cowtown Land Development Pvt LtdLodha Group513.62011

Compact Disc Film cityJeff Morgan3202011

Oceanus Real EstateWarburg Pincus3182011

Indiabulls Properties Pvt LtdIndiabulls Property Invest Trust223.12012

Embassy PropertyBlackstone2002012

Laing O'Rourke(50:50 JV) is a UK based construction company. It will construct all DLF's landmark projectsNakheel of Dubai are partnering with DLF for developing townships in India.WSP GroupPlc (50:50 JV)is also partnering DLF, providing management and consultancy to the built and natural environment.Ventures is providing consultancy for faster project executionDLF has teamed up with Hilton Hotels to jointly develop hotels in India.

Joint Ventures

Exits

In 2013, July DLF has sold 74 percent stake in the life Insurance joint venture with U.S based Prudential International Insurance Holding Ltd to Dewan housing Finance Corp.

New entrants

Large number of small new entrant are seen in the last couple years because of the huge profitability in this sector and related sector.

Cost & Profitability Margin

The cost of property in the real estate industry includes the various types of costs involved in the transaction and is not just restricted to the transaction value of the property

The three main components of cost in this industry are:Transaction Costs: Duties and fees and other charges to complete the transaction Finance Cost: Application fee, processing fee, pre-EMI (Equated Monthly Payment) costs and expenses other than interest and EMI expenses involved in obtaining a loan for the transaction. Cost of land, construction of property and other development charges.

Cost

Expenses as a % of total income of real estate companies

Analysis of various costs

ParticularsFY 08FY 09FY 10FY 11FY 12Raw Materials Expenses11.1913.4716.7514.5918.41Compensation to employees3.274.814.494.574.93Advertising expenses0.871.250.81.040.76Marketing Expenses0.790.830.710.920.67Interest expenses9.8325.0722.6723.1926.64Others Expenses36.1922.9830.2733.5934.69

Raw material expensesOne of the major cost in the real estate industry.

The raw material costs have been increasing due to raising inflation

Increase in the demand for the raw materials has led to hoarding of these raw materials by the suppliers

Compensation to employeesThe labour costs are involved in the phase of construction

Due to govt. regulations of minimum wages, the labour costs have increased.

The demand for the labour is also another reason for the increase in the wage costs.

Marketing expensesThe marketing costs involves the selling & advertising expenses of the real estate industry.

These costs are not very high, but still the amount spent on the marketing forms a part of the costs involved in the real estate project.

These costs include the advertisement expenses in the newspaper, television, maintaining websites etc.

Interest ExpensesThis is a major part of the cost in this industry.

Since the capital required is high, Loan is a major form of financing option for the real estate industry.

Due to rising inflation and interest rate hikes by the RBI, the interest expense on these loans have been increasing.

The costs involved in these includes application fee, processing fee, pre-EMI costs and expenses other than interest and EMI expenses involved in obtaining a loan for the transaction.

Other ExpensesThis includes various commission, brokerage fees paid to the agents.

It also includes various machineries, insurance, unforeseen expenses

It also includes various stamp duty charges, taxes, pre acquisition costs, legal fees, planning costs et al. which are statutory in nature

ProfitabilityREVENUEThe revenue factor is one of the most important factor while ascertaining the profitability.In the real estate sector, as is shown in the below graph, the sales of the FY 08 was up by 82.38%. This was during the boom period of the real estate sector worldwide. There was cheaper financing option and also the demand was high.But since the 2008 real estate bubble burst, the sales in the FY 09 saw a negative growth in sales.It is still in the recovery phase and the sales in the FY 12 increased by 23.39% compared to FY 11

Net ProfitThe net profit shows the actual profits earned by the industry after taxes and interestThe net profit in the FY 08 was up by 132.82% compared to FY 07But due to the effect of real estate bubble burst, the industry saw a negative profits for the next three years from FY 09 to FY 11.It was only in FY 12 that the industry posted profitAnother main reason for the decrease in profits is the high inflation which is leading to higher operating costs.The financing costs is also on raise which is again impacting the overall profits of the industryThe DBS report forecasts a good financial performance (profits) in the coming years FY 13 to FY 17

EBITDAEBITDA is also one of the main criteria that is looked into to ascertain the profitability of the industry.It helps to meaningfully evaluate and compare the cash flow generating capacity from quarter to quarter and year to year. In this industry, the EBITDA margin is decreasing at greater pace since FY 09This may be the result of high raw material costs which is hampering the operational effectiveness in terms of cost.The raise in inflation and also the problems in supply side for raw materials such as hoarding, strikes et al, has been a major factor for the decline in the EBITDA margin

Future Outlook

Real estate is reaching a point of saturation in developed countries and the demand and prices are fallingGlobal real estate players are looking at emerging economies such as India for their investmentsThe Indian retail realty sector is projected to grow at around 15 per cent year-on-year over the next 35 years.If the sector does indeed manage the aforementioned growth, it will touch Rs. 34 trillion (US$ 544.73 billion) by 2016. The construction development sector, including townships, housing and built-up infrastructure garnered total FDI worth US$ 22,671.95 million in the period April 2000August 2013.Demand for space from sectors such as education, healthcare and tourism has opened up opportunities in the real estate sector.Tier-3 cities like Surat, Lucknow et al, are beckoning real estate players

Future Outlook

Education SectorThe entry of major private players in the education sector has created vast opportunities for the real estate sector The top seven cities i.e. Hyderabad, Bengaluru, Mumbai, Delhi, Pune, Chennai and Kolkata are likely to account for 70 per cent of total demand for real estate in the education sector NCR is expected to have the highest incremental demand from the education sector The rising young population of India is expected to drive this space

Tourism SectorForeign tourist arrivals in India are expected to rise at a CAGR of 10.5 per cent during 2012-15 The number of foreign tourists arriving in the country is expected to be over 8.9 million by 2015 The number of hotel rooms in India as of 2011 stood at 121,000The number of hotel beds in the country is expected to increase to 443,000 by 2015 from the current capacity of 262,000

Southern states offer significant investment opportunitiesThe southern Indian States - Andhra Pradesh, Tamil Nadu and Karnataka - have been the major drivers of economic growth in India.The three states together account for about 22 per cent of Indias GDP Nearly 45 per cent of Indias office stock is represented by these states; over 64 per cent of the countrys IT SEZs are housed in this region Office stock projected to grow at a CAGR of 8 per cent between 2014 and 2017A growing migrant population due to increasing job opportunities, together with healthy infrastructure development, is underpinning demand in the regions residential real estate market

The healthcare sector is estimated to grow at the rate of 15% per annum from 2013-16

This means that India is expected to need additional 950,000 beds.

This has provided a great source of opportunity for the real estate industry and the investment towards this is expected to be around $50 Bn over a period of 10 years.Healthcare Sector

Key Challenges AheadLack of clear land titlesAbsence of title insuranceAbsence of industry statusLack of adequate sources of financeShortage of labourRising manpower and material costsApprovals and procedural difficultiesSource: www.ibef.com

Key Challenges AheadNeed of improved delivery and project executionLack of consistency in rules relating to development of SEZsIncreased monitoring of sector by regulatory agenciesTightening of rules for lending to the real estate sectorFluctuations in key rates by RBI several timesNo incentives for R&D for developing new building materials, low cost techniques etc.High interest rates and fluctuating currency

Source: www.ibef.com

Putting in place a single window clearance systemEvolving a rational structure on payment of stamp duties for sale and purchase of land and propertiesRevision in limit of interest deduction on housing loan of Rs 1.5 lakhs to five lakhs.Easing the FDI policies in realty sectorThe Indian real estate sector promises to be a lucrative destination for foreign investors into the country.

Recommendations

RecommendationsThe Indian realty sector, if channelized properly, could lead to the growth of several other sectors in India through its backward and forward linkages.

Maturity of the real estate markets will lead to infusion of foreign investment and adoption of international best practices by real estate players.

Considering the growth of the industry and the opportunities in it, we see that there is a great chance to attract global players to India which would lead to more matured, better utilization of techniques in the sector

Thank You

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