ndia?s realty mart is on a high growth path with a market size of about $15 billion and currently growing at a pace of about 30 per cent annually. The real estate market is projected to touch US$50 billion by the year 2008. Besides FDI inflow, corporates that turned sick a few years ago and sitting on large tracts of land are now bouncing back with renewed vigour on seeing the real estate prices reaching dizzying heights.

Reality funds galore

Typically realty funds enter the market with a lifecycle of 8-10 years and expect a yield of 30 per cent. However, consultants feel, returns may not be uniform across major cities for all types of projects. It varies from project to project depending on the demand-supply mismatch and land values in select areas in major cities. Land prices rose to astronomical levels recently in select cities, which acts as a deterrent for large scale development in city areas.

Image Recently the Anand Rathi Realty Fund announced the initial closing of its first scheme at Rs. 150 crores. The Fund, with a target corpus of Rs. 500 cr will focus on partnering with developers in tier II cities to cater to the growing demand for quality residential space in these cities and also earmark some investments in rental income yielding office properties. ?Our main focus is to invest in residential projects as they provide a self-liquidating exit for our investments unlike other asset classes such as shopping malls and hotels which require a mature secondary market that does not exist at present. We will be targeting gateway cities such as Coimbatore, Mysore, Pune, Ludhiana, Kanpur and Agra, etc., as these cities are the economic hubs in different parts of the country?, according to Sumit Anand, CEO, AR Venture Funds.

The fund is planning to launch $75 million overseas fund. ?This will consolidate our initiative to provide a fund based investment platform to global investors who are keen to diversify in Indian real estate assets?, says Amit Rathi, managing director, Anand Rathi Securities.

Incidentally retail investors have been left out in the race. Only institutional investors, banks, corporates and HNIs can invest in real estate funds. The only solution is to allow Real Estate Investment Trusts (REITs) on the lines of developed countries. If and when they are allowed, the ROI would enthuse investors and it can be traded like any other instrument. All eyes are now on SEBI, Reserve Bank and the Finance Ministry?s next move.

Residential property scenario

The residential property market is 80 per cent of the total real estate market in India and the gap between demand and supply is estimated at 41 billion sq ft. Considering that the office market is expected to increase to 66 million sq ft over the next five years, the paramount need to proportionately increase the residential supply need not be overstressed. Is an irony that major cities are ill equipped to handle such a large requirement within so short a time. Even though FDI in integrated township projects had been allowed under automatic route, not much impact has been felt across the country.

Global construction giants have already entered into strategic partnership in select cities for township development. There are still impediments at the state level with regard to zoning regulations, absence of single window clearance, rigid floor space index rules and prolonged delay in giving planning permission. Infrastructure is yet another major hurdle in cities like Bangalore, Hyderabad, Lucknow, Delhi, Mumbai and Chennai where unprecedented growth is being witnessed in real estate development.

Lower interest rates, easy availability of housing finance, escalating salaries and job prospects have been lending buoyancy to the residential sector. The net yields (after accounting for all outgoings) on residential property are currently at 4-6 per cent per annum. However, these investments have benefited from the improving residential capital values. As such, investors can count on potential capital gains to improve their overall returns. Capital values in the residential sector have risen by about 25-40 per cent per annum in the last 15-18 months.

Commercial property scenario

The increase in demand from the IT / ITES and BPO sector has led to approximately 20-40% increase in capital values for office space in the last 12-15 months across major metros, says Knight Frank India research. Grade-A office property net yields have come down from 12-14 per cent in 2003 and currently average around 10.5-11 per cent per annum. The fall in yields has resulted from decreasing interest rates and increasing appetite from investors. This has in turn resulted from abundant liquidity options available coupled with the acceptability of real estate as an conventional class of asset.

Retail scenario

Indian retail sector is a $210 billion pie, according to a recent survey by PricewaterhouseCoopers, which is witnessing a healthy pace of five per cent per annum. Of this, organised retail now accounts for only three per cent but is expected to growth to 10 per cent by 2010. The ongoing retail upsurge is expected to translate into 8 million new jobs over a period of five to six years. Though FDI in retail is still a far cry, Prime Minister Manmohan Singh?s assurance for a major decision in six months offers scope for opening up the sector to FDI. As rightly pointed by out by CII National Retailing Committee member Krish Iyer, organised retailing in India is expected to touch a whopping Rs 1,10,000 crore by 2010. If it were to happen, it would need about Rs 20,000 crore investments.


Outlook

India?s population is likely to cross 1.3 billion mark by 2020 and what is more, urban population is set to grow by 85 million over 10 years. The demand for dwelling units will grow to 90 million by 2020, according to ASSOCHAM report on real estate development, which in turn would require a minimum investment of $890 billion (Rs 40,05,000 crore). In such a scenario, the paramount need is to initiate a multipronged strategy to tackle the crucial issues plaguing the housing sector like reforms in legislation, infrastructure development and removal of barriers to ensure smooth implementation of projects.

There is no denying that with the liberalisation of FDI in real estate development and the entry of global players enormously aided by realty funds, real estate development will scale a new high in the coming years. And Indian consumers will have access to better product quality, quicker turnaround time of projects and more value for money. For investors of course, the search for higher returns will continue to accelerate the growing volumes across the Indian cities, driving improvements in market transparency and liquidity. After all for every rupee invested in housing, Re 0.78 is added to the GDP of the country.

Home ownership trends

The Indian consumer is upgrading from basic apartments of 900 ? 1,000 sq ft to an average of 1,500 sq ft
apartments, with high quality constructions, leisure amenities and services.
The average age of home ownership has come down from over 40 years to 32 years.
A number of business houses are investing in residential real estate.
Over the past four years, the home loan market has been growing at a compound annual growth rate of 40 per
cent.
Over $11 billion was disbursed in 2004 as home loans; the figure is projected to grow to $15 billion in 2005.
The furniture, furnishings and home products market is estimated at $5 billion. It is growing at 10-12 per cent a
year.

Courtesy: KSA Technopark

Highlights of FDI in real estate


A significant development in the FDI Policy for the real estate sector is the issuing of
Press Note 2 (2005) dated March 3, 2005 by the Government of India.


Allowing FDI up to 100 per cent under the automatic route for investment by non-residents in housing and real estate sector without obtaining approval from the Foreign Investment Promotion Board.

Lowering of minimum development size from 100 acres to 25 acres (10 hectares).

Minimum land area to be developed for serviced housing plots is 10 hectares.

Minimum built-up area for construction-development projects is 50,000 sq. mts.

Minimum capitalisation of US$10 million for wholly owned subsidiaries and US $ 5 million for joint venture with Indian partners.

Funds to be brought in within six months of commencement of business of the company.

Original investment can be repatriated only after 3 (three) years from completion of minimum capitalisation.

Investor can exit earlier with prior approval of the Government through Foreign Exchange Promotion Board (FIPB).

At least 50 per cent of the project must be completed within five years from date of obtaining statutory clearances. Investor cannot sell ?undeveloped plots?. Completion certificate to be obtained from concerned Local Body.

Project must confirm to norms and standards as provided under building control regulations, byelaws, rules and regulations of the State Government/Municipal/Local Body concerned. All necessary approvals to be obtained from concerned State Government/Municipal/Local Body.

Hi, do you know any contact details for people who they like to participate and invest in such prospective development projects with a high targeted ROI over the years

Thanks
Antonis

Hey,
Very informative post.I would like to add here few of my viewpoints..With property boom spreading in all directions, real estate in India is touching new heights. However, the growth also depends on the policies adopted by the government to facilitate investments mainly in the economic and industrial sector. The new stand adopted by Indian government regarding foreign direct investment (FDI) policies has encouraged an increasing number of countries to invest in Indian Properties.Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons.The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate in India is seemingly the most lucrative ground at present. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden change in investment policies, the overseas firms can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space.Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards.