Indian Real Estate: How and Why a Trillion Dollar Economy
A recent industry survey reports the real estate sector estimated growth to USD 1 trillion by 2030. Realty+ analyses the factors contributing to such bullish outlook.
Research: Leandra Monterio & Sreyasi Maity
The quest for touching the dream figure of a trillion dollars seem to come to an end with the sector’s projected contribution to GDP going up from the present 7 per cent to 13 per cent in next ten years. The main reason is the investor and consumer confidence that is consistently growing with improved ranking in global real estate and stringent regulatory and fiscal reforms. GST on under-construction flats slashed to 5%, affordable housing to 1% and RERA laws enforced across the country have been the booster shots for revival of Indian realty sector.
The increase in transparency and accountability has made sure that, now it is only the financially disciplined builders who stand a chance of surviving in the current market scenario. For instance, distressed DLF’s promoter’s infusion of funds has substantially brought down the net to Rs 5513 crore at the end of October-December quarter 2018 and it now aims to become a zero-debt company by the end of 2019.
Some noteworthy developments are:
• By the end of June 2018, the industry witnessed around 200 co-working players offering around 400 shared workspaces across different parts of India.
Pradhan Mantri Awas Yojana (PMAY, Urban and Grameen) has a goal of building 20 million affordable houses by 31 March 2022 for urban poor through financial assistance of INR2 trillion.
• Student housing continues the upward trend as there has been a 67 per cent increase in the student population and a 29 per cent increase in the number of universities since 2010.
Modernization of real estate in recent times too has positively impacted the consumer interaction and transparency in transactions. Technologies that facilitate property search, marketing, EMI services and property agreements, payments & bookings are some of the developments. Blockchain, a dynamic encrypted and time stamped ledger of blocks (records) which offers reading rights to the public but editing rights only to the rightful user is also on the anvil.
Indian real estate is projected to be the third-largest market globally and the confidence of investors has resulted in private equity investments of 15 per cent year-on-year in January- March 2018. The main beneficiaries being tier 1 and 2 cities. The housing sector’s contribution to the Indian GDP is expected to almost double to more than 11% by 2020 and the relaxation in the FDI has driven private equity and debt investments in real estate to increase by 12% year-on-year in 2017.
Prominent 5 Satellite Towns
1. Sonipat- Kundli-Manesar-Palwal (KMP) Expressway, which is close to completion will offer speedier access to the international airport and enable the growth of a new financial corridor
2. Yelahanka, near Bengaluru saw its fortunes rise because of the growth of the IT sector
3. Pendurthi is a neighbourhood in the city of Visakhapatnam. The formation of the Visakhapatnam-Chennai Industrial Corridor is major growth driver in this region
4. Dwarka is the largest residential suburb in Asia and also has the largest rooftop solar plant in India.
5. Vikram City is the first planned city in the state of Madhya Pradesh.
Top 10 Investment Bonanzas
Private equity investments in Indian real estate estimated to grow to USD 100 billion by 2026 in tier 1 and 2 cities.
2. Of the total investments that have come in 2018, nearly 44 per cent are from foreign investors primarily from the US, Canada and Singapore. Also, over 90 per cent of the foreign investment has preferred commercial projects across Mumbai, Pune, Bengaluru and Hyderabad.
3. The average deal size of foreign investors is USD 149 million compared with domestic’s USD 87 million. These domestic investors have equally preferred commercial (USD 959 million) and residential (USD 870 million) projects.
4. Private equity investors invested around $4.9 billion or Rs 33,700 crore in the Indian real estate market during the January-June period of 2018.
5. In the first six months of 2018, $4.9 billion (Rs 33,700 crore) has been invested across 31 deals with an average investment per deal of $158 million (Rs 1,080 crore)
6. In the office space market, private equity investment was $2,784 million during the first six months of 2018
7. GIC, the sovereign wealth fund of Singapore government, has acquired Mumbaibased BSE- listed company, Nirlon that owned IT park. It also bought 50 per cent stake in Mumbai-based Sheth Developer’s Mall.
8. Morgan Stanley arm buys majority stake in Pune’s KSH Infra for ₹350 crore.
9. Private equity (PE) and venture capital (VC) exits jumped more than threefold to $472 million in February 2019.
10. PE and VC investments in February surged 51%, compared with the year-ago period, driven by larger big-ticket deals, that is, deals of $100 million or more.
Top 10 Housing Trends Boost
The demand for luxury houses is getting higher. Luxury housing is gaining more attention in metro cities. The revenue in India for the Smart Home market is pegged at US$870m and the average revenue per installed Smart Home is US$97.59.
2. Rising demand for affordable, compact and budget-friendly housing has led to the shrinking apartment sizes across top 7 Indian cities by almost 17 per cent between 2014 and 2018.
3. Mumbai Metropolitan Region topped with 27 per cent squeeze, followed by Kolkata with 23 per cent reduction and least decline of 12 per cent in Bengaluru
4. The top 10 developers’ market share to increase to 40 per cent in Mumbai from 20 per cent three years back.
5. Rentals have gone up 5-10 per cent annually across regions over the last five years, driven by high demand for Grade A office space.
6. The government has extended the timeline to avail tax deductions under section 80 IB-A by one year i.e, till March 2020.
7. Under the Pradhan Mantri Awas Yojana (PMAY) Urban, more than 6.85 million houses have been sanctioned up to December 2018.
8. Allocation to CLSS for economically weaker sections (EWS) and low income groups (LIG) by 54% to Rs 6,000 crore under PMAY-Urban.
9. Allocation to the mid-income group (MIG) segment has been reduced by 33% to Rs 4,000 crore. 10. New housing launches across top seven cities in India increased 32 per cent year-on-year by 2018 end to 193,600 units.
Top 10 International Business Forays
The expected 8-10 per cent annual return in the affordable segment of residential real estate is attracting not just Indian investors but also foreign entities from the U.S., Singapore and Canada.
2. Blackstone Group, one of the largest owners of commercial real estate in India, agreed to buy a majority stake in Aadhar Housing Finance – an affordable housing project, and committed 8 billion rupees ($112 million) of additional equity to the asset.
3. Piramal Enterprises and Ivanhoe Cambridge, the real estate arm of Canadian fund Caisse de dépôt et placement du Québec (CDPQ), announced a $70.15 million investment in Palava – a project of Lodha Group on the outskirts of India’s financial hub, Mumbai.
4. Canadian asset management firm Brookfield Asset Management is exploring roughly half a dozen residential real estate investments and it aims to nearly double its bets in the space to over $1 billion, from $450 million in the coming year.
5. The Abu Dhabi Investment Authority (ADIA), along with Hines Investments is poised to announce an investment in the affordable housing space
6. Tama Home, a leading developer of Japan, in partnership with Singapore-headquartered Developer Group, has forayed into India, with a recently launched gated residential project — Westwind in Chennai.
7. Tama Home has made public its plans to invest Rs 6,000 crore to develop over a dozen projects in five years. Tama Home President and Chief Executive, Yasuhiro Tamaki is bullish about India. According to Tamaki, besides building around 10,000 homes in the affordable and mid segment, the group has plans to take up smart city and hospitality projects.
8. A leading Chinese developer, Dalian Wanda Group has committed to invest $10billion in an industrial park in Sonepat (Haryana) in the high potential NCR. The company had signed an agreement with Haryana State Industrial & Infrastructure Development Corporation (HSIIDC) for the township that will cover 13 sq km in the first phase.
9. According to Donald Trump Junior, the group is chalking out ambitious plans to expand its footprint in India through branded residential and commercial office projects. The company that already has two projects in India- one in Mumbai in tie up with Lodha Group and another in Pune in tie up with Panchsheel Group, has recently announced its first commercial project in Gurgaon.
10. Saudi Arabia wants India to open up its real estate sector to foreign ownership, which will lead to investments of hundreds of millions of dollars in residential and commercial properties.
Challenges to Overcome
Notwithstanding the Indian economy’s projected robust growth of 8 -9 per cent over the next decade, the rising economic disparity in the country can derail the economic growth of the country. Government’s social-development efforts to sustain economic growth and make it more equitable and financial institutions initiatives for furthering financial inclusion are essential.
Corruption at macro level and lack of corporate governance at micro level in the system are the biggest leaks in the economic growth. The cultural transformation among the society at large, starting from the top of the pyramid are necessary to achieve the growth targets.
Quality of Education:
The technical education at higher levels and skill development at the lower levels is a drastic requirement for increasing employability in the sector. Additionally, improving the quality of education and that of graduates from universities is the demand of sector players in all areas. Partnering with corporate and private institutions is the way to go.
Aggressive Job Creation:
The aggressiveness towards creating jobs by the government is lacking. The focus should be on ensuring ease of business for private sector, especially start-ups. Availability of capital and minimizing red tape could fuel the kind of job creation that India needs.