Indian Real Estate:

Perspectives
PREPARED BY
SUKETU KOTHARI-07UP01
SUB:HOUSING POLICY AND FINANCE
3RD SEM,OCT 2008

A.P.I.E.D
BHAIKAKA CENTRE FOR HUMAN SETLEMENT
V.V.NAGAR

Demographics and Development

1.

Global urban population is expected to grow from 2.86

billion in 2000 to 4.98 billion in 2030, of which highincome nations will account for only 28 million out of
the expected increase of 2.12 billion (Source: UN-Habitat 2004)

2.

In India, 19.9% (in 2001 that translated to ~200

million) of total population lived in our urban areas, and
contributed 38.9% of GDP.

A simplistic but linked projection based on the two

statements above seems to indicate at least 500 million
of Indias 2030 population could be urban, but only by
assuming that the rural-to-urban population shift
remains static, and zero percent population growth!
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State of the Real Estate Market

The sector remains largely urban & semi-urban, and

again, largely unorganized
There are less than a dozen developers in the country
who are able to deliver relative quality, and operate in
niche territories, although a few amongst them are
seeking to expand their geographical footprint
The sector has recently shown explosive growth, and
this growth was not caused by increased FDI
Nevertheless, many (incl. FIIs) feel that prices are
overly rich and unsustainably high

State of the Real Estate Market

A key question: Is relative pricing predominantly set by

investors or end users? Industry sources say that end
user buying has gradually increased over the last ten
years (to 60+% from 35%)
India could do with a clutch of quality foreign developers
to offer much needed competition and improve the
quality of our (perhaps already improving) residential
and office offerings that mostly come to us from less
than a handful of Indian developers
Many of you are probably just as surprised as others
elsewhere how tenets of basic urban planning especially
related to primary infrastructure are so casually ignored.
This is true in both tier-1 and tier 2/3 cities
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State of the Real Estate Market

First time home buyer numbers have multiplied

The median age of home buyers has reduced from 38
years in the early 1990s to about 28 years today
The ready to migrate office worker (especially in
IT/ITES sector) would much rather now buy than rent,
even if stability of job & location in one city is not
assured
Low mortgage rates & easy access; many competing
players in the mortgage business

A Bubble in the Making?

Over last 12 months, some parts of the country have

seen land price surge by 40-45%
Investors who traditionally stayed out of real estate
are now acquiring a land bank in the hope of quick
profits
Many such investors are acquiring agricultural land in
multiple locations for conversion later, or sell such
land parcels to other investors or developers
However, does this apply to raw or even serviced
land, or only to developed single & multi family
homes?
Class A (& now, any) office space is in short supply
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A Bubble in the Making?

We all know that some segments of the market (retail

in particular - in some over reached parts of the
country), has cooled off
Has the projected incremental demand (200 million
sq. ft. by 2010) by IT/ITES caused the current volume
of new developments in this sector?
Even currently available/scheduled BTS office yields
will be seriously jeopardized if IT/ITES demand
projections are negatively impacted by as much as 710%

A Bubble in the Making?

Are developers (esp. office and residential) building &

expanding aggregate land bank in anticipation of a
continuing boom in one sector
In some cities, very high land prices make sensible
returns from development unrealistic, or at least very
difficult to achieve
Some recent land transactions (in urban areas panIndia) would point to such a situation

So, is this a Bubble - after all?

Probably not, for a variety of reasons

That does not mean a correction is not overdue in
certain selected regions
Tier 2 cities have potential to grow from where they
are today because prices are not rich, and their
populations have ample purchasing capacity, and
most of all, they also know what they want in terms
of layout, quality of fit-out, and design
Tier 1 cities pricing may or should(?) correct, or at the
very least, plateau

Reduced Developer Margins?

There is clear evidence though that while land prices

have risen sharply & finished product price may be
looking up, this is happening very selectively
Building material costs have also recorded increases
adding to developer woes
So, developer margins must be under pressure?
Niche developers of repute offering quality may yet
attain higher margins

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Reduced Developer Margins?

Land prices could plateau during a cool down period

while finished product prices catch up?
In many mature markets developers have to be
satisfied with un-leveraged returns of 5-7%, but India
has revealed the glimpse of much higher returns,
which though attractive, may reduce over time.
This explains the continuing interest of FDI in Indian
real estate

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Relevant Base Data

The Planning Commission is said to hold the view that

urban housing is currently short of ~9 million units
The Asian Development Bank believes that the deficit
will balloon to ~22 million units by 2007/8
Do the above statistics include all segments of
demand, incl. low/affordable housing?
It is thought that FDI may tend to eye the upper end
of the market, while the middle to affordable end of
the market may be just as attractive in absolute
terms!

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Relevant Base Data

Urban dwellers in India accounted for ~20% of

population in 2001, compared to ~18% in 1961
(China: 32-34% ~ 2001). While our economic
planners try and arrest the rural-to-urban shift, it is
currently a fact of life
Although it merits little comparison, a similar statistic
for urban dwellers in Western Europe or most of North
America would be 75-80%
The real estate sector in India is estimated to be
growing at just under 10% (development &
construction) and looking ahead this is an important
driver for GDP growth
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What does todays relaxed FDI

Policy allow?

FDI allows FIIs to invest in smaller developments (of

25 acres, relaxed from 100 acres)
100% investment in townships, housing, hospitality,
education, recreation, etc.
Some concessions for JVs with Indian companies

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What FDI Policy does not allow

Sale of un-serviced or un-developed plots

Access to re-furbishing and re-fitting existing
developments
Logistics for retail; Storage and warehousing

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Impediments to FDI in this

sector

Indian developers mostly have no need for offshore

capital, although some, arguably, could do with an
infusion of better development skill-sets
This is either because most Indian developers are
already adequately capitalized, or because cheaper
debt finance is liberally available
Besides, sale payment terms currently concede
adequate progress payments cash flow to the
developer

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Impediments to FDI in this

sector

There is a lack of a proper exit strategy.

A REIT form of exit would assist enormously
It is just possible that Indian REITS will become real
in the near future as intervening tax structures are
further rationalized and liberalized
This could potentially enable retail real estate
investors invest in REITS instead and let mature
developers play a meaningful role in a sustainable
market

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Impediments to FDI in this

sector

Although the Urban Land Ceiling Act 1976 was

repealed in 1999, many States have not complied in
repealing at State level. In some such States, the
ceiling is as low as 500-2000 sq. metres
Stamp duties continue to vary State to State, and in
any case some would even consider 8 (+1)% still far
too high and as a transactional cost, an obstacle to
home ownership.
Stamp duty + registration should not exceed 2-2.5%
The Central Govt. should do more to actively
persuade State Govts. to act coherently in this regard
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Impediments to FDI in this

sector

One of the most critical obstacles impeding FII

investment is the lack of transactional transparency
This remains the number one reason why FDI into this
sector remains low
The real estate sector in India is still largely
unorganized and partly as a result, prone to seeking
part cash payments to fund purchases
This is especially true in higher value properties

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Impediments to FDI in this

sector

This arises partly because the sector needs

unaccounted cash to lubricate the various approvals
process at different (lower?) levels
The high end property market attracts players who
are only able to pay (at least in part) for property with
unaccounted funds earned from business
The solution probably lies not just in overhauling the
tax system (where we have made good progress), but
in simplifying the approvals process for development

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Impediments to FDI in this

sector

However, as more and more first time buyers are raising

mortgage financing, the ubiquitous cash element will
hopefully disappear
It is even possible that buyers are not willing to pay
cash for real estate when financial institutions are
willing to lend against lower equity, and surplus cash if
any may be spent to support a consumer lifestyle
This situation is probably true of the affordable to mid
market housing (defined as Rs. 900-Rs. 1200 per sq ft price range)
Be that as it may, land deals in particular large value
deals, and high end housing is still plagued by a high
cash component

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Impediments to FDI in this

sector
Last and by no means the least, our urban
infrastructure is yet to catch up with
projected development. Indeed, it is sadly
true that infrastructure has not caught up
with existing development. The prospect of
more density without urban planning,
matching city infrastructure for roads, water,
waste disposal, power, education and public
transportation (to name a few), is daunting
and will remain our biggest challenge as we
move ahead
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Thanks

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