The sector faces a number of structural as well as policy bottlenecks that need to be removed at the earliest if the growth momentum has to be maintained.
“This is a turning point in the Indian economy. FDI restrictions have been relaxed and real estate sector now offers tremendous potential.”
– Pranay Vakil, Chairman, Knight Frank India.
Probably, no other sector has generated the kind and amount of interest, both nationally as well as internationally, as the real estate sector in India, in recent times. A surge in demand for residential as well as commercial properties has seen the domestic realty sector clock ‘super’ growth of over 30% during the past couple of years; the rate, hardly any other sector could rival.
The boom has been on the back of a strong economy that has grown at a robust over 8% during the last two years, continued growth of IT and ITES industry, the happening retail sector, thrust on infrastructure development and special economic zones, rising disposable incomes, a change in the mindset of traditional Indian middle class for owning a house, and last but not the least, a slew of reform measures that include 100% FDI in construction and serviced land development. No doubt, they all have played a vital role in the revival of what was once almost a moribund sector.
Strong growth prospects of the sector have already attracted a number of foreign investors and real estate developers into the country. The boom is attracting investors and property developers, globally, as they make a beeline to get a pie in India’s burgeoning realty market. From big global property developers like Emmar to private equity biggies like Goldman Sachs, Morgan Stanley, JP Morgan and Blackstone Group have already entered the fray in order to capitalize on, what experts say, strong demand for commercial property across Tier I cities, high capital and rental value appreciation etc.
According to a FICCI report, increased demand and IT, ITES and BPO sector has led to an appreciation of approx. 20-40% for capital value for office space in the last 12-15 months. In the residential property market, the yield on an average to a developer is 25% to 40% on investment deployed or 10 to 15% on turnover while for an investor the figure comes to 20 to 30%. Organized retailing is going to add further impetus to the realty market in India in the near future. As per the report, presently additional 46 million sq.ft. for malls and multiplexes is being added in India out of which 32 million sq.ft. is spread across seven major Indian cities.
Experts say that FDI to the tune of $10 billion is likely to enter the Indian realty space in the next couple of years. That is a far cry from the 90s, when it was mere $2-3 billion a year. The FDI in the real estate has grown at 18% between 2004 and 2005. And, if industry experts are to be believed, Indian property market, which is currently worth the size of $12 billion, is set to more than quadruple in the next few years. According to Rohan Narse, CEO and Managing Partner, Indian Ocean Ventures, an India-focused real estate advisory and co-investment firm with offices in London and Mumbai, “this market is probably going to be a $50 billion to $55 billion market by 2010.” A major driver would be the IT and ITES sector. According to FICCI, the ITES sector alone would require space of approx. 100 million sq.ft. by 2008.
What adds to the importance of this sector is the fact that the growth in the real estate has a rub-off effect on other allied sectors such as construction, cement, steel and so on. The growth is also crucial from job creation standpoint, given the fact that it is the second largest employer in the country, next only to agriculture.
Structural Bottlenecks
However, the sector faces a number of structural as well as policy bottlenecks that need to be removed at the earliest if the growth momentum has to be maintained. First and foremost, according to CII, though the real estate and its allied sectors are contributing 30% to the GDP, it is not officially recognized as an industry. Red Tapism is another issue affecting the industry. Further, there is no proper system of maintaining land records. Tenancy laws are archaic and outdated. Higher stamp duties are another major issue which discourages proper registration of properties by buyers and hence results in loss of revenues for the exchequer.
Land reforms are the need of the hour. Also, in the wake of tightening of interest rates in the country and spiraling property prices, both commercial as well as residential space is further posing threat of an impending slowdown. However, these are only indicative of the long list of issues that have restricted the growth of the realty sector in the country. Yet, it is one of the key sectors of the economy, and is expected to witness increased activity in the coming days, given the fact that a majority of the country’s population still does not own a house.
As per the Tenth Five Year Plan, there is a huge shortage of 22.4 million dwelling units out of which more than 70% dwelling units are for middle and low income brackets. And the coming days are going to see increased inflows in the sector with the Government alone planning houses for all by 2012 under its habitat policy at an estimated investment of Rs.400,000 crore ($800 billion). Also, with property prices escalating across tier I cities, more and more IT, ITES and BPO companies are either moving or planning to venture into tier II cities, which could drive realty markets over there.
N Janardhan Rao, Senior Economist.
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