real estate & fdi in real estate in india

Batch-XIII (B)Gaurav, Kishore & Shravan

Macro EconomicsDr Gulnar Sharma

Case Study On

Real Estate & FDI in Real Estate in India

Presented by

Gaurav Patel (KH08JUNMBA65)Kishore Gulhane (KH08JUNMBA74) Shravan Bhumkar (KH08JUNMBA100)



Presentation Flow

Real Estate in India

Current Trends

FDI & Real Estate in India Gaurav Patel Kishore Gulhane

Shravan Bhumkar



Demographics and DevelopmentBetween 1950 and 2005 the global urban population has more than tripled to reach 3.15billion. While urbanization has considerably slowed down in developed countries, theenveloping world is where cities are growing the most. It accounted for 68% of the urbanpopulation in 2000. By 2020, 77% of the global urban population is expected to be indeveloped countries.

In India, Urban population has been increased from 20% in 1971 to almost to 34% in 2006 and contribute over 50% to GDP.(Source : www.unhabitat.org)



Indian Economy

• Indian Economy currently stands among the world’s 4th largest growing economy interms of PPP(Purchasing Power Parity).

• India’s GDP is estimated to be the third largest in the world by 2020.• India is also considered second most attractive country in world for FDI investmentsof about US$ 11.14 Billion in 2007 with rise of 36% in terms of rupee and 54 interms of US dollars. (Source : Economic Budget 2007-08)

• India performance has been steady over past 3 years with an average Annualgrowth rate of 8%.

• In recent years, the broad based growth in service sector has been principle driverof GDP growth.

• India has a well developed road and rail network. Large investments are underway inareas of:

- Highway development- Air-connectivity (Domestic & International)- Up gradation of ports with their privatization- Power sector



Real Estate in India

What is Real Estate Market ?

The term ‘real estate’ is defined as land, including the air above it and theground below it, and any buildings or structures on it. It is also referred to asrealty. It covers residential housing, commercial offices, trading spaces suchas theatres, hotels and restaurants, retail outlets, industrial buildings suchas factories and government buildings. Real estate market involves thepurchase, sale, and development of land, residential and non-residentialbuildings. The main players in the real estate market are thelandlords, developers, builders, real estate agents, tenants, buyers etc. Theactivities of the real estate sector encompass the housing and constructionsectors also.



History of Real Estate Market

Source: Circular NHB(ND)/HFC(P&D)/15.3/6065, National Housing Bank



Why invest in Indian Real Estate ?

• The Size of Indian Real Estate Market is estimated at USD 15 billion and is currently growing at rate of about 30% annually.

• The second largest employing sector including construction and facility management.

• Strong and Improved economic growth, proactive policy initiatives like relaxation of FDI in construction and availability of finance driven demand for real estate across all sectors -Commercial,Residential,Retail,Hospitality and SEZ in India.

• There has been rising demand for quality infrastructure across various segments of the real estate sector.




• In India demand for new office space has grown from an estimated 3.9 million sq.ft to 45 million sq.ft in 2006-07.

• The demand for office space is driven by more than 7000 IT and ITES firm, Financial service provider and other sectors.

• As Indian IT-ITES industry has absorbed a total of approx. 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft of space by 2010.

High Demand Commercial Real Estate




• The Residential property market in India constitutes almost 75% of the real estate market in terms of value.

• Low per capita housing stock ,rising disposable income coupled with easy finance from housing finance company and banks are driving demand in this sector.

• Average house loan borrowers have decreased to 30-35 years from 40-45 years a few years ago.

• Housing sector is growing at 30-35% per annum.

• The demand for housing is also driven from investor who view it has an attractive investment option as compared to mutual funds and stocks.

High return on Residentail Real Estate




• The Retail industry in India continues to bedominated by individual small format stores withfloor space of less than 500 sq.ft.

• Total number of retail outlets is estimated to bearound 12-15 million, indicating a retail density of12-14 outlets per 1000 people, which is one of thehighest in the world.

• The contemporary retail sector is reflected byshopping centers and Multiplex-mall contributinglarge scale investment in real estate.

• The retail sector in India is currently estimated atUSD 230 billion.

• But the organized retail activity is 7 billion which ismere 3% of total retail sector and is growing at 25%- 30% per annum is expected to be worth over USD30 billion by 2010.

Retail sector facilitating real estate growth




• Hospitality industry is in India is growing at an annual rate of 8%.• The number of foreign tourist arrivals (Major driver) in country was approx. 4.4

million in 2006-2007.• More than 55% of total demand for hotels in country is generated by foreign leisure

tourists and business travelers.• Service Apartments ,Hostels, Wellness space gaining popularity.• With growth in demand for rooms at five star hotels at 18% another 65000 – 85000

rooms will be needed till 2010, results in high level of activity in construction ofhotels which will fetch more investors in this sector.

High Demand for Hospitality real estate




• The upcoming realty trend in India after multiplexes and mega housing projects arethe Special Economic Zones(SEZ).

• Currently only 28 SEZ are operational in country, including those converted fromExport processing Zones(EPZ) to SEZ.

• Approx. 189 proposals have been granted approval since SEZ Act,2005 came intoforce.

• SEZ’s are in various segments such as multi-product, Information technology, Bio-technology, Gems and Jewellery, textiles and technology initiative industries.

• Major Players RELIANCE,ADANI,SUZLON Infrastructure, HINDALCO etc.

SEZ’s – The emerging investment option




• With the opening of the sector for 100% FDI under automatic route, the real estatesector is estimated to capture about 18-20% of the total FDI coming to India in2005-06.

• The FDI in Real Estate is expected to have a favorable multiplier effect on theeconomy.

• As an indicator, for every rupee spent on construction, an estimated 75-80% getsadded to the GDP.

• The spill-over effect of this initiative can also be witnessed in important sectors likethe cement and construction industries, where the key players are expandingcapacity to meet the soaring demand.

FDI – inviting real estate investments



FDI (Foreign direct investment)



What is FDI?

• Foreign direct investment is the acquisition of assets in acountry by foreign entities for the purpose of control .

• FDI in India was initiated in 1992. Streamlining of theprocedures and substantial liberalization has been done since1995. As of now, Indian corporate/Registered partnershipfirms are allowed to invest abroad up to 100% of their networth and are permitted to make overseas investments inbusiness activity. FDI is now ownership of at least 10% of abusiness .



FDI limits for other sectors are as follows:

• Banking - 74% • Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100% • Insurance - 26% • Telecommunications - 74% • Private petrol refining - 100% • Construction development - 100% • Coal & lignite - 74% • Trading - 51% • Electricity - 100% • Pharmaceuticals - 100% • Transportation infrastructure - 100 % • Tourism - 100% • Mining - 74% • Advertising - 100% • Airports - 74% • Films - 100% • Domestic airlines - 49% • Mass transit - 100% • Pollution control - 100% • Print media - 26% for newspapers and current events.

511618.62, 38%

320195.21, 24%

164910.23, 12%

125148.95, 10%

95978.61, 7%

93978.61, 7% 21985.64, 2% Services

Computer Software & HardwareTelecommunication

Construction Activities Housing & Real EstateAutomobile Industry

Mechanical Industries



Foreign Direct Investment is encouraged and permitted, subject to certain conditions, in the following real estate sectors in India:

• Hotel Development:• Tourism• Hospitality• Township development• Developing Commercial Real Estate• Built-up infrastructure• Housing and construction projects• Building Resorts• Building Hospitals • Building Educational institutions• Building Recreational facilities• Infrastructure projects: regional and local level• Special Economic Zones (SEZ's)

Foreign Investment (FDI): Real Estate Sectors in India



FDI Inflow in Real Estate

0.5 0.75 0.92.6

2.913.94

5.43

8.2

0

2

4

6

8

10

12

2003-04 2004-05 2005-06 2006-07E

Real Estate Other Sectors

Source: ASSOCHAM, E&Y Research

Amount in US $ Billion



Investing in India – Entry Routes

Automatic Route Prior Permission(FIPB)

Investing in India

General ruleNo prior permission requiredOnly information to the Reserve Bank of India within 30 days of inflow/Issue of shares

By exceptionPrior Government Approval neededDecision generally Within 4-6 weeks

FIPB: Foreign Investment Promotion Board



Guidelines for FDI in Real Estate



FDI Policy Liberalization Path

• FDI Policy Liberalization Path



Guidelines for FDI in Real Estate in India

• Conditions for Development • Minimum 10 hectares to be developed for serviced housing plots.• For construction-development projects, Minimum built-up area of 50,000

square meters prescribed.• In case of a combination project, any one of the above two condition

should suffice.• At least 50% of project to be developed within 5 years from date of

statuary clearances. • FDI is not permitted in the business of buying and selling of property.



Conditions for investments

• Minimum capitalization of US$10 million for wholly owned subsidiaries &US$ 5 million for Joint ventures with Indian partners.

• Infusion of fund within 6 months of commencement of business.• Original investment cannot be repatriated before a period of 3 years from

completion of minimum capitalization.• Investor may be permitted to exit earlier with prior government approval.




Miscellaneous Conditions

• Investor not permitted to sell undeveloped plots • Project to conform to norms and standards laid down by respective state

authorities.• Investor responsible for obtaining all necessary approval as prescribed

under applicable rules/ by-laws / regulations of the state.• Concerned Authority to monitor compliance of above condition by

developer.




Business & Investment Models for FDI

Business Models

• Large Scale Direct EntryIndependent approach for undertaking real estate projects

• Establishment of Umbrella Joint VentureForeign developer/investor enters into a joint venture with a local partner to carry out projects

• Multiple Joint VenturesJoint ventures with different local partners on project-to-project basis

• Investment through creation of Capital Fund Facilitating the local developers through funding their ventures



Investment Models

Private Equity/Real Estate Funds • The investors pick up equity stake in unlisted real estate firms and collaborate in business plans• Lowers the transaction costs and provides an easier exit route

Joint Venture• Long term partnerships or project-specific• Mitigates the risk of entering the new market


Source: E&Y Analysis




Wholly Owned SubsidiaryA relatively less preferred arrangement, few overseas developers are developing projects on a stand-alone basis

Public - Private PartnershipGovernment takes a proactive role and collaborates with foreign developers



Major Foreign Developers in India

• Real estate FDI inflow up nearly five-fold in 2008.

Housing and Real Estate

Service Sector

Software and

HardwareTelecome

construction activities

Automobile PowerPetroleum

and Natural Gas

2006-07 2121 21047 11786 2155 4424 1254 713 401

2007-08 8749 26589 5623 5103 6983 2697 3857 5729

0

5000

10000

15000

20000

25000

30000

Am

ount

in U

S $

Mill

ions

FDI Inflow



INVESTOR COUNTRY PROJECT LOCATIONEmmar Group Dubai Hyderabad Kontur Bintang /Westport Malaysia Gurgaon Singapore Housing Board Singapore Hyderabad/Chennai Keppel Land Singapore Bangalore Salim Group Indonesia Kolkata Ascendas Singapore Hyderabad Lehman brothers US Mumbai Lee Kim Tah holdings Singapore Chennai/Mumbai

Major Foreign Developers in India



FDI Experience in Indian Real Estate




FDI contributing to an organized Indian real estate• To become more organized sector• Fastest growing economy

0 171

2121

8749

1510696 667

4424

6989

895

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2004-05 2005-06 2006-07 2007-08 till April-2008

Real Estate Construction Activities

US$ in million

Source: RBI & Department of Industrial Policy and Promotion (DIPP)



FDI in real estate on the high growth pathGrowing at the rate of 30% p.a (Source: ASSOCHAM)

Share of foreign investments will be US$ 25-28 billion by 2010.(Source: ASSOCHAM)


Source: Industry sources, E&Y Research

4.50%

10.60%

16.00%

26.50%

38.50%

47.60%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09Share of real estate in FDI




• Majority of the direct investment is from West Asia with overall commitment of US$ 9.7 billion from Dubai based developers

• Further, investor from USA and Europe have shown keen interest with the launch of several RE funds

Source: Industry sources, E&Y Research

59%

25%

10%2% 4%

Dubai

Indonesia

Singapore

Malaysia

Others

Major Countries investing in India



Most Preferred Cities for Investment

I. DelhiII. Noida III. GurgaonIV. Mumbai V. PuneVI. KolkataVII. Hyderabad VIII. BangaloreIX. Chennai

Many more…



I. VizagII. VadodaraIII. DehradunIV. IndoreV. NashikVI. GuwahatiVII. ChandigarhVIII. Nagpur

Many more…

Most Preferred Tier II Cities for Investment



Advantages of FDI in Real Estate

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Bring Superior Technology

Induce Healthy Competition

Create More Professionalism

Organize the Sector

Ranking of Advantages of FDI

Source: FICCI, India



Advantages of FDI in Real Estate

0 0.5 1 1.5 2 2.5 3 3.5

Best Designs

International Quality and Construction Tech.

Make Available Huge Funds

Edge of FDI over domestic investors

Source: FICCI, India



The Impact of Macroeconomic Factorson Demand & Supply of Real Estate

Economic Growth - Broad based GDP growth rate of 8-9 % per annum forecast- Demand driven by the growth in services sector

Inflation - Has significant role in supply-demand of real estate- Continues to remain a major concern

Money Supply - Growth is higher than RBI estimates- Liquidity is key to inflation and over-heating- Restricted availability to reduce options for builders/developers

Interest Rates - Higher rates lead to higher cost of borrowing- Developers seeking other options, consumers are re-evaluating options- Investors are revaluing returns from the sector

Credit Take-off - Easy availability of capital has led to growth in valuations- Concern over exposure of Banks towards the sector

Economic Growth - Liberalization of FDI has led to an interest from new players- Valuation standards and greater transparency- Service tax on commercial rental to affect retail space

Source: RBI, E&Y Analysis



Market Trends and Outlook

Parameters Characteristics/ Trends OutlookMarket Concentration

• Highly concentrated within top 6- 8 cities in the country

• High concentration leading to significant property price rise in such cities

• Growth to be driven primarily by Tier-II and Tier-III cities in the near future, across segments

• Emergence of at least 10-15 new cities as growth centers

• Increased development of planned cities

Competition • High competition with 4-6 key national players and numerous regional players

• Shift in competition towards product focus/ differentiation



Parameters Characteristics/ Trends OutlookFinancing • 30-40% annual increase in the home loan

disbursements loan disbursals from Indian housing finance companies

• Loan tenures have increased: 150 months (2001) to 173 months (2006) due to declining age of borrowers

• Larger mortgage penetration• Introduction of globally accepted

instruments/modes such as REITs

Extent of Regulations • Moderate-No functional regulatory body• Region/Location specific building laws• 100% FDI is allowed under the automatic

route

• Stringent regulations expected to be introduced inline with international norms

• Reforms in local development guidelines

Market Trends and Outlook



Key Opportunities Low–cost Housing

• 72% of the total population is still rural areas• Current housing shortage of 22 million units at an estimated cost of US$ 88 billion• Increasing shift from rented to owned house• Nuclear families increasing the demand for housing

Education Infrastructure• Huge market with untapped potential and low competition• Growing interest of leading global educational institutions in setting up institutions in

IndiaLogistics & Warehousing

• Booming trade – Domestic & International• Agriculture Logistics – proper cold chain management and opportunity• Logistics for large infrastructure and Engineering Projects

Healthcare Infrastructure• Healthcare BPO• Medical Infrastructure



• Nagarjuna Construction to invest up to Rs 500 cr in airports,Ports (July 17, 2008)• QVC Realty to launch first project in Bangalore soon (July 17, 2008)• Realty developer Bearys starts Montessori schools (July 17, 2008)• Emaar to infuse $150 m into specific projects (July 15, 2008)• Era Infra bags BHEL contract (July 15, 2008)• Foreign firms to pick up stake in Eldeco Infra for Rs 196 cr (July 15, 2008)• Maytas Properties to develop three IT SEZs (July 14, 2008)• Subhash Projects forays into urban infrastructure (July 13, 2008)• JP Morgan invests Rs 250 cr in BPTP (July 11, 2008)• New JMD for Parsvnath SEZ (July 11, 2008)• GMR Infrastructure (Rs 94.10): Buy (July 11, 2008)• Johnson Controls inks pact to manage Lodha projects (July 10, 2008)

Real Estate & Construction Markets: 2008



• Marathon Group to develop Rs 1,800-cr SEZ in Navi Mumbai (June 29, 2008)• HT Media acquires stake in realty major Sunil Mantri (June 27, 2008)• Lanco contract for Hind Const (June 27, 2008) NCC bags Rs 333 cr worth orders (June

26, 2008)• Retail blueprint: Parsvnath to open 5-10 stores in 2008-09 (June 21, 2008)• Maytas-led consortium lays foundation for Shimoga airport (June 21, 2008)• Emaar MGF, Leighton venture to focus on Palm Springs project (June 20, 2008)• Suncity in talks with PE firms to raise Rs 350 cr for IT SEZ project (June 18, 2008)• Mantri Developers to re-enter Pune with realty projects (June 11, 2008)• Punj Lloyd inks pact with Singapore firm (June 06, 2008)• Nagarjuna Const bags 4 orders (June 04, 2008)• K Raheja joins hands with Servcorp (June 03, 2008)

Real Estate & Construction Markets: 2008

Source : Business Line



Road Ahead….



Road Ahead….• Negative Impact on the credit profiles of Real Estate companies.• Weeding out weaker entities, thereby increasing the relative strength of larger

companies.• Liquidity risks remain a key challenge across the board.• Materially high rates of interest end up refinancing by small players.• Monetization of stakes by attracting PE would remain a key for managing overall

funding and liquidity requirement.• Liquidity pressure for project execution and general slowdown in property sales.• Reducing list price for enhancing demand and to avoid risk of liquidity pressure.• Higher construction cost could also impact margins.• Large players with an attractive portfolio of ongoing development and an

established track record will enjoy access to loan market and also attract capitalthrough PE route.

• Finally, Short-term outlook is Negative.



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