real estate, infrastructure & construction_2013

7/27/2019 Real Estate, Infrastructure & Construction_2013

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UNNATI Sector Report 2013

Unnati Investment Management and Research Group MDI Gurgaon

1

Avneet Sikka

Sri Krishna Bhutra


Real Estate, Infrastructure & Construction


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Table of Contents

1. CONSTRUCTION INDUSTRY ....................................................................................................................................... 4

2. OVERVIEW OF REAL ESTATE SECTOR ........................................................................................................................ 5

3. REAL ESTATE SECTOR ................................................................................................................................................ 7

3.1. VALUE CHAIN .................................................................................................................................................... 7

3.2. MARKET SEGMENTATION ................................................................................................................................. 9

3.2.1. DIFFERENT SEGMENTS .............................................................................................................................. 9

3.3. KEY GROWTH DRIVERS .................................................................................................................................... 18

3.4. KEY GROWTH DETERRENTS ............................................................................................................................. 22

3.5. KEY ANNOUNCEMENTS OF BUDGET 2013-14 ................................................................................................. 23

3.6. UN-MET BUDGET EXPECTATIONS: .................................................................................................................. 25

3.7. GOVERNMENT REGULATIONS AND FRAMEWORK/ EXPECTED POLICY CHANGES ......................................... 27

3.7.1. REAL ESTATE BILL, 2013 .......................................................................................................................... 27

3.7.2. LAND ACQUISITION, REHABILITATION AND RESETTLEMENT BILL, 2012 ................................................ 32

3.7.3. MAJOR AMENDMENTS BY THE FINANCE ACT 2012 REAL ESTATE ....................................................... 34

3.7.4. FLOOR SPACE INDEX (FSI)........................................................................................................................ 35

3.7.5. REVISED GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS .................. 37

3.8. FINANCIAL SUPPORT TO THE SECTOR ............................................................................................................. 38

3.9. SECTOR OUTLOOK ........................................................................................................................................... 41

3.10. THE ROAD AHEAD ....................................................................................................................................... 43

3.11. COMPANY ANALYSIS ................................................................................................................................... 43

3.11.1. GODREJ PROPERTIES LIMITED ................................................................................................................. 43

4. OVERVIEW OF INFRASTRUCTURE SECTOR .............................................................................................................. 49

4.1. VALUE CHAIN IN INFRASTRUCTURE ................................................................................................................ 50

4.2. Types of Projects ............................................................................................................................................. 52

4.2.1. BOT (Build Operate Transfer) ............................................................................................................ 52

4.2.2. BLOT (Build Lease Operate Transfer) ............................................................................................. 53

4.2.3. BOOT (Build Own Operate Transfer) .............................................................................................. 53

4.2.4. BOOST (Build Own Operate Share Transfer) ............................................................................... 53

4.2.5. EPC (Engineering Procurement Construction) .................................................................................. 54

4.2.6. DBFO (Design Build Finance Operate) ............................................................................................ 54

4.3. Major Segments in Infrastructure Sector ....................................................................................................... 55

4.3.1. Roads and Highways ............................................................................................................................... 56

4.3.2. NHDP ....................................................................................................................................................... 57


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4.3.3. RAILWAYS ................................................................................................................................................ 58

4.3.4. PORTS ...................................................................................................................................................... 59

4.3.5. AIRPORTS ................................................................................................................................................ 61

4.4. INFRASTRUCTURE FUNDING ........................................................................................................................... 63

4.4.1. PPP MODEL ............................................................................................................................................. 65

4.5. INFRASTRUCTURE DEBT FUND ........................................................................................................................ 66

4.6. KEY ANNOUNCEMENTS IN ANNUAL BUDGET 2013-14 ................................................................................... 67

4.7. Key Growth Drivers ......................................................................................................................................... 68

4.8. KEY GROWTH DETERRENTS ............................................................................................................................. 68

4.9. Business Profile: GMR Infrastructure Ltd. ....................................................................................................... 70

4.10. Sector Outlook ............................................................................................................................................ 72

4.11. References................................................................................................................................................... 74


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1.CONSTRUCTION INDUSTRY

World class infrastructure is very essential to achieve high economic growth rate. Therefore, construction

activities are very crucial in developing physical infrastructure. Construction, on average, accounts for more

than half of the investment required for setting up critical infrastructure facilities like power projects, ports,

railways, roads, bridges etc., given the high construction intensity in such projects.

With the increasing demand in the housing sector and consistent attention given to infrastructure

development, the construction sector has been growing at a compounded annual growth rate (CAGR) of about

11.1% over the last eight years. The current GDP contribution of construction sector is around 9.0%.

Construction sector can be broadly classified into two sub-segments:

I. Real Estate

II. Infrastructure


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The chart below illustrates further sub-division of real Estate and infrastructure sectors.

2.OVERVIEW OF REAL ESTATE SECTOR

The real estate sector in India assumed greater prominence with the liberalisation of the economy, as the

consequent increase in business opportunities and population migration led to rising demand for commercial and

housing space. The Indian real estate sector has traditionally been dominated by a number of small regional players

with relatively low levels of expertise and/or financial resources. Historically, the sector has not benefited from

institutional capital; instead, it has traditionally tapped high net-worth individuals and other informal sources of

financing, which has led to low levels of transparency. This scenario underwent a change in line with the sectors

growth, and as of today, the real estate industrys dynamics reflect consumers expectations of higher quality with

Indias increasing integration with the global economy.

At present, the real estate and construction sectors are playing a crucial role in the overall development of Indias

core infrastructure. It is the second largest employer after agriculture and is slated to grow at 30% over the next

decade. The Indian real estate market size is expected to touch $180 billion by 2020. The real estate industrys

growth is linked to developments in the retail, hospitality and entertainment (hotels, resorts, cinema theatres)

industries, economic services (hospitals, schools) and information technology (IT)-enabled services (like call centers)

etc. and vice versa. The housing sector alone contributes to 5% of the countrys GDP.

Construction

Industry

Real Estate

Residential

Commercial

SEZ andIndustrial

Retail

Hospitality

Infrastructure

Utilities

Power

Irrigation

UrbanInfrastructure

Water Supply

Sanitation

Urban Roads

Transportation

Railways

Civil Aviation

Highways

Ports


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According to a study by ICRA, the construction industry ranks 3rd among the 14 major sectors in terms of direct,

indirect and induced effects in all sectors of the economy. A unit increase in construction expenditure generates five

times the income, having a multiplier effect across the board. With backward and forward linkages to over 250

ancillary industries, the positive effects of real estate growth spread far and wide. Truly, real estate is a growth

engine for Indias economy.

The ongoing economic slowdown had a mixed impact on property markets in India over the last six months, due to

rising prices, poor investment and poor performance of the construction sector. Indian construction players

accumulated huge debts and, with the economy slowing, more big companies are struggling to repay their loans as

profits decline. They are beset by a faltering economy, weak home sales in key cities and high interest rates,

prompting them to scale back or put on hold projects planned during the boom years of 2005-2007. The

accumulated debt of Indian realty companies is estimated at around Rs50,000 crore (US$10 billion). Several real

estate companies have approached banks for a restructuring package as they are unable to pay their loans.

The rise in input costs for developers and sustained inflation has caused increases in prices in 18 cities. The NHBs

Residential Property Index (Residex) showed residential property prices trending upward, with prices in 18 major

cities rising by 11.3% in first quarter 2013, compared with 9.6% in the previous quarter, although prices fell in Indore

and Faridabad. The biggest increase was in Mumbai, followed by New Delhi and Kolkata, where property became

more expensive in early 2013 than a year earlier.

India suffers from a chronic shortage of housing. Regulatory approvals for projects have been slow in the past 18

months, drying up housing supply in the city and affecting cash flows that are crucial for developers. The first three

months have seen reductions in new supply, which has kept prices higher. Home sales have been under pressure as

overall economic sentiment remained low and interest rates high, forcing home buyers to postpone buying

decisions. The World Bank approved a US$100 million credit to provide low income households in Indian cities with

loans to purchase, build or upgrade their dwellings.

The NHB implemented the Low Income Housing Finance Project that will provide housing finance to low-income and

informal sector households in urban areas and strengthen the capacity of financial institutions that target low-

income groups. The project will serve households with incomes of up to Rs200,000 (US$3,700) a year or Rs 16,667

(US$308.34) a month. Loans will initially be capped at Rs5 million (US$500,000), or just under US$10,000. The

project will be financed by credit from the International Development Association (IDA) the World Banks

concessionary lending arm under 25-year interest-free loans.


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Planning Plans are basically a graphical or visual representation of the structure of homes, offices, malls etc.

Seeking Approvals In India, a lot of approvals are required to be obtained before construction at any site could

start, for example, an NOC, a pollution certificate etc. It is necessary to have all the clearances for smooth execution

of the projects. The noted township of Lavassa being built by HCC, for not having adequate environmental

clearances had to face many objections from Ministry of environment and forest.

Project Execution and Construction Project Execution is marked by the following activities:

Excavation

Works for structural framework

Finishing Works

Marketing Since real estate is a sector where entry barriers are low, marketing of the product assumes high

importance for the success of the project.

Facility Management Facility management is a very upcoming field that is gaining immense popularity with every

passing day. Facility management basically means maintaining and taking care of institutional as well as commercial

buildings. These may include office space, schools, resorts, hotels, shopping arcades, sports complexes etc. Prime

Activities that fall under the purview of facility management in India are:-

Electricity, Lighting system and air conditioners

Security

Plumbing activities

Garbage collection and Waste Disposal

Pest control at home/office

Gardening and Landscaping

Housekeeping etc.


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3.2. MARKET SEGMENTATION

Activities in real estate segment can be segregated into residential, commercial, retail, special economic zones and

hospitality. The FY 2012 market size of real estate was around US$ 71 billion. This corresponds to 5-6% of the total

GDP. The Indian real estate market size is expected to touch US$ 180 billion by year 2020.

Market Size of Indian Real Estate

3.2.1. DIFFERENT SEGMENTS

REAL ESTATE SUB-SECTORS & SUB SUB-SECTORS

50,800 53,100 56,10067,200 71,715.80

180,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2020

REAL ESTATE MARKET SIZE, USD MILLION

Real Estate Market Size, USD million

Real Estate

Commercial Retail Residential

AffordableHousing

MiddleIncome

Group

LuxurySegment

Hospitality SEZ


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RESIDENTIAL SEGMENT

Driven by increasing urbanization, rising income and decreasing household sizes, the residential segment is the

mainstay of Indian real estate sector. The sector witnessed its peak in just before global economic crisis in 2008. The

residential prices reached all-time high; driven by market speculations. Majority of developers then focused on

premium segment which offered higher returns. The demand in premium segment decelerated as the economic

crisis unfolded later in 2008-09. With low demand in premium segment developers became concerned about the

sale ability and return from premium segment products. Many investors re-oriented their development strategy to

meet the requirement of masses. Affordable housing became the buzz word in the sector. This meant reduction in

unit sizes with bare minimum amenities and basic specification.

This reduced the price and increased the end user sales from the middle income group. Consequently, second half

of 2009 witnessed increase in sale volume in all micro-markets.

The shift in focus on affordable housing product has been because of dip in luxury segment, but now many

developers want to be in low cost budget segment as it is a fast moving realty product and it has helped developers

to pay off bad debts.


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India real estate sector have around 6000 players but still there is a significant demand supply gap in this sector,

especially in the low cost budget housing segment. To boost the supply in this segment government had launched

many schemes such as Indira Awaas Yojna, Rajiv Awas Yojana for slum dwellers under JNNURM, and National

Housing Bank which is a subsidiary of RBI; which have been promoting housing for all segment of society.

The National Housing Bank (NHB) launched NHB RESIDEX, a representative housing price index (HPI) for select cities,

in 2007. The RESIDEX captures the price trends in 26 cities (a few of them added recently) on a quarterly basis with

2007 as the base year.

Overall impression: Property prices in majority of the cities, 22 out of 26 are witnessing marginal downward trend.

CITY WISE HOUSING PRICE INDEX FOR THE QUARTER APRIL- JUNE, 2013 (Source: http://www.nhb.org.in/)

CITIES2007

Index

Jan-Mar

2011Index

Apr-Jun

2011Index

Jul-Sept

2011Index

Oct-Dec

2011Index

Jan-Mar

2012Index

Apr-Jun

2012Index

Jul-Sep

2012Index

Oct-

Dec2012Index

Jan-

Mar2013Index

Apr-

Jun2013Index

Hyderabad 100 83 91 84 79 86 85 84 90 88 84

Faridabad 100 165 220 206 218 217 217 216 205 207 202

Patna 100 146 146 141 140 129 140 138 151 152 147

Ahmedabad 100 165 169 163 167 164 174 180 191 192 186

Chennai 100 218 248 271 296 304 309 312 314 310 303

Jaipur 100 67 64 65 64 80 78 85 87 112 110

Lucknow 100 157 160 154 165 164 171 175 189 183 187

Pune 100 148 150 169 184 181 200 201 205 221 219

Surat 100 128 149 139 152 144 145 138 150 140 142

Kochi 100 86 107 97 82 72 73 80 87 89 86

Bhopal 100 167 224 208 211 204 207 206 216 230 227

Kolkata 100 211 194 191 190 191 196 191 209 197 189

Mumbai 100 175 181 194 193 190 197 198 217 222 221

Bengaluru 100 88 92 93 100 92 100 98 106 109 108

Delhi 100 126 147 154 167 168 172 178 195 202 199

Bhubneshwar 100 - - - - 161 164 168 172 197 195

Guwahati 100 - - - - 157 159 158 166 153 147

Ludhiana 100 - - - - 163 171 168 179 167 157

Vijayawada 100 - - - - 184 186 181 185 184 174

Indore 100 - - - - 208 203 196 194 195 184

Chandigarh 100 - - - - - - - - 194 191

Coimbatore 100 - - - - - - - - 184 178

Dehradun 100 - - - - - - - - 183 184

Meerut 100 - - - - - - - - 191 189

Nagpur 100 - - - - - - - - 163 168

Raipur 100 - - - - - - - - 156 155


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The Residential segment can be broadly divided into three sub divisions:

Affordable housing

Affordability is very subjective term; therefore defining affordable housing is very difficult. JLL report on affordable

housing in India defined affordable housing using parameters such as minimum volume of habitation, provision of

basic amenities, cost of the house, and location of the house. The following table defines affordable housing in

detail.

Minimum Volume of Habituation Provision of Basic

Amenities

Cost of the House Location of the House

EWS Minimum of 250 sq ft carpet area

Minimum of 2,250 cu ft internal

volume

Sanitation, adequate water

supply and power

Provision of community

spaces and amenities such

as parks, schools and

healthcare facilities, either

within the project or in the

neighbourhood, depending

upon the size and location of

Cost of the house

such that EMI does

not exceed 30-40%

of gross monthly

income of the

buyer

Reasonable

maintenance costs

Locatd within 20 km

of a major workplace

hub (could be

suburban hubs as

well) in the city

Adequately

connected to major

public transit hubs

LIG 300-600 sq ft carpet area

2700-5400 cu ft internal volume

MIG 600-1,200 sq ft carpet area

5,400-10,800 cu ft internal volume

According to the Technical Group (11th Five Year Plan: 2007-12) on estimation of urban housing shortage by the end

of 2012 there would be a shortage of 26.53 million houses. The group earlier estimated that at the end of 10th five

year plan 88% of this shortage pertains to houses for Economically Weaker Section (EWS) and 11% for Lower

Income Group (LIG) whereas for Middleand HighIncome Groups (MIG & HIG), the estimated shortage is only 0.04

million.

Source: JLL, 2012 Supply-Demand Dynamics for Various Income Groups

5% 5%

20%

40%

30%

35%

25%

20%

15%

5%

200-300 300-500 500-700 700-1,000 >1,000

ShareofSupply/Dem

and

Income Group INR '000

Share of Supply Share of Demand


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Despite having huge growth potential this segment havent been explored by developers and banks. India has

extensive network of financial institutions, banks, and apex housing cooperative societies, but the low income group

lacks the access to home finance. The loan market for INR 3 to 10 lakhs is worth approximately INR 1,100,000 crores.

Despite this fact most of the loans disbursed are for Middle and High Income group of value greater than INR 10

lakhs. Reserve Bank of India has set up a wholly owned subsidiary, National Housing Bank, to accelerate housing

finance activity in India and promote the Housing Finance Companies (HFCs) by providing them with financial

support.

Key players in this segment are TATA Housing, Ansal Properties, and HDIL.

Middle Income Group

The burgeoning Indian middle class is the fastest economically growing segment of the Indian population. The Great

Indian Middle Class is said to number today between 320 -350 million people. This accounts for 30% of the total

population of India. As per the management consultancy firm, McKinsey, Indias middle class will reach 583 million

by the year 2025. By then the middle class with constitute 50% of total Indian population.Majority of developers launch products that cater the needs of customers in this segment of Indian Real Estate

market. Almost all leading developers offer units for the Middle Income Group buyers in the range of INR 2.5-10

million in all major cities in India.

Luxury Segment

With high profit margins this segment has been the favourite of Real Estate developers. Demand in this segment is

driven by the high lifestyle aspirations of growing India. Growth has brought increase in earning capacity of

individuals matching these aspirations. Luxury homes are centrally located, close to business centres; thereforedevelopers are able to charge a premium for these units.


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Mumbai and Delhi are currently the only cities with sustainable demand for luxury housing. In other, HNIs tend to

buy and develop their own extravagant residence. In Tier II & III cities there is insignificant demand for luxury

housing.

Source: Reserve Bank of India, National Council for Applied Economic Research

COMMERCIAL

The last decade has seen the metamorphosis of commercial real estate segment due to change in business

environment. The growth in this segment is largely driven by demand from MNCs and corporate India alike,

particularly IT-ITeS, BFSI, Telecom, and Pharma companies.

With the emergence of IT-ITeS companies, which have huge office space requirement, development of commercial

properties started to move towards city suburbs. This led to the multifold development of city outskirts like Bandra

and Malad in Mumbai, Gurgaon near New Delhi, and Electronic city in Bengaluru. Over the years, cities like Pune,

Hyderabad, Chennai and Kolkata have also emerged as preferred destination for commercial real estate

development.

Demand of office space is directly linked to the addition in number of employees in IT-ITeS companies. With the

economic downturn many companies withhold their expansion plan leading to lower demand in office space. The

downturn in real estate sector in 2008-09 was largely the result of postponement of expansion plans by corporate.

30%

27%

19%

10%

4%

3%2%2%

3%

Segmentation of Investment by urbanhouseholds in India

Real Estate

Gold and Arts

Bank Deposit

Insurance and Pension

Post Office

Mutual Funds

Consumption

Equities

Others


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The above chart shows the leasing volumes of different sectors of the industry. It could be used as a proxy to

understand the commercial segment demand from various sector of the industry.

RETAIL

Indian retail sector is evolving and so is the associated real estate. In the last ten years there has been a change in

the shopping culture of Indian people. There is a structural change from small format stores to large shopping malls

and hyper-market. These malls have become the new destination for shopping needs. While most development till

the recent past was restricted to the top seven cities in India, mall development has moved on to tier II and III cities.

This sector has immense potential, which is still untapped. Currently, only 5-6% of Indian retail is organized, which is

far below than the western countries where organized retail is around 80%. The retail real estate market supply is

expected to grow at a CAGR of 17% over the period 2012-2016. The retail real estate segment will witness an

addition of 1,592.3 thousand square meters of retail space by 2013 and 2,802.3 thousand square meter of retail

space in 2016 against an absorption of 2,037.3 thousand square meter during the same period. The retail real estate

segment in India by the new completions of retail space is expected to grow at CAGR of 17% during 2012-2016.This

is due to an increasing young domestic population which is expected to increase the demand for modern malls with

better entertainment facilities coupled with increasing brand consciousness and changing lifestyle of the people in

the country in the near future.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

48 47 49

3323

46

3439

11 12 11

17

23

16

118

22 21 21

29

22

18

2629

5 6 6 6

5

5

8 3

14 13 13 15

25

1318 17

0 1 0 0 2 2 3 4

Leasing of office space by sector

IT/ITES BFSI Manufacturing/ Industrial Consulting Service Provider Miscellaneous

Source: JLL India CFO Survey 2013


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HOSPITALITY

Indian hospitality sector is witnessing significant increase in demand from the growth in inbound tourism and

increase in business travel. Moreover, rising income, higher weekend trips and increased access to travel-related

information over the internet have propelled growth in hospitality sector.

Many domestic hotel chains and international brands are providing several categories of hotels to cater needs of

different travellers. Government initiatives to promote tourism in Tier II and Tier III cities are generating significant

demand for hotels in these cities, especially for budget hotels. Entry of international brands has triggered private

equity investment. Private equity players are also keen on budget and mid-size hotels. Besides hotels, the hospitality

market comprises serviced apartments and convention centres.

Mumbai and Delhi are by far the biggest market in this segment followed by Bengaluru, Hyderabad and Chennai.

From 2010 to 2013 the demand in this segment is estimated to grow at a CAGR of 10%.

In 2012-13, growth in room demand was muted at 8 per cent y-o-y because of uncertainty in macroeconomic

conditions. The rise in foreign tourist arrivals (FTAs), which mainly drive demand for premium segment hotels, was

also subdued at 4 per cent y-o-y during the year.

On the other hand, room additions rose by 11 per cent y-o-y. Occupancy rates (ORs) declined marginally to 61 per

cent in 2012-13 from 62 per cent in 2011-12 and average room rates (ARRs) also decreased by 5 per cent y-o-y to Rs

7,350 during the year. Consequently, revenue per available room (RevPAR) declined by 7 per cent in 2012-13 to Rs

4,450.


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The table below provides us with a gist of the above graphs

SEZ

Government of India introduced SEZ Act, 2005 to provide world class infrastructure to boost the industrial export

potential and generate employment opportunities. As of now government had approved 588 SEZs in which majority

of them are in IT-ITeS sector.

Developing a SEZ is 15-20% cheaper than developing a non-SEZ commercial space. Many developers are attracted to

SEZ project because of the various fiscal benefits available to SEZ developers. The SEZ policy allows as high as 50% of

area to be used for non-processing zone such, offering significant potential for residential and support infrastructure

development.

According to the latest data, exports from SEZs rose almost 30 per cent to $88 billion in 2012-13, from $68 billion the

previous year. These were up 17 per cent in 2011-12, compared with $58 billion a year before. These are quite


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impressive numbers, given that the countrys total exports fell 1.76 per cent to $300.6 billion in 2012-13. It means

exports from SEZs accounted for 29 per cent of total exports in 2012-13.

Total investments in SEZs rose to $44 billion in 2012-13, compared with $43 billion the previous year. As of March

31, SEZs had generated 1,074,904 jobs.

The government has so far formally approved 577 SEZs, of which 389 are notified. At present, 170 operate across

India.

3.3. KEY GROWTH DRIVERS

Demand for real estate is expected to grow at a CAGR of 19% from 2010 to 2014. Tier-I metropolitan cities will

account for 40% of this projected growth.

Growing Urbanization

Urbanisation in India has been increasing at an unprecedented rate, with almost 71 million people added to the

urban population from 2001 to 2011. At this rate, close to 534 million people (greater than the combined population

of the United States, Russia and France) will live in Indian cities by 2026. This offers tremendous opportunities for

real estate development, particularly for housing.

Source: Population Projections for India, 2001-26, Registrar General of India

0

5

10

15

20

25

30

35

40

45

0

100

200

300

400

500

600

2001 2011 2021 2026

Populationinmillions

Urbanisation to fuel housing demand in leading cities

Urban Population Urban Population as a % of total population


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Growth in Household Income

Indias household income is expected to increase by an average INR 60,000 per annum over a period of six years

from 2009-10 to 2015-16. This is expected to fuel consumption and be a support base for growth in Indias organised

retail industry. Industry research indicates that out of the top five priorities of household spending, three categories

belong to the retail segment. Also, as per the Centre for Monitoring Indian Economy (CMIE), close to 30% of a total

households income is spent on retail categories such as grocery, apparel and food & beverage. The most noticeable

increase in income is likely to be observed in urban areas, which will result into further investment in the

development of organised retail real estate.

Credit Availability

Indian households now have easy access to loans; this has increased the purchasing-power of consumers. The

rising middle class and upper middle class aspires to have a high standard of living. Easy available loans have

made their housing dream affordable and achievable. Also, residential units are one of the most favoured

investment options of Indian household and as income rises many more will invest in second home as

investment vehicles.

Growth in Information Technology Industry/Services Industry

Burgeoning growth in the information technology and outsourcing industry is a major demand driver for the growthof commercial real estate space in the country. This sector is the biggest office occupier in the country, comprising of

approximately 70% of the entire office stock (including IT parks and special economic zones). As the IT industry

0

50000

100000

150000

200000

250000

300000

350000

RURAL URBAN ALL INDIA

123000

250000

160000156000

350000

290000

Ho

useholdIncomeinIndia(INR)

Source: NCAER 2012

Increase in Household Income to Fuel Retail

Spend

2009 2015


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grows in size, the demand for commercial real estate is likely to increase. This provides a significant opportunity for

real estate developers to step in to meet the requirements of this sector.

FDI in Retail

The recent decision of the government to allow FDI in the single brand and multi-brand retail sector is expected to

help the real estate sector in the country. The market sentiment has witnessed a significant development since. At

one hand, it is expected to usher in a new era for the commercial real estate in the country, with foreign players

entering the Indian retail market with the much needed investment. Alongside, the residential sector is also cheerful

of the impending inflows.

Tourism and hospitality market set for a surge

Tourism and hospitality sectors direct contribution to GDP totaled USD34.7 billion in 2012 and is expected to rise to

USD40.8 billion in 2013. Over 200613, direct contribution is expected to register a CAGR of 12.6 per cent.

The sectors total contribution to GDP increased to Tourisms total contribution to GDP (USD billion) USD115.5 billion

in 2012 from USD88.1 billion in 2007 and is expected to reach USD136.3 billion in 2013.

0

1

2

3

4

5

6

7

8

0

20

40

60

80

100

120

2008 2009 2010 2011 2012

USDBillion

Source: NASSCOM

Growth in the IT/ITeS Industry to Impact Commercial Real Estate Demand

IT BPO Revenues Contribution to GDP


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Easy available loans have made their housing dream affordable and achievable. Also, residential units are one of the

most favoured investment options of Indian household and as income rises many more will invest in second home as

investment vehicles.

Segment wise growth driver:

a. Commercial real estate:

Growth in IT-ITES sector

Growth in knowledge and technology intensive sector

Significant growth in FDI

b. Residential real estate:

Rising urbanisation

Increasing number of households

Growing number of first time home buyers

Increasing income levels

Increasing affordability of homes

Penetration of mortgage finance

17.8

25.223.6

26.3

30.9 30.8

35.9

40.8

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013E

SOURCE: WORLD TRAVEL AND TOURISM COUNCIL'S ECONOMIC IMPACT 2013

DIRECT CONTRIBUTION OF TOURISM AND

HOSPITALITY TO GDP

USD Billion


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c. Retail Real estate:

Rising Consumerism

Growth in organized retailing

Entry of international retailers in India

Entry of Indian Corporate in Retail Industry

d. Hospitality real estate:

Increase in international tourist arrivals

Growth in domestic tourism

Low cost airlines and improvement of airports

Medical tourism

International events

e. Special Economic zones:

Growing IT and manufacturing sector

3.4. KEY GROWTH DETERRENTS

Following are the major setback for the sector:

High Interest rates (Bank rate is at 10.25)

Low GDP growth of 4.4% in Q1fy14, would take time to be back on track

Depreciating rupee

High CAD and Fiscal Deficit

Degradation of Ratings

Liquidity crunch

Differing opinion of central and state governments

Federal Reserve pull back of fiscal stimulus

Huge burden of subsidies on the government

No major policy changes due to upcoming elections


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Lack of clear land titles

Absence of title insurance

Absence of industry status

Lack of adequate sources of finance

Shortage of labour

Rising manpower and material costs

Approvals and procedural difficulties

The Indian real estate sector has traditionally been an unorganised sector but it is slowly evolving into a more

organised one.

3.5. KEY ANNOUNCEMENTS OF BUDGET 2013-14

An Urban Housing Fund in line with Rural Housing Fund is proposed to be set. The objective of this fund is to

alleviate the huge shortage of housing in certain urban areas. The Finance Minister has proposed allocation of Rs

2,000 Crore for this purpose. The framework of the scheme is awaited, however, it is likely that it would be in

lines of the Rural Housing Fund, and would have the objective of lending for urban housing undertaken by

weaker sections. The Rural Housing Fund (set up through the National Housing Bank) has got Rs 6000 crore for

2013-14 compared to Rs 4000 crore in 2012-13.

Plans for seven new cities have been finalised on Delhi Mumbai Industrial Corridor (DMIC) and work on two new

smart industrial cities at Dholera, Gujarat and Shendra Bidkin, Maharashtra will start during 2013-14. DMIC to

be provided additional funds during 2013-14 within the share of the Government of India in the overall outlay, if

required.

Chennai Bengaluru Industrial Corridor to be developed.

Excise duty on marble increased from Rs 30 per square meter to Rs 60 per square meter.

Transfer of immovable properties being stock in trade

Consideration for determination of business profit on the sale of land and/or building held as stock in

trade would be higher of stamp duty value or actual transaction price. Similar provisions exists for land

and/or building held as capital asset for determination of capital gains where the date of agreement to

transfer and the date of registration of the transfer is not same, the stamp duty value as on the date of

agreement would be considered this would have a significant impact on real estate companies which

have traditional land banks acquired at much lesser values in a land owning company, as the actual


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development activity happens in the flagship company by acquiring the land or its development right

from the land owning company

Additional deduction of interest on housing loan

An additional deduction up to Rs 1 Lakh of interest on housing loan taken from financial institution is

proposed to be allowed to an individual the deduction would be available subject to the following

conditions:

the amount of loan does not exceed Rs 25 lakhs

the value of residential property should not exceed Rs 40 lakhs

the assesse does not hold any other residential property on the date of sanction of loan

loan should have been taken within the FY 2013 -14

the quantum of deduction shall be allowed to be carry forwarded to FY 14-15 if not fully utilised

in the FY 13-14

no deduction of the said sum would be allowed under any other provisions of the Income Tax

Act, 1961

Transfer of immovable properties under Tax Deducted at Source (TDS) net

Under TDS mechanism, a new section 194-IA is proposed to be inserted with effect from 1 June 2013 to

recover tax by way of TDS where transfer of immovable property not being an agricultural land takes

place.

tax would be withheld @ 1% on the total sum paid as consideration

TDS would get triggered where the consideration exceeds Rs 50 Lakhs

a similar provision was introduced in last year's budget, but did not find place in the enactment

this would entail compliance burden in the hands of the buyer and procedural simplifications are

warranted

it is not clear whether this provision will be applicable in situations such as:

when the immovable property is part of an undertaking which is transferred under slump sale or

demerger when the buyer avails an housing loan and the consideration is paid directly by the lender

typically on the day the property is registered in the name of the buyer

Change in the definition of agriculture land

the proposed amendment in the definition of capital asset brings clarification to agriculture land, which

is presently dependent upon Government notification with respect to distance from the local limits of

each municipality or similar authority as per the proposed amendment, in following situations the

agriculture land will be considered as a capital asset:


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Distance

from

municipality

limit

Population

of the

municipality

Capital asset

Within 2 kms more than

10,000 but

does notexceed

100,000

Yes

Within 6 kms more than

100,000 but

does not

exceed

10,00,000

Yes

Within 8 kms .Exceeding

10,00,000

Yes

Withholding of taxes on interest paid to non-resident

Section 194LC of the IT Act is proposed to be amended so as to provide concessional withholding tax

rate of 5% in respect of the interest income arising on subscription by non-residents in long term

infrastructure bonds issued by an Indian company ( i.e. rupee denominated bonds). The withholding tax

rate of 5% would be applicable provided non-resident deposits foreign currency in a designated bank

account and such money as converted in rupees is utilised for subscription to a long-term infrastructure

bond issue of an Indian company. This amendment will take effect from 1 June 2013

Service tax

Standard rate of service tax is retained at 12%.

Surcharge

Surcharge increased from 5% to 10% on domestic companies whose taxable income exceeds Rs 10 crore.

In case of foreign companies the surcharge is increased from 2% to 5%, if the taxable income exceeds Rs

10 crore.

Surcharge on dividend distribution tax or tax on distributed income increased from 5% to 10%.

Abatement in case of construction

for residential units having carpet area upto 2000 sq. ft. or where amount charged is less than 1 Crore

(including amount of land), abatement remains at 75%. Therefore the taxable value would be 25% in all

other cases, abatement is reduced to 70% (accordingly taxable value is increased from 25% to 30%).

3.6. UN-MET BUDGET EXPECTATIONS:

Industry status to real estate sector Grant Industry Status to Real Estate Sector for easier availability of funds for real estate sector for purpose of

availing long term and short term finances.


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Therefore, it is suggested that individuals owning house property should be allowed depreciation as

in the case of corporates and also allow repair/maintenance/renovation of houses to an extent of

50% of the gross income.

Service Tax & VAT on Developers for sale of immovable property

It may be particularly noted that the materials & services used in the production of the immovable property,

the so-called unit that the developer sells is comprised of VAT paid materials and Service Tax paid services.

The levy of VAT and Service Tax on developers only adds to the value of the property value which is TOTALLY

recovered by the developer from the purchaser and the purchaser is saddled with payment of VAT and

service tax that has been part of construction cost and also VAT & service tax that the developer recovers on

the sale.

Needless to say Stamp Duty is always to be borne by the purchaser. Its a triple jeopardy for the purchaser not

even a double.

Mat on SEZ

Consistent with the SEZ policy, the exemption from MAT and DDT should be continued for SEZ developers

and Units.

3.7. GOVERNMENT REGULATIONS AND FRAMEWORK/ EXPECTED POLICY

CHANGES

3.7.1. REAL ESTATE BILL, 2013

3.7.1.1. The salient features of the draft Bill are as under:

Applicability of the Bill:

The proposed Bill applies to residential real estate i.e. housing and any other independent use ancillary to

housing. However it shall not apply where the area of land proposed to be developed does not exceed

1000 square meters or the number of apartments proposed to be developed does not exceed 12, inclusive

of all phases, or an area or number of apartments as notified by the Central Government on

recommendations from the appropriate Government, which may be different for different States or Union

territories but not more than 1000 square meters or 12 apartments.


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Important Definitions:

The Bill will bring about standardization in the sector leading to healthy and orderly growth of the industry

through introduction of definitions such as apartment, common areas, carpet area, advertisement,

real estate project, prospectus etc. Introduction of the concept of using only carpet area for sale, which

has till now been ambiguously sold as super area, super built up area etc., will curb unfair trade practices.

Establishment of Real Estate Regulatory Authority:

Establishment of one or more Real Estate Regulatory Authority in each State/UT, or one Authority for two

or more States/UT, by the Appropriate Government, with specified functions, powers, and responsibilities

to exercise oversight of real estate transactions, to appoint adjudicating officers to settle disputes

between parties, and to impose penalty and interest;

Registration of Real Estate Projects and Registration of Real Estate Agents:

Mandatory registration of real estate projects and real estate agents who intend to sell any immovable

property, with the Real Estate Regulatory Authority on real time basis without adding another layer of

approvals.

Mandatory Public Disclosure of all project details:

Mandatory public disclosure norms for all registered projects, including details of the promoters, project,

layout plan, plan of development works, land status, carpet area and number of the apartments booked,

status of the statutory approvals and disclosure of proforma agreements, names and addresses of the real

estate agents, contractors, architect, structural engineer etc.;

Functions and Duties of Promoter:

Duty of promoters towards disclosure of all relevant information and adherence to approved plans and

project specifications, obligations regarding veracity of the advertisement for sale or prospectus,

responsibility to rectify structural defects, and to refund moneys in cases of default;

Compulsory deposit of seventy percent or such lesser percent as notified by the Appropriate

Government, to cover the construction cost of the project, of funds received by the Promoter, in a

separate bank account

Functions of Real Estate Agents:

Real estate agents not to facilitate the sale of immovable property which are not registered with the

Authority required under the provisions of the Act, obligation to keep, maintain and preserve books of

accounts, records and documents, obligation to not involve in any unfair trade practices, obligation to

facilitate the possession of documents to allottees as entitled at the time of booking, and to comply with

such other functions as specified by rules made in that regard;


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For knowingly providing false information or willful contravention at the time of applying for

registration and for other contraventions under the law A penalty which may extend up to

5% of the estimated cost of the real estate project as determined by the Authority

3.7.1.2. Benefits and Advantages of Real Estate Bill, 2013

The Bill will bring about standardization in the sector leading to healthy and orderly growth of the

industry through introduction of definitions such as apartment, common areas, carpet area,

advertisement, real estate project, prospectusetc. Introduction of the concept of using only carpet

area for sale which has till now been ambiguously sold as super area, super built up area etc., will curb

unfair trade practices.

The Bill like other sectors such as telecom, electricity, banking, securities, insurance etc. provides

for specialized regulation and enforcement which includes both curative and preventive

measures, with powers to enforce specific performance, not available under the consumer laws.

The Authority has powers to give directions for specific performance powers to impose penalty for

non-registration of projects including imprisonment for continuous violation upto 3 yrs and

impose penalty in case of other contraventions.

The Bill proposes to register real estate agents which have hitherto been un-regulated, with clear

responsibilities and functions, thereby leading to money trail and curbing money laundering.

The Bill aims to ensure consumer protection, by making it mandatory for promoters to register all

projects, prior to sale; and only after having received all approvals from development/municipal

authorities thereby protecting buyer investments.

The Bill will promote transparency and fair and ethical business practices, relating to

transactions, through disclosure of project details and contractual obligations vis--vis the project

and the buyer, promoting informed choice for the buyers. This will substantially reduce the power

asymmetry prevalent in real estate transactions.

The Bill seeks to establish a regulatory oversight mechanism, through Real Estate Authority(s) and

Appellate Tribunal in the States, to enforce accountability norms for the promoter buyer and the

real estate agents.

The Bill will infuse professionalism and promote planned development of the real estate sector

through the promotional role of the Regulatory Authority.

The Bill will ensure timely completion of projects, and prevent fund diversion.

The Bill provides for a speedy and specialized adjudication mechanism to settle disputes betweenthe promoter, buyer and real estate agents, thereby de-clogging the civil courts and consumer

forums, from disputes in the real estate sector.


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promoters which has a direct bearing on the supply of projects. If approvals are granted within the

stipulated time by the authorities, it will enable timely delivery of projects.

The bill must remove criminal charges like imprisonment for the developer. Only financial penalties be

imposed for offences of the developer.

Real estate is a complex subject and each state has different and some conflicting regulations. For states to

implement these regulations, it will require a lot of research into the provisions of this regulation vis--vis similar and

conflicting provisions in state laws.

3.7.2. LAND ACQUISITION, REHABILITATION AND RESETTLEMENT BILL, 2012

Title of the Bill The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and

Resettlement Bill, 2012

Significance of the title of the Bill: It underlines the government's stated focus on fair compensation through

resettlement and rehabilitation of those affected, adequate safeguards for their well-being and complete

transparency in the process of land acquisition rather than fast acquisition of land which the title of the older bill

conveyed.

Indias new land acquisition Bill, praised in some quarters and reviled in others, is a complex piece of legislation. Itwas passed by the Lok Sabha on 29th August 2013 and will likely be passed by the Rajya Sabha shortly as well. The

government has issued a document explaining the tenets of the Bill that offers a comprehensive explanation of a law

that will change how land is acquired and owners are compensated in India.

3.7.2.1. Salient features of the bill:

The Land Acquisition, Rehabilitation and Resettlement Bill, 2012 stipulates mandatory consent of minimum

70 percent for acquisition of land for the Public Private Partnership (PPP) projects, as well as 80 percent for

acquisition of land for the private companies.

Increase in share of appreciated value: If the government after acquiring the land sells it to a third party

then 40% of the appreciated value will be shared with the original owners. This has been increased from

20%.

The Bill seeks for compensation of around 4 times the market value of the land in rural areas as well as two

times the value in the urban areas.

The Bill includes a total of 107 clauses.

The Bill will provide protection to the farmers as well as the rights of the farmers.


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The Land Acquisition, Rehabilitation and Resettlement Bill, 2011 replaced the century-old India's Land

Acquisition Act of 1894 which had various shortcomings.

The new Land Acquisition Bill will apply when Government will acquire the land for its own control, hold or

use; or when the Government will acquire the land for transferring it to use of private companies for stated

public purpose. The bill will also apply in case the Government acquires the land for the purpose of

immediate and declared use by private companies for public purpose.

The Bill, after being enacted into law, will affect the rural Indian families who have farms as their primary

source of livelihood. The Bill will also have an effect on the urban households where land is acquired for

industralisation and urbanization.

The Bill however, exempts the land acquisition for the linear projects like ports, railways, irrigation canals as

well as highways.

In order to safeguard the food security as well as for preventing the arbitrary acquisition, the Bill also directs

all the states for imposing the limits on those areas which are under the agricultural cultivation and can still

be acquired.

In the case where the land is not utilised even after acquisition, the Bill empowers all the states to return

such a land either to the State Land Bank or to the owner.

The Bill also proposed that no land can be acquired in the Scheduled Areas without Gram Sabhas consent.

The Bill proposed that no person shall be dispossessed unless all the payments have been made as well as

alternative sites for purpose of rehabilitation and resettlement have been prepared.

The Land Acquisition, Rehabilitation and Resettlement Bill, 2011 proposed several benefits such as land for

employment, land, housing as well as annuities, which will accrue apart from one-time cash payments to

people whose land has been acquired.

Under the law of this new Bill, Wakf land will not be acquired.

3.7.2.2. Macro issues of the bill

While the populist objective is to ensure people losing land should be adequately compensated, the obverse that

this will help the acquirers of the land to be more assured of the acquisition process and there by rule out problems

of unwarranted claims and issues of inadequate compensations. The provisions of the Bill will be applicable in cases

of land acquisition of 50 acres in urban areas or 100 acres in rural areas.

The compensation for land acquisition will now at least double in urban areas and will go up by 4 times in rural

areas, according to the new LARR guidelines. Thus, the cost of land acquisition will surely go up for all projects

irrespective of them being government or private or public-private-partnership (PPP) projects as they will have toadhere to the new norms. Further, the clause of mandatory consent of 80% of owners for private projects and

consent of 70% landowners for PPP projects will delay the process of land acquisition and the projects in turn.


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Income Tax rules provide that for a project to qualify under affordable housing scheme, it has to fulfil certain

conditions.

Further, realising the need to fund low-cost housing and in order to make the scheme of affordable housing more

feasible, the Government extended the benefit of External Commercial Borrowing (ECB) to affordable housing

project. Further the budget also extended a beneficial rate of only 5% on interest to non-residents who fund such

projects. Affordable housing thus continues to be the focus of the Government. An enhancement in the scope of

deduction for the business of developing and building housing project under the scheme for affordable housing

framed by the Government will lead to a consequent increase in the investment in this sector. The rate of service tax

and excise has been increased. It is anticipated that the increase in the rate of excise on steel and cement (along

with the increase in service tax) will push the price, by approximately 1.5%. With the ever increasing inventory, the

industry may find it difficult to pass on the additional tax cost to the consumer.

Some of the key conditions are as follows:

the project shall have the prior sanction of the competent authority

the project shall be on a plot of land which has a minimum area of one acre

the layout and specifications including design of the project to be developed and built shall be approved by

the State or Union Territory Government or its designated implementing agency

the project shall be completed within a period of 5 years from the end of the financial year in which the

project is sanctioned by the competent authority

3.7.4. FLOOR SPACE INDEX (FSI)

The Planning Commission in its recent report has recommended vertical growth of Indian cities by selectively

providing additional FSI beyond the permissible index at an extra charge of at least 50% of the area/ circle rates.

In the present scenario, FSI values in India vary from city to city however on an average it ranges between 1 and 4

(including all product mix residential, commercial, retail etc.). However, this is far below considering other cities in

the world; for example FSI in New York and Manhattan is 15, in Shanghai it is 13.1 and in Hong Kong (Central

Business District area) it ranges up to 15.

With respect to Indian cities, the concept of low rise-low density has worked well considering the fact that sufficient

land was available for horizontal growth. However with the exponential population growth and limited availability of

land parcels for urban/ rural sprawl, going vertical with high rise-high density seems to be an optimal solution. Butthis underlines the need for increased and stronger infrastructure considering additional load on services such water,

electricity, sewage, parking and most important security.


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previous FSI norm of 2, the built up space was 8 lakh square metre. Moreover, this move also resulted in an

estimated revenue of Rs. 13,000 crore from the sale of extra built-up space.

3.7.4.3. Andhra Pradesh Limitless FSI

Andhra Pradesh is one state that does not limit vertical growth and where there is no limit on the FSI. However to

check the pressure on the existing infrastructure in the surrounding area an additional fee called the Infra Impact

Fee is charged in case a building is required t o go beyond the specified height in that particular area as per the

building bye-laws. In this case the additional FSI can be built by paying an infra impact fee to the tune of Rs. 30-50

per square feet (on an average, it may differ from area to area). This additional collection by the corporation is then

utilised to improve the infrastructure of that area. The change has impacted the skyline of many cities in the state

and there is a visible shift from FSI of 1.75 (prior to 2006 when the new regulation came into being) to 4 to 6 in

peripheral cities and 3 to 4 in cities.

3.7.5. REVISED GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL ESTATE

DEVELOPERS

The real estate sector in India has been evolving consistently over the past few years. This transition from being a

highly unorganised business to an organised sector underlines the need to review varied accounting practices being

followed by the real estate companies. The introduction of the Guidance Note on Accounting for Real Estate

Transactions by the Institute of Chartered Accountants of India (ICAI) is a step forward in addressing subjectivity

and ambiguity in a number of areas, and is all likely to bring uniformity in accounting practices. The Note, which

supersedes the existing Guidance Note issued in 2006, will also ensure comparability of financial statements. The

objective of this Guidance Note is to recommend the accounting treatment by enterprises dealing in 'real estate as

sellers or developers.

3.7.5.1. Key changes

The scope of the Guidance Note has been significantly enlarged to capture all models/ structure of transactionsincluding sale of development rights, joint development arrangements and transactions involving exchange of land

with developed property.

3.7.5.2. Definition of project

A project is defined as a group of units/plots/saleable spaces which are linked with a common set of amenities in

such manner that unless the common amenities are made available and functional, these units/ plots/ saleable

spaces cannot be put to their intended effective use. A larger venture can be split into small projects if the basic

conditions as set out. The pre-conditions to be satisfied for Revenue Recognition are as follows:

all critical approvals necessary for commencement of the project have been obtained

expenditure incurred on construction and development is higher than 25% of the construction cost

(excluding land cost)


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at least 25% of the saleable project area is secured by eligible contracts or agreements

at least 10% of the total amount collectible in respect of an agreement to sell (ATS) has been so collected at

reporting date

revenue should be recognised for "legally enforceable contracts" only when there are no outstanding

defaults of the payment terms in such contracts.

3.7.5.3. Way Forward

Transition: long term projects where even a small portion of revenue has been recognised before 1 April

2012, will be continue to be accounted for on the basis of the existing guidance note. For the initial years,

the companies may have to keep two separate revenue recognition computations for projects pre and post

the implementation of the revised GN

Project: Identification of common set of amenities within a project would be key for evaluating the project

definition. Resultantly any reassessment of project definitions may lead to significant changes in the

revenues/ profit calculations.

Payment defaults: It is not clear if post balance sheet date defaults or payments to be considered. A

complete track of the defaults made by the customers need to be maintained on a real time basis.

Recognized revenues may result in subsequent reversal adjustments as a result of delayed cash inflows.

Impact on the tax assessments: One of the key considerations of this change should be acceptability of the

proposed accounting principles by the income tax authorities.

Communication with stakeholders: On deferral of revenue, some of the debt covenants may get broken.

Time and effective communication with different stakeholders is going to be a key in managing the transition

to the new accounting rules.

This new accounting development is a welcome step for the companies in the real estate sector. Apart

from bringing in some common set of principles for accounting, these new accounting rules will also take

into consideration the current uncertainties impacting the sector and shall ensure a more realistic picture

of revenues for these companies.

3.8. FINANCIAL SUPPORT TO THE SECTOR

In the Financial Years 2007-08, 2008-09 and 2009-10, the housing and real estate sector attracted FDIs of 8.9%,

10.3% and 11% respectively, of the total FDI in India. However, the financial year 2010-11 saw a mere 6% FDI in this


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sector. The year 2010 saw the Indian real estate sector spring back into action after the gloom and recessionary

pressures experienced in the aftermath of the global downturn.

India is ranked 20thin the list of worlds top real estate investment markets with investment volume of US$ 3.4

billion in 2012, according to the latest report titled 'International Investment Atlas' by Cushman & Wakefield. The

sector is set for robust inflows of US$ 4-5 billion from overseas investors in the next couple of years, with Bangalore,

Delhi and Mumbai emerging as the favorites, according to Jones Lang LaSalle, a global real estate consultancy giant.

Source: Department of Industrial Policy and Promotion

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2006 2007 2008 2009 2010 2011 2012 2013

2.70%

6.30%7.10% 7.40%

11.10%

5.70%

7.86%

5.95%

0.70%

3%

8.90%

10.30%11%

6%

2.00%

5%

%age of Total FDI in Construction Activities and Real

Estate

Construction Activities Real Estate


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3.9. SECTOR OUTLOOK

Classifying the Real estate sector into three segments - Residential, Commercial and Retail. In case of residential,

demand is determined by factors like property prices, interest rates, economic scenario determining the income

levels etc. whereas the demand for commercial as well as retail segments is directly related to the prevailing

macroeconomic environment.

The real estate in India is highly fragmented, capital intensive in nature and is yet to receive an Industry status.

Further,the sector has close linkages with the economy and therefore is highly sensitive to business cycles. A typical

real estate project has agestation period of three to four years and any unfavourable change in the macroeconomic

factors in the meantime canaffect the cash flows of the developer.

In FY13 the industry faced the headwinds like slow rate of approvals, regulatory changes in key micro market

Mumbai (pertaining to development control rules), inflation impacting cost structure, declining demand due to

increasing prices, etc., made the real estate sector continuing to stay fragile. New investments projects added in the

realty sector across the Asian country slumped by concerning 58% in the financial year ended March 2013 to

Rs.43151 crore from Rs.1,01,368 crore during the same period a year back, according to CMIE. Developers are even

facing lack of adequate sources for funding the project, which is executed through a mix of internal accruals, clientadvances, and debt. Funds from internal accruals are likely to be limited in nature in short to medium term owing to

current sluggish demand in realty sector, impacting the cash flows from ongoing projects. Customer advances, the

other source of funding, may not be available to fund the project in the initial stages. Thus, debt becomes the

principal source of funding for the project. The total exposure of banks calculated as percentage increase in

disposition towards the real estate sector has additionally followed a declining trend. Bank loans to real estate sector

have augmented solely by around 12% in FY12 against FY11 whereas, the same augmented by around 23% in FY11

against FY10 indicating the cautious outlook of the banks towards the sector.

To add to the current, foreign investors have conjointly become cautious in investing due to continued weakness in

the Indian rupee in an uncertain macroeconomic atmosphere. The rupee has weakened 6.27% against the US dollar

in the last fiscal and touched a record low of 68.75 on 28th

August 2013. As per RBI's data, FDI flows to India in real

estate activities in FY12 (provisional) has been USD 340 million vis--vis USD 444 million in FY11 (provisional). Since

these traditional sources of finance have dried up, developers approach non-banking financial companies (NBFCs) for

short-term debt and private equity (PE) funds. However, funds from NBFCs and PE investors are also declining as the

returns have been on the lower side and many PE investors are struggling to exit at decent returns.


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All the above-mentioned factors have resulted in liquidity crunch in the sector. The same can also be reflected from

the latest dispersion of credit ratings for real estate players rated by Credit Analysis & Research Limited (CARE).

It has been observed that primarily subdued demand, increasing construction cost, rising interest expense, and

delays in project approvals have dented the earnings and return ratios of real estate developers in India. Moreover,

drying funding sources have impacted the liquidity profile. As a result, the credit ratings of real estate developers

were impacted in FY13 and in such a scenario, most entities in the real estate sector fell in CARE BB [Double B]

category.

More than 50% of total outstanding ratings at the end of June 2013 in the real estate sector were below investment

grade. During FY13, around 30% of the outstanding ratings were downgraded, and only 11% were upgraded. The

sector has also some established and organized players with strong credit profile. Out of total portfolio of companies

rated by CARE 34% belong to investment grade rating.

Moving forward GDP growth for Q1 FY14 was 4.4, this might bottom out by Q2 of FY14. A gradual recovery is

expected most likely from Q4FY14. Further, inflation (wholesale price index) has

Again started rising, it was 5.79% for July 2013 as compared to 4.86% for June 2013 (4.70% May, 2013) and 7.55%

during May 2012. Since it was above RBIs 5% mark, the repo rate was left unchanged and MSF (and Bank Rate) was

raised to by 200 basis points to 10.25% which have led to rise in interest rates. The business confidence is at the

lowest level. Thus, making the sector outlook negative in the short term to mid-term.

0 1

7

26

43

16

2

4

0

5

10

15

20

25

30

35

40

45

50

CARE AAA CARE AA CARE A CARE BBB CARE BB CARE B CARE C CARE D

Percent

Source: CARE Rsearch

Rating Dispersion

Ratings


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Decline in interest rates and improvement in employment outlook can improve affordability and provide the much-

needed stimulus to demand within the real estate sector. Combination of the above factors and aggressive

marketing and valuation of inventory can facilitate the real estate players to stride on smoother ground and manage

cash flows in the coming period.

3.10.THE ROAD AHEAD

At present, up to 100 per cent FDI is allowed in the real estate sector through the automatic route, subject to

fulfillment of certain criteria. For housing plots, the project must have at least 10 hectares. Group-housing projects

(apartments) are eligible for FDI if the total built-up area is at least 50,000 square metres.

In June-end, the Reserve Bank of India eased the norms for external commercial borrowings in the affordable

housing sector. Among other things, the minimum experience required for developers was reduced from five years

to three years.

India has vast potential to draw in massive foreign investments into real estate. With real estate reaching some

extent of saturation in developed countries and therefore the demand and prices falling, global real estate players

square measure observing emerging economies like India for sound opportunities in real estate. Indian real estate

will stay attractive due to its sturdy economic fundamentals and demographic factors. Moreover, theres a high level

of global uncertainty looming over the developed and developing nations of the globe. While developed economiesare still struggling to regain their growth momentum, developing countries including India and China are expected to

grow at a reasonably high rate. The affordable housing sector offers vast opportunity for developers which do not

want to limit themselves to the comfort zone of high-end housing with huge profit margins. Investments in Indian

real estate will fetch higher returns for investors as compared to alternative global markets. In the coming years, the

opportunities in the real estate sector will attract more global players to India and therefore can facilitate the

industry to mature, become more transparent, improve management and adopt advanced construction techniques.

3.11.COMPANY ANALYSIS

3.11.1. GODREJ PROPERTIES LIMITED

3.11.1.1. OVERVIEW

Godrej Properties is a real estate development company involved in the business of residential, commercial and

township development.

The residential consists of various types of accommodation. The commercial includes office space catering to blue-
http://businesstoday.intoday.in/story/real-estate-watch-townships-benefits-developers-buyers/1/196131.htmlhttp://businesstoday.intoday.in/story/buy-property-house-deal-with-real-estate-developers-tricks/1/196114.htmlhttp://businesstoday.intoday.in/story/buy-property-house-deal-with-real-estate-developers-tricks/1/196114.htmlhttp://businesstoday.intoday.in/story/real-estate-watch-townships-benefits-developers-buyers/1/196131.html


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project in Kolkata- Godrej Prakriti.

09-MAY-13

Godrej Properties, one of the leading real estate developers announced Thursday the board of directors has

approved the sub-division of authorised capital of Rs 1.17 billion comprising of equity shares of Rs 10 each into 23.4

equity shares of Rs 5 each.

3.11.1.3. FINANCIALS

Profit & Loss - Godrej Properties Ltd.Mar'13 Mar'12 Mar'11 Mar'10 Mar'09

12Months 12Months 12Months 12Months 12Months

INCOME:

Sales Turnover 426.71 368.94 294.61 142.11 145.17

Excise Duty 0 0 0 0 0

NET SALES 426.71 368.94 294.61 142.11 145.17

Other Income 0 0 0 0 0

TOTAL INCOME 489.5 445.59 353.95 217.16 194.58

EXPENDITURE:

Manufacturing Expenses 228.75 254.13 216.47 103.85 64.45

Material Consumed 0 0 0 0 0

Personal Expenses 17.51 4.98 7.2 10.69 3.75

Selling Expenses 0 0 0 0 0

Administrative Expenses 40.27 28.33 14.98 14.15 9.97

Expenses Capitalised 0 0 0 0 0

Provisions Made 0 0 0 0 0

TOTAL EXPENDITURE 286.53 287.43 238.65 128.69 78.17

Operating Profit 140.18 81.5 55.96 13.43 67

EBITDA 202.96 158.16 115.3 88.47 116.41

Depreciation 3.54 3.18 3.54 2.45 1.07

Other Write-offs 0 0 0 0 0

EBIT 199.42 154.98 111.76 86.02 115.34

Interest 59.82 68.84 46.02 67.13 51.3

EBT 139.61 86.13 65.74 18.89 64.05

Taxes 16.44 22.96 49.32 36.9 31.3

Profit and Loss for the Year 123.17 63.17 16.42 -18.02 32.75

Non Recurring Items 0 18.27 89.82 139.86 41.99

Other Non-Cash Adjustments -0.5 -0.07 -0.08 -0.21 -1.01

Other Adjustments 0 0 0.08 0.21 1.01

REPORTED PAT 122.67 81.36 106.24 121.84 74.74

KEY ITEMS

Preference Dividend 0 0 0 0 0

Equity Dividend 31.23 23.41 31.43 27.94 15.1

Equity Dividend (%) 40.01 30 45 40 25

Shares in Issue (Lakhs) 780.46 780.37 698.5 698.5 604.2

EPS - Annualised (Rs) 15.72 10.43 15.21 17.44 12.37


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4.OVERVIEW OF INFRASTRUCTURE SECTOR

The growth of infrastructure as a sector is an important factor in deciding the strength of the economy of any

country. India is expected to become the worlds third largest economy by 2050 and therefore, a need for more

robust and vast infrastructure is imperative. The Infrastructure sector encompasses in its ambit sub sectors ranging

from roadways to airways, ports to airports, electricity, irrigation, water supply as well as sanitation.

The current fiscal year has seen the growth momentum becoming weak due to a record high current account deficit

and weakening rupee. The Indian government is looking to infuse money into the infrastructure sector in order to

bring the countrys economy back on track. The Infrastructure spend is likely to have a positive spiral effect to the

GDP growth and is likely to be one of the main lever to unleash Indias economic growth potential.

Infrastructure got a major thrust in Budget 2013-14 with a great deal of measures announced to boost the sector's

growth like raising Rs. 50,000 crore through tax-free bonds, setting up of major ports as well as restructuring of

state-owned power distribution companies. Another policy reform brought in by the government is the proposal to

facilitate complete or partial exit of sponsors in an ongoing or completed project. This step is expected to speed up

the execution of projects stuck due to lack of funds.

Since Inadequate infrastructure was recognized in the Eleventh Plan as a major constraint on rapid growth, therefore

the Planning Commission had set a $ 1 trillion target for investment in Infrastructure with an assumption that the

economy will grow at the rate of 9 per cent during the 12th Plan period. But, In view of lower economic

growth prospects, the Planning Commission recently announced that it will not be able to achieve $ 1 trillion target

for investment.

Environmental clearances and land acquisition are getting resolved gradually with the government taking steps to

resolve issues of clearances and land acquisition e.g. delinking of environmental clearance and forest clearance some

time ago.

The government has introduced various tools for the expansion as well as modernization of the sector, includingtarget-setting for numerous subsector, employing specific strategies and undertaking measures to support

investment, especially in the form of public-private

real estate, infrastructure & construction_2013

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