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“INDIAN REAL ESTATE INDUSTRY”

Research on Real Estate Development

Dissertation Submitted to the

Padmashree Dr. D.Y. Patil University
in partial fulfillment of the requirements for the award of the
Degree of
MASTERS IN BUSINESS ADMINISTRATION

Submitted by:

Kumar Agnani

(Roll No. 64)

Research Guide:

Prof. Manish Rai

Department of Business Management

Padmashree Dr. D.Y. Patil University

CBD Belapur, Navi Mumbai April 2009

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CERTIFICATE

This is to certify that the dissertation entitled “ Indian Real Estate Industry

and its Development ” is the bona fide project work carried out by Mr.

Kumar M. Agnani student of Masters of Business Administration, at

Padmashree Dr. D.Y. Patil University’s Department of Business

Management during the year 2007 -2009, in partial fulfillment of the

requirements for the award of the Degree of Master in Business

Management and that the dissertation has not formed the basis for the

award previously of any degree, diploma, associate ship, fellowship or any

other similar title.

Signature of Director Signature of Project Guide

Place: Mumbai

Date:

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DECLARATION

I hereby declare that the dissertation “Indian Real Estate Industry”

Submitted for the MBA Degree at Padmashree Dr. D.Y. Patil University’s
Department of Business Management is my original work and the
dissertation has not formed the basis for the award of any degree,
associate ship, fellowship or any other similar titles.

Place: Navi Mumbai

Date:

(Kumar Agnani)

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“Acknowledgement is an art, one can write glib stanzas without meaning a

word, on the other hand one can make a simple expression of gratitude.”

I take the opportunity to express my gratitude to all of them who in some or

other way helped me to accomplish this challenging project in Real Estate
Industry. No amount of written expression is sufficient to show my deepest
sense of gratitude to them.

I am very thankful to Guide Prof. Manish Rai, and very grateful to, Faculty
Department of Business Management, Padamshree Dr. D.Y.Patil
University, Belapur for their everlasting support and guidance on the
ground of which I have acquired a new field of knowledge. The course
structure created for this curriculum has benefited with the inclusion of
recent development in the organizational and managerial aspects.

KUMAR AGNANI

MBA (Core, Marketing)

ROLL NO. 64

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TABLE OF CONTENTS

Chapter. Page.
No Title No.

A List of Tables A

B List of Abbreviations B

1 Executive Summery 14

2 Objectives of the Study 17

3 Research Methodology 19

4 Literature Review 23

5 An Introduction 24

5.1 Introduction 25

5.2 Real estate regulations 26

6 Indian Real Estate Industry – An Insight 34

6.1 Background 35

6.2 MAJOR MARKET PLAYERS 37

6.3 Size 38

6.4 Structure 39

6.5 Growth Rates 39

6.6 Statistical Data 42

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6.7 Regulations and Foreign Ownership 43

6.8 Various Industrial Conditions 50

6.9 Foreign Tie-Ups 51

6.10 Current Deals 53

7 Indian Real Estate Industry – Current Scenario 55

7.1 Current Scenario 56

7.2 Current demand and supply 58

7.3 Property Price Charts Of Major Cities 63

7.4 EVOLUTION OF THE MARKET 65

7.5 ENTRY STRATEGIES AND MODELS 67

8 FDI In Indian Real Estate Industry 72

8.1 The Foreign Investment Boom 73

8.2 FACT SHEET ON FOREIGN DIRECT INVESTMENT 78

Conditions for Foreign Investment in Real Estate

82
8.3 Sector in India

Factors Affecting The Indian Real Estate

84
9 Industry

10 Major Market Players 88

10.1 Sobha Developers 89

10.2 Peninsula Land 91

10.3 Marg Construction 93

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TABLE OF CONTENTS (Contd)

Chapter.
Page.No.
No Title

10.4 Prajay Engineers Syndicate 95

10.5 D S Kulkarni Developers 97

10.6 Arihant Foundations & Housing 99

11 Research on Emerging Real Estate Market 101

12 Indian Real Estate Industry – SWOT Analysis 106

12.1 STRENGHTS 108

12.2 WEAKNESSES 114

12.3 OPPURTUNITY 118

12.4 KEY THREATS 119

“The Ground Floor” - Real Estate Industry And

123
13 Recession

13.1 RECESSION 127

13.2 Slowdown across sectors 129

13.3 Real estate & Recession 130

13.4 Indian real estate sector in recession mode 134

13.5 MIGHTY BUILDERS TUMBLE 139

“RENOVATING REAL ESTATE” -EFFORTS TO 151

14 COUNTER RECESSION

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14.1 EFFORTS TO COUNTER RECESSION 158

15 Conclusion 165

ANEXTURES 168

Reference 169

Bibliography 170

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LIST OF TABLES
No. Title Page.
No.

5.1 Turnover of Automobile Manufacturers 32

5.2 Key regulations in the real estate sector 35

6.1 Major Market Players 40

6.2 Industry Profile 41

7.1 Demand forecast 59

7.2 Demand forecast 60

7.3 Cumulative Office supply across 7 Key Cities Across 63

India

7.4 Addition in retail Space 65

8.1 Amount of FDI inflows(In Rs. Crore) 83

8.2 FDI Equity inflows during calendar year 2007 84

11.1 Research Nominees 106

12.1 Long Term Growth Rates 116

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LIST OF FIGURES

No. Title Page.

No.

6.1 Real Estate Developers Planning Exponential Growth 43

6.2 Indian Real Estate market Growth Drivers 44

6.3 Growth Potential and Expected Trends 45

7.1 Distribution of India New Office Space by 2008 64

7.2 India’s Mall space to rise fourfold in three years 65

11.1 Chart 1 107

11.2 Chart 2 108

11.3 Chart 3 109

12.1 SWOT Analysis 111

12.2 Favourable Demographics 113

12.3 Growth Chart (FCI) 115

12.4 Role Of Aggregators 119

12.5 Market Oppurtunities Snapshot 121

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12.6 Interest Rate Movement For 25 Years 122

12.7 Decreasing Spreads 125

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LIST OF ABBREVIATIONS

ABBREVIATION FULL FORM

SEZ Socio-economic zone

CRZ Coastal Regulation Zone

CAGR Compounded Annual Growth Rate

CAN Controller Area Network

FDI Foreign Direct Investment

GDP Gross Domestic Product

IT Information Technology

MNC Multi National Corporation

R&D Research & Development

Strength, Weakness, Opportunity &

SWOT Threats

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Chapter 1
Executive Summary

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EXECUTIVE SUMMARY

Indian real estate has huge potential demand in almost every sector
especially commercial, residential, retail, industrial, hospitality, healthcare
etc. Commercial office space requirement is led by the burgeoning
outsourcing and Information Technology Industry. The leaders of the
IT/ITES world have set up or are setting up their centers in India. Estimated
demand from IT/ITES sector alone is expected to be 150mn sq.ft. of space
across the major cities by 2010. In residential sector there is housing
shortage of 19.4 million units out of which 6.7 million are in urban India.
The increase in purchasing power and exposure to organized retail formats
has redefined the consumption pattern. As a result the country has
experienced mushrooming of retail projects across the cities.The main
growth thrust is coming due to favorable demographics, increasing
purchasing power, existence of customer friendly banks & housing finance
companies, professionalism in real estate and favorable reforms initiated by
the government to attract global investors.

India, like many other parts of the world is zooming away in the face of a
real estate boom. In India there is a real estate boom in any direction you
wish to see. Whether it is Bangalore, Pune, Calcutta or Chennai or
Hyderabad or even already sky high Mumbai and Delhi - the story is the
same. Now apartments are more than just houses. They are about lifestyle.
So while the first housing colonies had nothing but a security guard, these
new housing colonies have a gym (spa, jacuzzi, steam), swimming pool
(heated, lined with Italian marble). Some have a multiplex, shopping

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complex. There are those which offer a servant entrance. The next step is
creating an ambience.

Along the length and breath of India, there are many small and big Indian
real estate companies. Each has a geographical stronghold, but there are
also bigger companies, which have a national presence. There are
innumerable agents, brokers, architects, property consultants, builders and
home finance companies in the metros and smaller cities. Indian real estate
news is hot news in the global real estate market. And Indian real estate
companies have geared up to meet the high demand from domestic as well
as international buyers. If you are looking for a reputed Indian real estate
company to help you with your property dealing, look no further. The
development of real estate in India focuses on two primary areas: retail and
residential. The global real-estate consulting group Knight Frank has
ranked India 5th in the list of 30 emerging retail markets and predicted an
impressive 20 per cent growth rate for the organized retail segment by
2010.The organized segment is expected to grow from a mere 2 per cent to
20 per cent by the end of the decade, it said.

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Chapter 2
Objectives of Study

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OBJECTIVES OF THE STUDY

Management Objective

To fuel initiative and foster activity by allowing individuals freedom of action

and innovation in attaining defined objectives.

People Objective

To help HCL Insys people share in the company’s success, which they
make possible; to provide job security based on their performance; to
recognize their individual achievements and to help them gain of
satisfaction and accomplishment from their work.

Core Values

♦ It is uphold the dignity of individual

♦ It is honour all commitments
♦ It is committed to quality, Innovation and growth in every endeavor
♦ It is responsible Corporate Citizens.

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Chapter 3
Research Methodology

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RESEARCH PROBLEM

• Real Estate Corporate facing financial crunch.

• Decreasing business of Real Estate Companies

RESEARCH DESIGN

• Determined the Information Sources: The researcher gathered

data through secondary sources.

• PRIMARY DATA is collected through questionnaire, search and

research from developers and market watchers.

• SECONDARY DATA is being search sites like magazines,

newspapers, journals, websites and the data has been collected
through other approaches.

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DATA COLLECTION

The researcher collected information through the official websites,

magazines and journals.

DEVELOPED THE RESEARCH FRAME:

This included deciding upon various aspects for the project on which
the entire research is based. The research frame included:

NATURE OF STUDY

The project on which the researcher worked is descriptive and inferential

in nature.

DATA SOURCE:

The researcher took the help of both primary as well as secondary

sources. Secondary sources being interaction with various Real Estate
people of the selected and has been chosen for the research by the
researcher. Secondary sources being the internet as the medium and
the official sites of the companies of Real Estate sectors and corporate
selling and feedback on real estate Companies.

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INSTRUMENT USED

The researcher for the research used a Questionnaire cum Schedule for
market research for both the segments horizontal and vertical. The
Questionnaire was prepared by the researcher and Schedule was
provided by the company in which the researcher did its research report.

SAMPLE SIZE

Sample size for the research is fixed. It counts to 30. That is the Real
Estate companies and Developers and feed of Real estate in
comparison between other sectors.

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Chapter 4
Scope of Study

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SCOPE OF THE STUDY

The study is to know the latest crisis faced by the real estate companies
and how it can effect the growth of the country. The study is to also
determine the demand and future expectation of real estate companies.

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Chapter 5
Real Estate – An Introduction

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5 1INTRODUCTION

“It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint,
and I just love real estate.” – Donald Trump

1.1.1 What is Real Estate ?

The most basic definition real estate is "an interest in land". Broadening
that definition somewhat, the word "interest" can mean either an ownership
interest (also known as a fee-simple interest) or a leasehold interest. In an
ownership interest, the investor is entitled to the full rights of ownership of
the land (for example, to legally use and transfer the title of the
land/property), and must also assume the risks and responsibilities of a
landowner (for example, any losses as a result of natural disasters and the
obligation to pay property taxes). On the other side of the relationship, a
leasehold interest only exists when a landowner agrees to pass some of his
rights on to a tenant in exchange for a payment of rent. If you rent an
apartment, you have a leasehold interest in real estate. If you own a home,
you have an ownership interest in that home. Some jurisdictions recognize
other interests beyond these two, such as a life estate, but those interests
are less common in the investment arena.

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As a real estate investor, you will most likely be purchasing ownership

interests and then earning a return on that investment by issuing leasehold
interests to tenants, who will in turn pay rent. It is also not uncommon for an
investor to acquire a long-term leasehold interest in land, which then has a
building constructed upon it. At the end of the land lease, the land and
building become the property of the original land-owner.

5.2 Real estate regulations

1.2.1 Central laws

1.2.1.1 Laws relating to land acquisition

The Urban Land (Ceiling and Regulation) Act, 1976 prescribes the limits to
urban areas that can be acquired by a single entity. It has, however, been
repealed in some states and union territories under the Urban Land (Ceiling
and Regulation) Repeal Act, 1999. Further, land holdings are subject to the
Land Acquisition Act, 1894, which provides for the compulsory acquisition
of land by the central Government or the appropriate state Government for
public purposes, including planned development and town and rural
planning. However, any person with an interest in such land has the right to
object to such compulsory acquisition and the right to compensation.

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1.2 1.2 Laws regulating transfer of property

Transfer of Property Act, 1882

Transfer of property, including immovable property, between living persons,

as opposed to the transfer of property by the operation of law, is governed
by the Transfer of Property Act, 1882 (TP Act). The TP Act establishes the
general principles relating to the transfer of property, including among other
things, identifying the categories of property that are capable of being
transferred, the persons competent to transfer property, the validity of
restrictions and conditions imposed on the transfer, and the creation of
contingent and vested interest in the property.

Registration Act, 1908

The Registration Act, 1908 (‘Registration Act’) has been enacted to provide
public notice of the execution of documents affecting transfer of interest in
immoveable property. The purpose of the Registration Act is to conserve
evidence, assurances, title, and publish documents and prevent fraud. It
details the formalities for registering an instrument. Section 17 of the
Registration Act identifies documents for which registration is compulsory
and includes, among other things, any non-testamentary instrument which
purports or operates to create, declare, assign, limit or extinguish (whether
in present or in future) any right, title or interest (whether vested or
contingent) in immovable property of the value of Rs100 or more, and a
lease of immovable property for any term exceeding one year or reserving
a yearly rent. A document will not affect the property comprised in it, nor be

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treated as evidence of any transaction affecting such property (except as

evidence of a contract in a suit for specific performance or as evidence of
part performance under the T.P. Act or as collateral), unless it has been
registered.

The Indian Stamp Act, 1899

There is a direct link between the Registration Act and the Indian Stamp
Act, 1899 (‘Stamp Act’). Stamp duty should be paid on all documents
specified under the Indian Stamp Act and at the rates specified in the
Schedules there under. The rate of stamp duty varies from state to state.
The stamp duty is payable on instruments at the rates specified in
Schedule I of the said Act. The applicable rates for stamp duty on these
instruments, including those relating to conveyance, are prescribed by the
state legislation. Instruments chargeable to duty under the Stamp Act,
which are not duly stamped, are incapable of being admitted in court as
evidence of the transaction contained there in. The Stamp Act also
provides for impounding of instruments which are not sufficiently stamped
or not stamped at all.

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Table 5.1 : Stamp Duty And Legal Costs

The Easements Act, 1882

The law relating to easements is governed by the Easements Act, 1882

(‘Easements Act’). The right of easement is derived from the ownership of
property and has been defined under the Easements Act as a right which
the owner or occupier of land possesses for the beneficial enjoyment of
that land and which permits him to do or to prevent something from being
done in respect of certain other land not his own. Under this law an
easement may be acquired by the owner of immovable property, i.e. the
dominant owner, or on his behalf by the person in possession of the
property. Such a right may also arise out of necessity or by virtue of a local
custom.

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1.2.1.3 Laws relating to employment

The employment of construction workers is regulated by a wide variety of

generally applicable labour laws, including the Contract Labour (Regulation
and Abolition) Act, 1970, the Minimum Wages Act, 1948, the Payment of
Bonus Act, 1965, the Building and Other Construction Workers (Regulation
of Employment and Conditions of Service) Act, 1996 and the Payment of
Wages Act, 1936.

1.2.2 State laws

1.2.2.1 Urban development laws

State legislations provide for the planned development of urban areas and
the establishment of regional and local development authorities charged
with the responsibility of planning and development of urban areas within
their jurisdiction. Real estate projects have to be planned and developed in
conformity with the norms established in these laws and regulations made
there under and require sanctions from the government departments and
developmental authorities at various stages. For instance, in certain states
such as Haryana, for developing a residential colony, a licence is required
from the relevant local authority. In cases where projects are undertaken on

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lands which form part of the approved layout plans and/or fall within the
municipal limits of a town, generally the building plans of the projects have
to be approved from the concerned municipal or developmental authority.
Building plans are required to be approved for each building within the
project area. Clearances with respect to other aspects of development such
as fire, civil aviation and pollution control are required from appropriate
authorities, depending on the nature, size and height of the projects. The
approvals granted by the authorities generally prescribe a time limit for
completion of the projects. These time limits are renewable upon payment
of a prescribed fee. The regulations provide for obtaining a
completion/occupancy certificate upon completion of the project.

1.2.2.2 Agricultural development laws

The acquisition of land is regulated by state land reform laws, which

prescribe limits up to which an entity may acquire agricultural land. Any
transfer of land which results in the aggregate land holdings of the acquirer
in the state to exceed this ceiling is void, and the surplus land is deemed,
from the date of the transfer, to have been vested in the state government
free of all encumbrances. When local authorities declare certain agricultural
areas as earmarked for townships, lands are acquired by different entities.
After obtaining a conversion certificate from the appropriate authority with
respect to a change in use of the land from agricultural to non-agricultural
for development into townships, commercial complexes etc. such ceilings
are not applicable. While granting licences for development of townships,

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the authorities generally levy development/ external development charges

for provision of peripheral services. Such licences require approvals of
layout plans for development and building plans for construction activities.
The licences are transferable on permission of the appropriate authority.
Similar to urban development laws, approvals of the layout plans and
building plans, if applicable, need to be obtained.

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Table 5.2 : Key regulations in the real estate sector

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Chapter 6
Indian Real Estate Industry – An Insight

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6.1 BACKGROUND

India is considered the birthplace of the number zero. In recent years,

however, the subcontinent has hit the headlines with rather larger numbers.
Home to roughly 1.1 billion people, India is the second most populous
country after China and is expected to overtake it by 2030. Its economic
transformation over the past decade has pushed up real GDP growth to an
average of 6% p.a. since 1992.

Indian realty sector will grow from US$ 12 billion in 2007 to US$ 90
billion by 2015.

The size of the real estate industry in India is estimated to be around $12
billion. And iti s continuously growing at the rate of 30% for the last few
years. Almost 80% of real estate developed in India is residential space
and the rest comprises of office, shopping malls, hotels and Hospitals. The
main reason for growth is mainly due to off-shoring business, including high
end technology consulting, call centers and software programming houses
which covers 15 million square feet of real estate development.

With an ever increasing influx of funds, the real estate sector in India is
growing bigger. In the first half of 2007, there will be atleast 20 more funds
making an entry in India while 35 big ticket foreign funds have already
made their presence in India. Northbridge Research expects that the Indian

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realty sector will grow from US$ 12 billion in 2007 to US$ 50 billion in 2010
and to US$ 90 billion by 2015. Global funds like Carlyle, Blackstone,
Morgan Stanley, Trikona and Warbus Pincus are sitting on a total corpus of
US$ 12-15 billion. Even the most aggressive retailers expands their
business creates a huge demand for real estate.

The real estate development in India focuses on two primary areas : Retail
and Residential. Northbridge research has predicted growth rate of 20% in
the organized retail segment by 2010. Lot of foreign players are attracted to
invest in real estate market in India. Examples are : Morgan Stanley Real
Estate has invested $68 million in mantri Developers private limited, a
private Banglore based Real Estate Developer.Vancouver-based Royal
Indian Raj International Corporation (RIRIC) will invest $2.9 billion in a
single real estate project named Royal Garden city in Banglore over a
period of ten years and the retail value of project is estimated at $8.9
billion.

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Table 6.1 : Market Players

6.2 MAJOR MARKET PLAYERS

Real Estate Developers

Construction Companies

Corporate Houses

Property consultants

Real Estate brokers

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Housing finance companies

Banks & Financial Institutions

Architects

Vendors & Suppliers

Table 6.2 : Industry Profile

6.3 SIZE

Real Estate and Construction is a $12 billion (by revenue) industry in

India.

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The industry has seen a rapid growth in the past few years.

6.4 STRUCTURE

In India, Real Estate sector is fragmented market

- Most real estate developers have only a local or regional presence

- There is participation of large corporations in these sector

- India has higher margins (20%) as compared to the developed markets

(5-6%).

Institutional finance in Real estate is just beginning.

Various foreign Real Estate and Finance companies like GE Commercial

Finance, Tishman Speyer, Ascendas and Farallon Capital have entered the
Indian market.

6.5 GROWTH RATES

Real Estate sector is growing at an annual growth rate of 30%

Returns in India range between 12-15% compared to 3-4% in the

advanced countries.

Northbridge research estimates that the 70% of the new construction will
be for the IT sector.

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Figure 6.1 : REAL ESTATE DEVELOPERS PLANNING EXPONENTIAL

GROWTH

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Figure 6.2 : Indian Real Estate market Growth Drivers

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Figure 6.3 : Growth Potential and Expected Trends

6.6 STATISTICAL DATA

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The growth in commercial office space requirement is mainly due to

outsourcing and Information Technology (IT) industry.

Northbridge research estimates that there is going to be housing

shortage of 19.4 million units out of which 6.7 million are in urban India.

Even the purchasing power and exposure to organized retail markets

has increased the scope of the market.

Projections are made that US$ 10 billion will be injected into Indian real
estate sector in the next 12 to 18 months.

Almost over 90 foreign investors are already in the country to tap

investment avenues.

Nearly 12 US funds are raising US$ 3.5 billion for investments in Indian
realty.Those raising the funds include Wall Street powerhouses such as the
Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup
PropertyInvestors (US$ 125 million), Morgan Stanley (US$ 70 million) and
GE Commercial Finance Real Estate (US$ 63 million).

Organised retail is currently 4.6% of the US$ 270 billion Indian retail
sector whichis expected to grow at the rate of 37% in 2007 and 42% in
2008.

6.7 REGULATIONS AND FOREIGN OWNERSHIP

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Till recently, FDI in real estate was restricted to development of industrial

parks, hotels, integrated townships and SEZ’s. From March 3, 2005
onwards, Government of India replaced the integrated township policy to
permit FDI upto 100% in townships, housing, built-up infrastructure &
construction – development projects.

A significant change is the lowering of the minimum development size from

100 acres to25 acres. The lower threshold is more manageable for a first-
time foreign investor. Further, there are limited holdings of 100-acre plots
available in major cities. Another significant change is the removal of
sectoral restrictions. The scope is expanded to cover residential,
commercial or shopping malls. The new guidelines for India can trigger an
investment of $1-1.5 billion annually. IT and IT-enabled services would
require an estimated 50-70 million sq ft of space in the next two to three
years, while the nationwide housing shortage is estimated at 20 million
residential units.

The FDI in Indian real estate sector is permitted through the automatic
route across all real estate segments except agricultural and plantation
properties subject to the conditions mentioned below :-

i. Investment

 Minimum Capitalization

- for wholly owned subsidiaries - US$ 10 million

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- for Joint Ventures with Indian Partners -US$ 5 million, to be brought

in within 6 months of commencement of business.

 Original Investment cannot be repatriated before a period of three

years from completition of capitalization.

 The investor may exit earlier with prior approval from Foreign
Investment Promotion Board (FIPB).

ii. Minimum Area Requirements:

The minimum area to be developed under each project would be as

follows:

 Minimum land area to be developed is case of serviced housing plots

is 10 hectare or approximately 25 acres.

 In case of construction development projects, a minimum built-up

area of 50,000 sqm.

 In case of a combination of the above two projects, any one of the

above two conditions should suffice. This limit has been brought
down from 100 acres that was required to invest in integrated
townships subject to FIPB approval.

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iii. Time Frame & Rules

 Atleast 50% of the project to be developed within 5 years from

the date of obtaining all statutory clearances.

 Investor cannot sell undeveloped plots- where roads, water

supply, street lighting, drainage, sewerage and other
convenience are not available.

iv. Other Legal Compliances

 The Foreign company intending to invest shall be registered as

an Indian Company under Companies Act 1956. In case of
joint ventures, an SPV other than the parent company of the
joint venture partners needs to be formed to invest in real
estate.

 Development of at least 50 per cent of the integrated project

within a period of five years from the date of obtaining all
statutory clearances has to be completed instead of from the
date of procurement of land. The investor would not be
permitted to sell underdeveloped plots (where roads, water
supply, street lighting, drainage, sewerage and other
conveniences have not been made available). The investor
must provide these infrastructures and obtain the completion

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certificate from the concerned local body/service agency before

being allowed to dispose of the serviced housing plots.

 The project shall conform to the norms and standards,

including land use requirements and provision of community
amenities and common facilities as laid down in the applicable
building control regulations, by-laws, rules and other
regulations of the State Government/Municipal/Local Body
concerned.

 The State Government/ Municipal/ Local Body concerned,

which approves the building/development plans, will monitor
the developer’s compliance to the above conditions.

v. Other Amendments

 IT/Business Park: Foreign investment in IT parks subject to

such IT parks providing space to atleast 3 tenants.

 Industrial/Logistics/Warehousing: FDI policy in these

properties is liberalized and now foreign investors can invest
in them at the construction stage subject to a minimum of
50,000 sqm.

In addition to the above, the guidelines have also been relaxed for
investment by foreign and domestic venture funds in real estate. Venture
funds fall under the Foreign Institutional Investment (FII) category rather

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than FDI and have to be registered with the SEBI. Venture funds can invest
in real estate if each investor brings in not less than US$ 11,111 and eighty
percent of the funds are invested in companies not listed on the stock
exchanges or financially weak companies.

FDI is now permitted in:

 Housing

 Townships

 Commercial Premises

 Hotels

 Resorts

 Hospitals

 Industrial parks

 Educational institutions

 Recreational facilities

 SEZ’s etc

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Key Regulatory Developments

 Securities & Exchange Board of India (SEBI) has allowed Indian

venture capital firms to invest in real estate .

 100% Foreign Direct Investment (FDI) is now allowed in the

construction sector under Automatic route.

 Foreign investors can now invest in commercial real estate

development projects having minimum built up area of 50,000 m2.

 Minimum area threshold for FDI in Integrated Townships reduced to

25 acres from 100 acres.

 Minimum equity investment cap of $10 million for 100% FDI projects
and $5 million in Joint ventures.

 Foreign investors only barred from trading in undeveloped land.

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6.8 Various Industrial Conditions

6.8.1 CONDITIONS OF DEVELOPMENT

 Minimum 10 hectares/ 25 acres area to be developed for serviced

housing plots.

 Minimum built up area of 50,000 sq mts for construction-

development projects.

 Atleast 50% of project to be developed within 5 years from date of

statutory clearances.

6.8.2 CONDITIONS FOR INVESTMENT

 Minimum capitalization of $10 million ( wholly owned subsidiary)

and $5 million (joint venture with Indian partner).

 There should be infusion of funds within 6 months of

commencement of business.

 Original investment cannot be repatriated prior to 3 years from

completion of minimum capitalization. Early exit is permitted with
prior approval of Government.

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6.8.3 MISCELLANEOUS CONDITIONS

 Investor is not permitted to sell undeveloped plots. ( Where

roads, water supply, street lighting, drainage, sewerage and
other conveniences have not been made available. It is
necessary for investor to provide this infrastructure and obtain a
completion certificate prior to sale of land).

 Concerned authority will monitor compliance of above

conditions by developer.

6.9 Foreign tie-ups

Residential

JP Morgan invested in Lodha group

Keppel Land ( Singaporean Company) – Joint venture with Puravankara

Salim Group (Indonesia) had a township in West Bengal

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Office

Farallon (US) had a joint venture with India bulls

Vornado – joint Venture with TCG.

Hotels

GMR Infrastructure – Accor Hotels and Resorts

EMAAR –Budget Hotels India Limited

Hilton Group – DLF JV

ACCOR- Emaar- MGF for budget hotels

Domestic Player promoted funds

ICICI Funds

HDFC Fund

Kotak realty fund

Urban Infrastructure Opportunities Fund

IL&FS Realty Fund

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CIG Realty Fund

Peninsula Realty Fund

Foreign player promoted Funds

Ascendas – GE

Blackstone

Starwood Capital

Sun- Apollo

Walton Street Capital

AIG Real Estate Fund

JP Morgan Real estate

6.10 CURRENT DEALS

 Morgan Stanley closed a deal with Oberoi Constructions in Mumbai

for $150 million.

 The Nakheel Group in Dubai signed a deal with DLF for development
of residential projects in Tier I & Tier II cities worth $10 billion.
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 Yatra capital buys 49 percent in Indian real estate company for 21.6
million Euro.

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Chapter 7
Indian Real Estate Industry – Current
Scenario

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7.1 Current Scenario

The estimated current size of Indian real estate market at US$57bn or
6.2% of India’s GDP. In terms of value, the real estate market would likely
grow at 12.8% CAGR in the next five years to US$105bn or 7.1% GDP by
FY12E. In the next five years, the average annual investments required in
the real estate sector are ~US$85bn, of which the residential segment
constitutes 88% at US$74bn. The estimated annual investments for office
space ais US$5.7bn and retail segment is US$4.8bn. These are based on
requirements of investment in land and construction cost to meet the
intrinsic real estate demand in India and not on sales as the mark up on
costs could vary with market conditions.

Table 7.1 : Demand Forecast

As of end-FY07, the stock estimates (in terms of constructed area) were as

follows – residential - ~38bn sqft, office - ~135mn sqft and retail - ~90mn
sqft. In FY07, ~1.8bn sqft residential, 35mn sqft office and 24mn sqft retail
space was added. We estimate the market to grow at 4.6% CAGR with

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4.2%, 15.2% and 14.3% CAGR in residential, commercial and retail

segments respectively. Also, we expect the next five-year average annual
demand for residential, office and retail space at 2bn sqft, 65mn sqft and
37mn sqft respectively.

Table 7.2 : Demand Forecast

Going forward, hotels, logistics and warehousing would create significant

real estate demand. As per industry estimates, 100,000-125,000 hotel
rooms would be added in the next five years, with setting up of around 100
economy hotels in India.

There is tremendous opportunity for developers to capture the burgeoning

real estate market. However, the developers need to re-invent themselves
to meet changing customer needs and offer differentiated, quality products
at the right price point.

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7.2 Current demand and supply

The demand and supply are on an even keel across India and estimate that
there would not be significant oversupply in either residential, office or retail
segments till end-CY09. However, further tightening of interest rate could
reduce demand, leading to lesser absorption of supply.

There would not be a sharp correction in real estate prices, although a mild
correction can not be ruled out. However, such a correction should not last
long and would be predominantly confined to a few overheated locations.
Given the significant capital appreciation in the past two years and higher
operating margins enjoyed by developer (50-80%), a marginal drop in
prices should not impact the sector significantly.

Residential segment

Residential markets are stabilizing and prices are not expected to rise
beyond the normal inflationary growth. Given the current supply scenario
and recent hikes in interest rate, home buyers have adopted a wait and
watch stance, implying that differentiated product offerings and brand name
would play a critical role in closing a sale. Further, this would increase the
possibility of a sporadic drop in prices in certain pockets. However, once
the interest rates stabilize, improving demographics and the latent housing

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demand would again push up the residential demand. As this market in

various Indian cities matures (i.e. no supply-side constraints for quality
homes), developers with business competencies/skills will differentiate
themselves and move forward.

As per the National Housing Bank (NHB), there was a housing shortage of
19.4mn units (12.7mn units in rural areas and 6.7mn units in urban areas)
in FY03. As per the five-year plan, there would be a shortage of 22.7mn
housing units by ’07. Industry estimates of cumulative demand supply gap
stand at 4.1bn sqft.

The demand for residential units in urban India is estimated to be ~2bn

sqft/annum. Although, it is difficult to estimate residential demand within the
target segment of real estate developers, the estimated demand is ~450-
550mn sqft. This is based on the new housing demand created by rising
middle and upper income households. Demand for the high-end residential
segment (properties with a ticket size >Rs2.5mn) is 100- 130mn sqft. As
per a recent AC Neilson report, supply from the high-end residential
segment is ~120mn sqft. This implies that the demand & supply situation is

comfortably matched; and the equilibrium is not expected to shift

significantly.

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Office segment

Currently, demand for office space is far exceeding supply in most

locations across India. This can be gauged by the large number of pre-
leases and the low vacancy rates. Office properties have hardly seen drop
in prices except in Whitefield, Bangalore, where poor infrastructure was a
damper. It is estimated that the current supply pipeline would not lead to an
oversupply; however, the rentals might not move further, signalling an end
to capital appreciation on office properties. The development of IT/ITES
SEZs remains a key risk to our estimate, which could create additional
33mn sqft supply annually.

The estimated office space demand in India is 65mn sqft/annum, 67% of

which is from the IT/ITES sector. We estimate the demand from the sector
to be driven by an annual 565,000 employee addition over the next five
years.

The estimated office space supply in India is ~50-55mn sqft in CY07. The
cumulative development pipeline for the key seven cities is ~105mn sqft.

Table 7.3 : Cumulative Office supply across 7 Key Cities Across India

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Figure 7.1 : Distribution of India New Office Space by 2008

Retail segment

The retail sector demand is estimated to be 37mn sqft/annum; currently,

there is high demand for quality retail space across India. The supply is
expected to exceed demand in the next two years as many large projects
would come on stream across most metros. In the next two years, we
expect rentals to remain flat or drop marginally.

However, the oversupply situation post CY09 is a critical issue. Oversupply

is likely to hit retail before office and residential segments and would have a
more severe impact given the high land and construction cost (input costs).

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Table 7.4 : Addition in retail Space

Figure 7.2 : India’s Mall space to rise fourfold in three years

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7.3 Property Price Charts Of Major Cities

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7.4 EVOLUTION OF THE MARKET

3 YEAR SCENARIO

 Realty sector is growing at the rate of 30% per annum to reach $45-
50 billion by 2010.

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 IT sector alone is expected to require 150 million sq ft of space

across major citites by 2010.

 Organised retail has the potential to add over US$ 45 billion business
by the year 2010.

 This will create a demand of 220 million square feet of retail space by
2010.

 27 million square feet of organised retail space is currently available.

Another 90 million square feet is expected to be added by 2008 from
263 mall projects.

 Of these, 18 million square feet is slated to come up in Delhi as well

as in Mumbai, 9.5 million square feet in Ludhiana, 6 million square
feet in Chandigarh and 3.6 million square feet in Ahmedabad.

 India will have 2.9 million hotel rooms by 2010 as compared to

today’s 1.2 million. The demand for hotels rooms will grow at a
compounded annual growth rate of 10% over the next five years.

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5 YEAR SCENARIO

 It is projected that the market size will be $90 billion by 2015.

 IT and ITES sector are expected to continue to grow at 30%. It is

estimated that additional 367 million square feet of office space
will be required by 2012-2013.

 A revenue of $333 million was generated from 1,80,000 medical

tourists in 2004 and it is expected to rise to $ 2 billion by 2012.

 Construction industry is currently worth $70 billion and would rise

to $120 billion by 2010.

7.5 ENTRY STRATEGIES AND MODELS

A foreign company planning to set up business operations in India has the

following options:-

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7.5.1 AS AN INDIAN COMPANY

A foreign company can commence operations in India by incorporating a

company under the Companies Act, 1956 through:

i) Joint Ventures

ii) Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on

the requirements of the investor, subject to equity caps in respect of the
area of activities under the Foreign Direct Investment (FDI) policy.For
registration and incorporation, an application has to be filed with Registrar
of Companies (ROC). Once a company has been duly registered and
incorporated as an Indian company, it is subject to Indian laws and
regulations as applicable to other domestic Indian companies.

7.5.2 AS A FOREIGN COMPANY

i) Liaison Office/Representative Office

ii) Project Office

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iii) Branch Office

Such offices can undertake any permitted activities. Companies have to

register themselves with Registrar of Companies (ROC) within 30 days of
setting up a place of business in India.

Liaison Office/Representative Office

Liaison office acts as a channel of communication between the principal

place of business or head office and entities in India. Liaison office can not
undertake any commercial activity directly or indirectly and can not,
therefore, earn any income in India. Its role is limited to collecting
information about possible market opportunities and providing information
about the company and its products to prospective Indian customers. It can
promote export/import from/to India and also facilitate technical/financial
collaboration between parent company and companies in India. Approval
for establishing a liaison office in India is granted by Reserve Bank of India
(RBI).

Project Office

Foreign Companies planning to execute specific projects in India can set

up temporary project/site offices in India. RBI has now granted general

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permission to foreign entities to establish Project Offices subject to

specified conditions. Such offices can not undertake or carry on any activity
other than the activity relating and incidental to execution of the project.
Project Offices may remit outside India the surplus of the project on its
completion, general permission for which has been granted by the RBI.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad

are allowed to set up Branch Offices in India for the following purposes:

i) Export/Import of goods

ii) Rendering professional or consultancy services

iii) Carrying out research work, in which the parent company is engaged.

iv) Promoting technical or financial collaborations between Indian

companies and parent or overseas group company.

v) Representing the parent company in India and acting as buying/selling

agents in India.

vi) Rendering services in Information Technology and development of

software in India.

vii) Rendering technical support to the products supplied by the parent/

group companies.

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viii) Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its

own but is permitted to subcontract these to an Indian manufacturer.
Branch Offices established with the approval of RBI may remit outside India
profit of the branch, net of applicable Indian taxes and subject to RBI
guidelines Permission for setting up branch offices is granted by the
Reserve Bank of India (RBI).

Branch Office on “Stand Alone Basis” Such Branch Offices would be

isolated and restricted to the Special Economic zone (SEZ) alone and no
business activity/transaction will be allowed outside the SEZs in India,
which include branches/subsidiaries of its parent office in India. No
approval shall be necessary from RBI for a company to establish a
branch/unit in SEZs to undertake manufacturing and service activities
subject to specified conditions.

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Chapter 8
FDI In Indian Real Estate Industry

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8.1 The Foreign Investment Boom

India’s real estate sector is undoubtedly on a high growth path and
recognized as global investors’ choice. India is holding ninth position
among retail markets in the world with organized retailing and growing at
the rate of 30 percent per annum. India has played up to its image of being
one of the most attractive FDI destinations. The positive outlook of Indian
government is the key factor behind the sudden rise of the Indian real
estate sector.

The Institute of International Finance (IIF)expects FDI in India to rise to $8

billion in 2007 from $6.5 billion in the last year. Following FDI groups have
already spread their wings in Indian real estate sector.

1.Emaar MGF has brought in the largest FDI of over US$1 billion in the
Indian real estate sector. In addition, the company is focusing on pan-India
projects in residential, commercial, infrastructure and hospitality sectors in
integrated master plans and SEZ.

2. Keppel land , a singapore based group has aleady signed JV agreement

with M/ S Purvankara group, banglore based group for residential and
commercial project.

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3.DSP Merrill Lynch, Barclays Bank and Mauritius-based TH Holdings and

groups have do far invested Rs.11, 460 crore in

the first half of this The collective investment that got parked in real estate
and construction sector was to the tune of Rs. 1,252.79 crore.

4. AEA Holdings is searching for the efficient partners to expand its

business horizons and wants to grab the deals and opportunities
aggressively and quickly, says industry source.

6. RREEF, the real-estate investment arm of Deutsche Asset Management,

is planning to invest over $200 million in a joint venture with realty major
Emaar- MGF.

8. Capital Land, Hong kong based group is also planning to invest in India.

9. Royal RaJ Indian, A Canadian group has has already signed JV

agreement for residential and commercial.

10..Morgan Stanley Real Estate Fund is known to have made the largest
private equity transaction in property market till date and invested
$125million Mumbai based Oberoi Constructions.

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10. Mauritius-based IREO Investment Holding grabs the honor of making

the highest FDI in the sector with the whopping investment of Rs. 321.70
crore.The company also has plans for related projects and heavier inflows.

11. Emaar MGF Land Private Limited is India’s pioneering joint venture in
real estate with projects being implemented on a pan-India basis across top
30 cities.

12.DSP Merrill Lynch Limited, India’s leading investment bank and broking
firm that pump in more than Rs 2,230 crore between April 2006 and
October 2006.

13. Barclays Bank made an investment totaling Rs 1,711.23 crore pitching

itself to the second investor slot.

14. Mauritius-based TH Holdings has invested of Rs.1697.35 crore.

15. French firm Carrefour has been showing interest in entering Indian
retail industry.

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16. World’s largest financial services group, Citi, which has sewed up

property deals of around $400 million in the past few weeks. This
prestigious group is also looking forward to enter into a joint venture with
HDFC and US based Portman Holdings.

17. Citigroup is all set to enter in the red hot property market through
Citigroup Property Investors (CPI) India.

18. A Mauritius based company financed by a fund in Cayman Islands, was

recently in the news to have raised $500 million through an India-dedicated
fund. The conglomerate is likely to raise more money to invest in realty.

19. Hong Kong based AEA Holdings announced that it plans to invest more
than $2 billion over the coming years in Indian realty projects.

21. Italian firm Rino Greggio’s plan to set up a joint venture for selling
silverware and UK-based Alpha Airport Group’s proposal to establish a
wholly-owned subsidiary for setting up duty-free shops, flight kitchens and
food and beverage outlets at airports in the country at an investment of Rs
22.5 crore was also approved other allied products.

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22. A proposal by the Netherlands-based Diageo Highlands Holdings to set

up a joint venture has received clearance as well from Indian Government.

23. Solitaire Capital Investments Pte and Solitaire Ventures Pte, a

Singapore based group are investing Rs 511-crore of in India’s booming
real estate sector.

24.Mauritius-based power producer Bijlee Bharat Holdings’ plan to set up a

subsidiary in India with an initial investment of Rs 308 crore,

25. NSK Limited of Japan which has committed Rs 41.25 crore to set up a
new JV in Chennai.

26. Spain-based Lladro Commercials S.A. will pump in Rs 5.85 crore for
increasing its equity in Spa Agencies (India) from 26 per cent to 49 per
cent.

27. Sri Lanka-based Damro Exports Pvt Ltd’s proposal to sell furniture
under the single brand name ‘DAMRO’ and Italian firm Rino Greggio’s plan
to set up a joint venture .

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Estate

28. UK-based Alpha Airport Group’s proposal to establish a wholly-owned

subsidiary for setting up duty-free shops, flight kitchens and food and
beverage outlets at airports in the country at an investment of Rs 22.5 crore
was also approved.

29. Hong Kong based AEA Holdings announced that it plans to invest more
than $2 billion over the coming years in Indian realty projects.

8.2 FACT SHEET ON FOREIGN DIRECT

INVESTMENT

A. CUMULATIVE FDI EQUITY INFLOWS

1. Cumulative amount of FDI inflows (from August 1991 to March 2006) Rs.
1,61,411 crore US$ 38,902 million.

2. Amount of FDI inflows during 2006- 2007 (from April 2006 – January
2007) Rs.50,652 crore US$ 11,194 million .

3. Cumulative amount of FDI inflows (updated up to January 2007) Rs.

2,12,063 crore US$ 50,096 million.

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B. FDI EQUITY INFLOWS DURING FINANCIAL

YEAR 2006-2007

Financial Year 2006-2007 (April-March)

Period (In Rs. Crore) (In US$ mn)

April 2006 2,972 661

May 2006 2,443 538

June 2006 2,405 523

July 2006 5,235 1,127

August 2006 2,878 619

September 2006 4,222 916

October 2006 1,698

7,718

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November 2006 5,157 1,151

December 2006 9,108 2,040

January 2007 8,514 1,921

2006-2007 up to 50,652 11,194

January 2007

2005-2006 (up to 18,535 4,179

January 2006)

Table 8.1: Amount of FDI inflows(In Rs. Crore)

%age growth over last year (+) 168 %.

Period (In Rs. Crore) (In US$ mn)

January 2007 8,514 1,921

Calendar Year 2,141 482

2006(upto January
2006)

Table 8.2 : FDI EQUITY INFLOWS DURING CALENDAR YEAR 2007

8
0
%age growth over last year (+) 298 % .

Foreign Direct Investment is encouraged and permitted, in the following

real estate sectors in India:

 Hotel Development

 Tourism

 Hospitality

 Township development

 Developing Commercial Real Estate

 Built-up infrastructure

 Housing and construction projects

 Building Resorts

 Building Hospitals

 Building Educational institutions

 Building Recreational facilities

 Infrastructure projects: regional and local level

 Special Economic Zones (SEZ)

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8.3 Conditions for Foreign Investment in Real

Estate Sector in India

Foreign Direct Investment in some of the aforesaid areas (not all) is subject
some conditions, some of which are as follows:

• Develop a minimum land area of 10 hectares for serviced housing

plots, and a minimum built-up area of 50,000 sq m in case of
construction projects. The policy does not clearly define ‘built-up’,
though FSI (Floor Space Index)/FAR (Floor Area Ratio) could be
used as a basis for the same.
• Fulfill the minimum capitalization norm of $10 million for a wholly-
owned subsidiary and $5 million for JVs. The funds would have to be
brought in within six months of commencement of business (which
needs to be defined) of the subsidiary or JV.
• Complete at least 50% of the integrated project within five years from
the date of obtaining all clearances.
• Do not sell undeveloped plots (with no infrastructural backup).
Provide infrastructure and obtain the completion certificate from the
concerned local body before disposal. This clause needs amendment
because certificates are sometimes not issued for months on end,
even years, an uncertainty which tends to raise project cost, often
beyond viability.

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• Do not repatriate original investment before three years from

completion of minimum capitalization. Early exits require prior
approval of the Foreign Investment and Promotion Board.

• Conform with all applicable local and state laws, and abide by all
regulations and norms.

FDI up to 100% is permitted under automatic route

in:

 Townships, housing, built-up infrastructure & construction-

development projects
 (including housing, commercial premises, educational institutions,
recreational facilities, etc).

 Establishment and operation of hotels.

 Set up of SEZ.

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Chapter 9
Factors Affecting The Indian Real Estate

Industry

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The real estate industry is not an isolated industry and the various
happenings in the market affect the real estate market at any place
,demand and supply .These factors may or may not have a direct impact on
the real estate market, but play a vital role in determining how the real
estate market would fare out. Some of the major factors are : -

 DEMOGRAPHICS :

The demographics of a particular place play a vital role in determining

the market behavior of property there. The demography determines the
overall spending power of the people and decides how and foe whom
the real estate product and services would shape up. Further more ,the
class of people inhabiting a particular area would determine what type of
buildings ,structures, complexes etc, would be best suited to the place.

 STATUS OF THE ECONOMY :

The economy of a particular place would directly determine the spending

power of the people and how prosperous they are. An economy that is
booming shows great opportunities for investors to invest as the demand
for the provided service is higher.This is one of the reasons why India
proves to be a lucrative real estate abode.

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 GOVERNING LAWS AND REGULATIONS

The local land laws as well as those imposed by the governing bodies at
a particular place is another factor that determines the growth of real
estate industry at that place .If the laws at a particular area are to
stringent, it increases the vows of the developer as well as investor.
Thus a sound government backing is always desired to urge the
development and buying of property at a particular place.

 MONETARY POLICIES AND LENDING RATES

The monetary policies and laws about lending rate directly hit the
demand for real estate at a particular place. The lending rates should be
low in order to urge investors to invest both in development as well as
buying of property.The monetary policy also determines how well the
investors would welcome a new initiative in the real estate segment.

 FOREIGN DIRECT INVESTMENT

India’s real estate sector is undoubtedly on a high growth path and

recognized as global investors’ choice. India is holding ninth position
among retail markets in the world with organized retailing and growing at
the rate of 30 percent per annum. India has played up to its image of being
one of the most attractive FDI destinations. The positive outlook of Indian
government is the key factor behind the sudden rise of the Indian real

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estate sector.The Institute of International Finance (IIF)expects FDI in India

to rise to $8 billion in 2007 from $6.5 billion in the last year.

 OVERSUPPLY :

Real estate has a long duration cycle; hence, oversupply and

undersupply in different phases of the realty cycle is inevitable. India’s
real estate cycle has witnessed a bull run since ’03. We estimate the
cycle to remain on the upswing till end-CY09.

 MANAGEMENT/TRANSPARENCY RISK :

Another crucial risk area is the level of transparency/disclosures by the

management, which include the developer’s track record, litigations,
professional management, best practices and under capitalized balance
sheets (high leverage).

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Chapter 10
Major Market Players

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10.1 Sobha Developers

Sobha Developers is one of the leading real estate developers in India. The
Bangalore-based company has excellent reputation for its quality of
construction and timely execution. Also, the company has the requisite
capability to outperform its peers. Its real estate and contractual businesses
are growing at a fast pace supported by sound and visionary management.
We estimate Sobha’s NPV at Rs96.5bn or Rs1,324/share. The company is
among the finest large-cap stocks in the sector and will continue to trade at
a premium against peers.

Strong core competencies. Sobha is well known for its quality of

construction and superior execution capabilities. Apart from in-house
construction, the company follows a unique backward integration model,
which helps keep a check on quality standards and execution timelines.
The company is led by sound and visionary management.

Growing project pipeline. Till date, Sobha has developed 17mn sqft
property with another 18.7mn sqft in the pipeline. The company has a large
land bank of 3,489 acres having a saleable area of 134mn sqft, to be

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developed over the next nine years. We estimate the total NAV of existing
projects (137.4mn sqft) at Rs72.9bn or Rs1,001/share.

Contractual business, impressive margins and steady growth.

Sobha has developed 10.15mn sqft via contractualprojects (93%
developed for Infosys). The business is expected to grow at a fast pace,
generating steady cashflow without undue risk to the capital. The
contractual business is valued at Rs10.7bn or Rs143/share.

Attractive valuations. We estimate Sobha’s NPV at Rs96.5bn or

Rs1,324/share, factoring in the value of current projects and contractual
business, Rs6.6bn terminal value and Rs6.6bn of net current assets. The
company reported FY07 EPS of Rs22.2; we estimate the earnings to grow
at 46% CAGR in the next three years, implying FY08E, FY09E and FY10E
EPS of Rs36, Rs47.8 and Rs68.6 respectively.

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10.2 Peninsula Land

Peninsula Land (PLL), the erstwhile Morarjee Realties, is a South Mumbai-

based real estate developer. The company is well known for its innovative
and superior construction. PLL is bestowed with an upbeat management
and a strong project pipeline. The company is an interesting play on high-
end real estate development, SEZs and townships. We estimate the NPV
of the company at Rs28bn or Rs596/share. PLL is among the best
developers in West India. There exists an upside to our NPV estimate.

Current project pipeline generating strong cashflows and capital

gains. At present, PLL has four ongoing projects in Parel (South Central
Mumbai), with cumulative saleable area of 3.5mn sqft. The company has
gained significantly through 3x rise in land value in the area. Additionally,
advance payments from residential projects (~100% sold) have boosted
the cash situation considerably.

SEZs, real estate mutual fund and townships – Future growth

engines. PLL is developing four SEZs with ~300 acres cumulative area
and current estimated value of these projects is at Rs9.4bn. The company
is also developing two bio-tech SEZs, a gem & jewelry SEZ in Goa and an
IT/ITES SEZ in Pune. These projects are expected to come on stream in

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the next 4-5 years. Two SEZs – bio-tech (Verna) and the IT SEZ in Pune –
have already been approved by the Ministry of Commerce. PLL is
developing two large township projects in Pune and Nashik with an
estimated total value of Rs2.9bn. The company is also managing a real
estate mutual fund (REMF) and has already raised close to Rs100bn.

Valuations. We estimate the NAV value of PLL at Rs28bn or

Rs596/share. For the fifteen months ended June ’06, the company reported
revenues and PAT of Rs2.7bn and Rs1.4bn respectively. On a fully-diluted
basis, 15MFY06 EPS was Rs30.6. We estimate FY07E, FY08E and FY09E
EPS at Rs40, Rs91, and Rs157 respectively and initiate coverage with
BUY recommendation. Also, we believe there will be significant earnings
growth in the coming years as SEZs and townships materialise.

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10.3 Marg Construction

Marg Construction is a Chennai-based real estate and infrastructure

developer. We believe the company has tremendous earnings growth
potential from its SEZ and port projects. We estimate Marg’s NPV at
Rs9.6bn or Rs385/share. Marg is an interesting triple play on real estate,
SEZs and port.

Attractive SEZ projects. Marg is developing two SEZs (one each for
multi services and light engineering) near Chennai, spread over 612 acres.
The SEZs have been approved by the Government in the Board of
Approval meeting. We estimate the NPV of both SEZs at Rs2.8bn.

Profitable Karaikkal Port project. Karaikkal Port is a dry cargo port

between Chennai and Tuticorn, the second and the third busiest ports in
India respectively. While the first phase of the project (4mnte capacity)
would commence by October ’08, the second phase (7.3mnte capacity)
would come on stream by November ’09.

The NPV is estimated to be Rs4bn.

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Lucrative real estate ventures. Marg is developing a mix of real estate

projects, including a mall, a township, serviced apartments and villas in
Chennai. Further, the company has a significant amount of additional land
banks and owned assets. The estimate of the cumulative NAV of Marg’s
real estate projects is Rs3.2bn.

Construction business. Marg is primarily a construction company with

its order book encompassing construction cost on infrastructure and real
estate projects. We estimate the construction division’s NPV at Rs3.4bn.
Also, Marg has formed a joint veture – SIGNA – with the Housing and
Urban Development Corporation (HUDCO) for participating in infrastructure
and urban development projects.

Discounted valuations. We estimate Marg’s NPV at Rs9.6bn or

Rs385/share. For FY06, the company reported revenue and PAT of
Rs576mn and Rs82mn, up 3.6x and 3.5x respectively. We estimate Marg
to register FY09E earnings growth of 19x to Rs63.4 from fully-diluted Rs3.3
EPS in FY06. Initiate coverage with BUY recommendation.

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10.4 Prajay Engineers Syndicate

Prajay Engineers Syndicate is the largest real estate developer in

Hyderabad, offering differentiated real estate and hospitality products. The
company has made significant capital gains on account of its well located
land bank of 850 acres. We estimate Prajay’s NAV at over Rs480/share
and believe that the company will emerge as one of the fastest growing
developers in India.

Hyderabad, a sprawling growth opportunity. Hyderabad has emerged

as one of the fastest growing real estate market, led by the booming
IT/ITES sector and lower real estate prices. The city boasts of skilled and
comparatively cheaper human resources, proactive Government and fewer
infrastructural bottlenecks. We remain positive on the Hyderabad real
estate market and on the tremendous growth opportunities that the city
offers.

Strong project pipeline. Prajay has around 35 projects under various

stages of development, with cumulative saleable area of 26mn sqft. These
include high-end residential apartments, villas, townships, and retail and
entertainment complexes. The NAV of these projects is estimated at
Rs8.9bn or Rs226/share.

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Capital gains on land bank. Prajay has been acquiring land in the
peripheral areas of Hyderabad for the past 10-15 years. With increasing
scale of development in the region and the ongoing work on arterial outer
ring road, which will reduce the distance from the airport, the capital value
of Prajay’s land bank has significantly appreciated. The current land bank
of the company is 850 acres.

Attractive valuation. We estimate Prajay’s NPV at Rs19bn or

Rs480/share. In FY07, the company reported revenues and PAT of Rs2bn
and Rs772mn, up 2.9x and 3.4x respectively. FY07 fully-diluted EPS of the
company was at Rs19.5 against Rs5.7 in FY06. Over the past two years,
the company’s revenues and PAT have grown 10.5x and 12.4x
respectively. We estimate FY08E, FY09E and FY10E EPS at Rs30, Rs55
and Rs78 respectively and initiate coverage with BUY recommendation.
Prajay would likely post impressive earnings growth at 59% over the next
three years.

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10.5 D S Kulkarni Developers

D S Kulkarni Developers (DSK) is the largest Pune-based real estate

developer and is emerging as one of the fastest growing companies in
West India. The company has a land bank of 650 acres with 23mn sqft
developable area. DSK’s vast project pipeline includes high-end to low-end
housing and mega SEZ & township projects. The company boasts of a
high-quality management, superior execution capability and robust project
pipeline. We estimate DSK’s NPV at Rs9.4bn or Rs427/share and believe
that the company has immense growth potential on the back of its strong
project pipeline.

Pune real estate – Potential for further appreciation. Availability of

extensive pieces of land, low real estate prices and presence of a plethora
of IT/ITES & manufacturing units and recognised educational institutes in
Pune would lead to further price appreciation in the region.

Robust project pipeline. At present, DSK has 17 projects with 23mn sqft
cumulative saleable area in various development phases. The majority
(97%) of the projects are in the peripheral areas of Pune with a few
developments forthcoming in Mumbai and Bangalore. We estimate the
projects’ NAV at Rs6.3bn or Rs284/share.

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Rapid earnings growth. Over the next three years, we estimate

earnings CAGR at 87% to Rs1.16bn in FY09E on the back of strong build-
up in the project pipeline. Similarly, we expect revenue CAGR at 79%
through the next three years.

Impressive valuations. We estimate DSK’s NPV value at Rs9.4bn or

Rs427/share based on the sum of project, terminal and other asset values
at Rs6.3bn, Rs3bn and Rs1.7bn respectively. In FY06, DSK registered
Rs1.3bn revenue, Rs176mn PAT and Rs8 EPS. Our FY07E, FY08E and
FY09E EPS estimates are at Rs16.3, Rs29.1 and Rs52.5 respectively. We
initiate coverage with BUY recommendation on the back of attractive
discount to NPV and strong earnings growth.

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10.6 Arihant Foundations & Housing

Arihant Foundations and Housing (AFHL) is a Chennai-based real estate

company with 25 years of track record. On the back of sound management,
the company is focussed towards strong and steady growth in South India,
particularly Chennai.

We estimate the NPV for AFHL at Rs3.2bn or Rs460/share and believe that
it can increase further as only the project pipeline for the next three years
has been factored in. AFHL is among the best emerging real estate
companies from Chennai.

Robust Chennai market. Over the past one year, Chennai has been one
of the fastest growing real estate markets with increasing demand for
quality residential, commercial and retail properties due to comparatively
lower prices, improving demographics and corporate investments in
IT/ITES, manufacturing and auto sectors. Other reasons for growth are the
availability of skilled manpower and lowest attrition rates across India.
Chennai is likely to emerge as a key manufacturing and outsourcing hub of
India.

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Land bank and projects creating significant value. AFHL has a total
land bank of 130 acres, of which 45 acres are strategically located on the
IT corridor and another 45 acres are close to the Mahindra City. AFHL is
currently developing 15 projects with 10mn sqft saleable area, out of which,
the company’s share stands at 6.2mn sqft. We estimate the project value of
the current land bank at Rs1.6bn. Also, two of AFHL’s larger projects are in
a JV with Unitech and JP Morgan, lending further credence to timely
execution.

Attractive valuations. We estimate the NPV for AFHL at Rs460/share;

however, there exists an upside to our NPV as new projects come on
stream. For the financial year ended September ’06, the company reported
revenues and PAT of Rs1.6bn and Rs201mn, up 29% YoY and 167% YoY
respectively. The fully-diluted FY06 EPS of the company was Rs28.7. We
expect the company to deliver 50%+ earnings growth in the next three
years.

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Chapter 11
Research on Emerging Real Estate
Market

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LOCAL & INDUSTRY VIEWS

In order to no more about the real estate sector I decided to conduct a little
research on the above parameters discussed so far. I prepared a
Questioner having three to four relevant questions which can give me the
exact picture of this fast growing sector.

The persons I asked are as follows:

SR. No Name Business

1 Mr. Latiff Real Estate

consultant

2 Balaji Builders Builder

3 Mr. Patel Real Estate

consultant

4 Sangvi Builders Builder

5 Mrs. Ponnam Sharma Real Estate

consultant

6 Mr. Raja Real Estate

consultant

7 Mr. Bharat Jain Builder

8 Lucky Homes Real Estate

consultant

9 Dream Homes Real Estate

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consultant

10 My Homes Real Estate

consultant

11 Ritu Paradise Builder

12 Paradise Properties Real Estate

consultant

Table 11.1 Research Nominees

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Question discussed and their result:

1) Do you think there is a growth in real estate business over the years?
Result: surprisingly all of them said yes.

12
12

10

6 YES
NO
4

0
Growth in Real Estate

Fig 11. Chart 11

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2) Did you experience any downfall in sales due to inflation and hike in
home loan Rates?

Result: 83% said yes and 17% said No

10
10
9
8
7
6
5 YES
4 NO
3
2
1
0
Down Fall due to Inflation /
Home loan rates

Fig 11.2 Chart 2

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3) How do you see the future of real estate market? Is it going to grow
or fall?

Result: Surprisingly all of them were positive.

12
12

10

6 YES
NO
4

0
Will it grow in future or not

Fig 11.3 Chart 3

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Chapter 12
Indian Real Estate Industry – SWOT
Analysis

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Figure 12.1 : SWOT ANALYSIS

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12.1 STRENGHTS

 Powerful demographic impetus

About one in every sixth person on earth lives in India, and the
growth rate of the population is still rapid. The present fertility rate is
just over three children per woman. Although considerably lower than
in the 1960s or 70s when women gave birth to an average of five to
six children, it is still far higher than in, say, China (1.7 children per
woman) or Europe (1.4 children per woman). Since the lower birth
rate is primarily a reflection of better living conditions in India, the rate
of population growth has moderated to just 1.5% p.a. Since 1970, the
improved conditions have also caused life expectancy to increase by
15 years to around 65 years at present. In addition, during this period,
infant mortality has been halved. The high birth rates and fall in infant
mortality over the past few decades imply that India’s population is
very young. One in every three Indians is under the age of 15, and
only one in three is older than 35. This compares it favorably against
China, where nearly 50% of the population is older than 35, and
roughly 60% in Europe. The three demographic trends, i.e. high but
falling birth rate, increasing life expectancy and declining infant
mortality, are expected to persist in the coming years. Only during the
third decade of this century will the population growth rate drop below
1%. Consequently by 2030, India looks set to be the most populous

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country on earth. By 2050, roughly 1.6 billion people will live on the
Indian subcontinent, 200 million more than in China.

The already impressive number of 700 million people of employable

age1 in India is expected to grow by another 250 million in the next
20 years. Additionally, the valuable economic reform policies
implemented since the early 1990s have created the proper
foundation for translating population growth into powerful economic
growth.

Figure 12.2 : Favourable Demographics

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 The economy is booming

In the past ten years, real GDP accelerated to an average of 6% p.a.,

growing much faster than in earlier decades. In 2005, real GDP is
expected to accelerate at least 8% from the previous period, with
investment to remain a strong impetus to growth. There are at least
three reasons for its sustained acceleration. First, the economic
liberalisation in the early 1990s has integrated the country into world
trade. This has benefited the services sector in particular, with many
companies from the United States and Europe discovering the
subcontinent as an attractive offshoring destination.

Second, India possesses a vast pool of highly skilled technicians and

engineers. Some 200,000 engineers graduate from Indian
universities each year, roughly six times as many as in Germany. But
even this large number of graduates may fall short of meeting the
strong demand for highly skilled staff. A survey of Indian headhunters
revealed that the number of urban jobs soared by 21.5% in 2005, with
a further 23% forecast for 2006.4 This implies that salaries for
university graduates are on course to increase markedly. This is
already an ongoing phenomenon. In a publication on salary trends in
Asia, Hewitt Associates, a consultancy, illustrated that salaries in
India rose by an average of 13.5% in 2005 from 2004, the steepest
climb among the countries reviewed. In the IT industry, pay packets
were almost 18% bigger.

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Figure 12.3 : Growth Chart (FCI)

Third, public spending on road and transportation infrastructure is

expected to climb. This is key to the government’s long-term growth
strategy – and will serve as a positive stimulus to the construction
industry.

 High growth trend in the long term

The current engines of economic growth – population trend, human

capital, openness of the economy and rising investment – will remain
the key drivers of India’s economic growth in the long run. Deutsche
Bank Research’s long-term growth model, Formel-G, depicted India
as the growth star performer over the period 2006 to 2020 among 34
developed and developing economies. This puts it ahead of China

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and Turkey. GDP per capita in terms of purchasing power parity

(PPP) is expected to climb by almost 4% a year over the next 15
years, with purchasing power doubling over the period. Real GDP is
expected to average 5.5% – with potential to rise even further to 6%,
reflecting India’s huge efforts to build up its infrastructure.

Table 12.1 : Long Term Growth Rates

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12.2 WEAKNESSES

 Archaic and Retrogressive regulations

India’s real estate market is characterized by heavy and frequent archaic

regulations,that have discouraged large scale private ownership of
property in urban areas.

Urban Land(Ceiling and Regulation )act ULCRA

The Urban Land Urban Land Ceiling and Regulation act restricts the
area of land/property that can be owned by an individual.Land in excess
of the ceiling can be acquired by the government under the law of
developing mass housing.This has made it extremely difficult for
developers to consolidate large land parcels and take up projects of any
meaningful scale in urban areas.

Rent Control Act

Rent Control laws have historically placed great emphasis on protecting

the rights of tenants rather than the owner of the property.Over a period
of time ,the controlled rent does not keep pace with the market rent,and

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therefore tenants never move out of the premesis . Moreover, with the
rental income falling too short of the maintenance cost, the landlord
loses interest in the repairs and maintenance of the premises and the
property dilapidates over a period of time. The landlord is also
discouraged to sell the premises as he is forced to share the proceeds
with the tenant (under the ‘pagdi’ system).The combined effect of all the
above converts the property into a redundant asset for the landlord and
the land on which it stands is not reallocated for rebuilding or
redevelopment. This creates artificial supply constraints in the urban
areas.

In addition to ULCRA and the rent control act, there exist many rules
and regulations Coastal Regulation Zone (CRZ), Slum Development,
property transfer rules and charges etc., which govern land acquisition
and use. These laws tend to result in long approval procedures, litigation
and disputes as also general delays in land development, thereby
stymieing growth of the sector.

 Scattered Land Holdings

In India, land is predominantly privately owned and most of it is

inherited. A given land parcel keeps splitting between successive
inheritors with the result that the size of the holding keeps getting
smaller with each passing generation .Futher,in India, the tendency of
keeping written laws is not much prevalent , making establishment of

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ownership rights on property extremely difficult. Moreover, the

landholding pattern arising due to inheritance results in multiple
ownership claimants for the same family, for a single plot of land. This
makes it extremely difficult to acquire land with a clear title.
Consequently, developers find acquisition of large tracts of contiguous
land with large ownership extremely difficult.

 Use Of Aggregators for land Acquisition

The combined effect of archaic property laws, scattered land holdings

and disputed ownership has resulted in the emergence of a unique kind
of service providers in the Indian Real Estate context, called
aggregators.

Aggregators operating mainly in suburbs and rural areas, buy land from
individual holders of smaller land parcels. The aggregators establish
ownership and settle all legal disputes between multiple claimants to
clear the title of the land. They also get land converted for non
agricultural use from the local revenue assessing authority. Contiguous
parcels of aggregated land, with clear titles and designated for use in
real estate development are then transferred to the developer.
Moreover, aggregators remain discrete in their activities and donot
reveal the final buyer of the land, as the land prices tend to shoot up, in
case word spread of a leading developer accumulating land parcels.

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Figure 12.4: Role of Aggregators

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12.3 OPPURTUNITY

Figure 12.4: Market Opportunities Snapshot

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12.4 KEY THREATS

 Increase in interest rates is the biggest threat to the sector as it

reduces the purchasing potential of home buyers, affecting the
demand of new homes significantly. Assuming no change in loan
tenor, a 1% increase in interest rate could reduce buying capacity by
~5-7%. Further, taking an equivalent drop in the selling price (to
compensate for decrease in buying potential), the discounted
profitability of a project can decrease 13-16%. However, due to rise in
loan tenor and increasing salaries, the actual impact of interest rate
hike is not as high.

Figure 12.5: Interest Rate Movement for 25 Years

Recent moves by the RBI to increase cash reserve ratio (CRR) &
repo rates and raise risk weightage of home & commercial real estate

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loans have pushed home loan rates up by 300-400bps. ICICI Bank

increased its floating reference rate of consumer loans (including
home loans) to 12.75% and HDFC hiked its key lending rates to
14.25%. Growth in housing loan disbursal has also slowed down.
Total home loan disbursals, that grew from Rs537.37bn in March ’04
to Rs1, 132.3bn in September ’06 (up 111%), have slowed down
since March ’07 when they reached ~Rs1,350.52bn. Growth in home
loans disbursal by HDFC (second largest home loan originator) has
also fallen.

 Decreasing spreads between rental yields versus

lending rate and g-sec.

Gsec yields have moved up significantly from <6% two years ago to
>8% as on date; lending rates have increased even more sharply. On
the other hand, rental yields have not moved up more than 100bps.
Given the regulated scenario of gsec and lending rates, money flow
(particularly from foreign investors) into the real estate market has
been easier. That aside, reducing spreads also imply the assumption
of capital gains priced into the real estate assets or a possibility of
rental yields moving upward. Currently, the trend of reducing spread
between rental yields and other risk-free asset classes has been
witnessed across the globe. This highlights that in the long term,
investor’s world over view real estate as lower risk asset class.

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Figure 12.6: Decreasing Spreads

 Government intervention. The central and state governments

have been impeding the natural developments in the real estate
sector. Changes in policies/regulations, tax incentives and
bureaucratic processes are significant risks to the sector.

 Oversupply. Real estate has a long duration cycle; hence,

oversupply and undersupply in different phases of the realty cycle is
inevitable. India’s real estate cycle has witnessed a bull run since ’03.
We estimate the cycle to remain on the upswing till end-CY09.

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 Land ownership. A check on the title and historical land record is

crucial. Occasionally, realty companies sign development
agreements with land owners and claim development rights as a part
of their land bank. However, this is not the best practice as the risk to
execution of projects based on development rights is higher as
against owned land. Inaccuracyindisclosures of fully-owned,
agreement to purchase, JVs and development rights poses a key
risk.

 Management/transparency risk. Another crucial risk area is

the level of transparency/disclosures by the management, which
include the developer’s track record, litigations, professional
management, best practices and under capitalized balance sheets
(high leverage).

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Chapter 13
“The Ground Floor” - Real Estate Industry
and Recession

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The Development of real estate in India is attributed to the off-shoring and

outsourcing businesses, such as high-end technology consultation, call
centers and programming houses. The demand from the information
technology sector certainly has changed the urban landscape in India.
Several multinational companies (MNCs) continue to move their
organizational operations to India to take advantage of lower manpower
and other costs. Providing human resources and home at their work place
assumes great significance and therefore, the requirement to create space
for people to live and work that in turn causes the development of other
related infrastructure. It has been a predominant trend to set up the world’s
best business centers, often campus-style establishments, bearing a
distinguishing corporate stamp. Some of these locations are so distinctive
that they are termed as the ´temples of new or modern India´. It is just an
indication of the extent to which the development of real estate has been
taking place.

The real estate market in India remains unorganized, fairly fragmented,

mostly characterized by small players with a local presence. Traditionally,
real estate developers were viewed with an element ofskepticism.
Developers were often identified dealingwithlarge amounts of
unaccounted money, lacking transparency and would use unscrupulous
mean to acquire a variety of regulatory approvals. The tremendous growth
of the real estate sector is attributed to various fundamental factors such as
growing economy, growing business needs, etc. This boom however is
restricted to areas such as commercial office space, retail and housing

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sectors. The impending concerns of this sector namely- skill shortage, non
availability of statistics, lack of low cost-affordable housing, lack of
sustainability, high RE prices and last, to meet a future that might have
downturn due to oversupply.

The industry is presently facing a major resource crunch – an obvious lack

of qualified skilled people from construction firms, PMC firms, etc. Coupled
with this manpower shortage is the shortage of availability of relevant
statistics which has created an ambiguity as to how much construction
activity is actually taking place and one can’t gauge the demand and supply
trends accurately. The opportunities and issues of affordable, low cost
housing in India are mainly related with tremendous shortfall of middle
class housing as majority of the developers are involved in developing high
class housing, so there is a dearth of low cost affordable units. The
negative version of Indian real estate industry is “they have complete
disrespect for sustainability” and that the concept of green buildings, proper
waste disposal methods and the longevity of the product are often
dismissed.

Presently, the impact of recession in US economy has impacted Indian

Real Estate Market as well as it is also witnessing the recession. Till now
the real estate industry was a very booming industry in India which were in
pace with IT industry. Accordingly, the demand for IT space and
Commercial spaces has been grown. Also the high net worth of individual

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investors has created a very fast pace of demand in Indian real estate
sector which have gain a very high impact image of investing in India.

As the money was coming in terms on investment in India from NRI as well
as Private Equity funds, the well known developers and real estate players
have grown their portfolio as well many small sized players have also
created in Indian market. It has provided a very high supply of real estate
segments either in residential or in commercial or in office space. SEZ has
also creates a very good opportunities for investors as well as corporate to
invest and get benefited from Indian real estate market. So the booming
market has created a niche as modern living in India and created a very
mass employment in Indian segment.

The recent changes which happened in American market such as

Bankruptcy of Lehman Brother an oldest financial firm of American market
and sell process of PE Firm Merryl lynch by the largest US bank Bank of
America has created a very fast drops/recession in financial industry and
created a crisis in all over US economy. Both of these firms were invested
their more part of funds in to real estate sector without having the proper
analyzing or effect. They also have given the funds for mortgage industry of
US which is currently facing the hurdle of Sub prime lending and have
impacted many players to bankrupt.

All of these changes in US economy have impacted in Indian economy as

well as Real estate segment as most of the Indian players have their

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liquidity funded by both of these firms. Also the IT segment which was
mainly funded by the PE firms or have their export to US markets have
noticed very sharp drop of net worth of their firms. This recession also
impacted the Sensex which has bullish very sharply and brings down the
net worth of the leader of Indian real estate player very low. The impact can
be shown in share price of DLF, Unitech, GMR group, Reliance group,
Wipro, Satyam etc groups.

All of these sudden changes in Indian and US market created a point of

thinking to investors & individuals that where it will go and what will be best
option in real estate investment. The market rates in India are also dropped
by 10 to 30% in most of prominent as well as upcoming cities and the trend
appears to be still continuing till it will not recover the effects of this financial
crisis.

13.1 RECESSION
We expect a GDP growth rate of 6.0% during FY10E. Our FY09 growth
forecast has also been revised down to 7.4% from 7.8% earlier. At 6%, the
FY10 GDP growth will be the lowest since FY03.

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Our projection of growth slowdown is against the backdrop of a rapid

deterioration of the global economic scenario. Several advanced
economies are almost certain to face recession in CY09. Business and
consumer confidence indices are at multiyear lows, indicating no possibility
of a quick turnaround in either consumer spending or industrial activity.
Weakening demand is also depressing prices of several commodities.

In India, investment activities, particularly corporate capex, have taken a

backseat in recent quarters and are unlikely to improve, at least for the bulk
of FY10. Discretionary consumption demand is likely to stay muted as well.
Nondiscretionary consumer demand, however, is likely to be largely
unaffected and will provide GDP some resilience.

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13.2 Slowdown across sectors

We expect a modest 5.4% growth in manufacturing in FY09E and a further
fall to ~3% in FY10E. Overall index of industrial production (IIP) is
estimated to grow at ~5.1% and ~3.3% during FY09 and FY10,
respectively.

The projection is factoring in further intensification of slowdown in

construction activities with base case expectations of 8.5% and 5.0% for
FY09E and FY10E, respectively. This is a sharp slowdown for the
construction sector from the average rate of ~10% over the past 10 years.
Despite fears of a sharp drop in corporate capex and weak demand for
housing, it is believed that the risks of further downside to these
projections are limited as a sizeable part of construction activities are
driven by the government (e.g., roads, rail roads, bridges, tunnels,

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pipelines, ports, runways, hydro-electric and power projects, etc).

As regards the services sector, it is believed that the growth rate will dip
from the current double-digits to ~9.2% in FY09E and further to ~7.9% in
FY10E. Amongst larger components of services, ‘banking, real estate, and
business services’ is likely to slowdown markedly from the current 12%
plus level to ~9% in FY09E and further to ~6.5% in FY10E. Our estimates
implicitly assume slowdown in trade, transportation, hotels and restaurants,
among others, to the levels of the most recent low growth phase of
FY1999-03. Communication (weight ~5% in overall GDP), however, is
likely to stay strong. The social and community services segment (~14% of
GDP) is likely to hold steady as well, as it is driven largely by government
activities.

13.3 Real estate & Recession

Real estate markets in the United States could hit to bottom in 2009 and
then flounder for much of 2010. During this period, ongoing drops in
property values, foreclosures, delinquencies, and a limping economy will
continue to crimp property cash flows.

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Commercial real estate faces its worst year since the wrenching 1991–
1992 industry depression , which projects losses of 15 percent to 20
percent in real estate values from the mid-2007 peak. Only when property
financing gets restructured will pricing recorrect and this transition could
wipe out companies and people.

The industry is facing multiple disconnects.Many property owners are

drowning in debt, lenders are not lending, and for many (industry
professionals), property income flows are declining. There is an
unprecedented avoidance of risk. Only when financing gets restructured
will pricing reconcile, giving the industry a point from which to start digging
out of this hole.

Distress in the housing market is benefiting the apartment market, which

the report lists as the number-one "buy." Moderate-income apartments in
core urban markets near mass transit offer the best buy, a trend that
carried over from the previous years.

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13.4 Indian real estate sector in recession

mode

The US financial crisis has caused disturbing impact on the Indian real
estate market, which is facing a plunge in real estate demand. The industry
is facing crunch of skilled manpower and it remains unorganised,
characterised by small players.

The Development of real estate in India is attributed to the off-shoring and

outsourcing businesses, such as high-end technology consultation, call
centres and programming houses. The demand from the information
technology sector has changed the urban landscape. Several multinational
companies (MNCs) continue to move their organisational operations to
India to take advantage of lower manpower and other costs. Providing
human resources and home at their workplace assumes great significance
and therefore, the requirement to create space for people to live and work
that in turn, causes the development of other related infrastructure. It has

been a predominant trend to set up the world’s best business centres, often
campus-style establishments bearing a distinguishing corporate stamp.
Some of these locations are so distinctive that they are termed as the
’temples of new India’. It is just an indication of the extent to which the
development of real estate has been taking place.

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The real estate market in India remains unorganised, fairly fragmented,

mostly characterised by small players with a local presence. Traditionally,
real estate developers were viewed with an element of skepticism. They
were often identified dealing with large amounts of unaccounted money,
lacking transparency and would use unscrupulous mean to acquire a
variety of regulatory approvals.

The tremendous growth of the real estate sector is attributed to various

fundamental factors such as growing economy, growing business needs
etc. However, this boom is restricted to areas such as commercial office
space, retail and housing sectors. The impending concerns of this sector
namely skill shortage, non-availability of statistics, lack of low cost-
affordable housing, lack of sustainability and to meet a future that might
have downturn due to oversupply.

The industry is presently facing a major resource crunch – an obvious lack

of qualified and skilled people from construction firms etc. Coupled with this
manpower shortage is the shortage of availability of relevant statistics,
which has created an ambiguity as to how much construction activity is
actually taking place and one can’t gauge the demand and supply trends
accurately. The opportunities and issues of affordable, low cost housing in
India are mainly related with tremendous shortfall of middle class housing
as majority of the developers are involved in developing high class housing.
So, there is a dearth of low cost affordable units. The negative version of

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Indian real estate industry is ’they have complete disrespect for

sustainability’ and that the concept of green buildings, proper waste
disposal methods and the longevity of the product are often dismissed.

Presently, the impact of recession in US economy has caused mammoth

impact on Indian real estate market as well, as it is witnessing the
recession. Till now, the real estate industry was a booming industry, which
were in pace with information technology (IT) industry. Accordingly, the
demand for IT space and commercial spaces has been grown. Also, the
high net worth of individual investors has created a very fast pace of
demand in Indian real estate sector, which has a very high impact image of
investing in India.

As the money was coming in terms on investment in from non-resident

Indians as well as private equity funds, the well-known developers and real
estate players have grown their portfolio as well many small sized players
have also created in Indian market. It has provided a very high supply of
real estate segments either in residential or in commercial or in office
space. Special economic zone (SEZ) has also creates a very good
opportunities for investors as well as corporate to invest and get benefited
from Indian real estate market. So, the booming market has created a

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niche as modern living and created a very mass employment in Indian

segment.

The recent changes, which happened in American market such as

bankruptcy of Lehman Brother (one of the oldest financial firms of
American market) and sell process of PE firm Merryl Lynch by the largest
US bank, Bank of America, has created a very fast drops/recession in
financial industry and created a crisis in all over US economy. Both of these
firms were invested their more part of funds into real estate sector without
having the proper analysing or effect. They also have given the funds for
mortgage industry of US, which is currently facing the hurdle of sub prime
lending and have affected many players to bankruptcy.

All of these changes in the US economy have affected Indian economy as

well as real estate segment as most of the Indian players have their
liquidity funded by both of these firms. The IT segment, which was mainly
funded by the PE firms or have their export to

US markets have noticed very sharp drop of net worth of their firms. This
recession also affected the Sensex, which is bullish and brings down the
net worth of the leader of Indian real estate player very low.

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The impact can be shown in share price of DLF, Unitech, GMR group,
Reliance Group, Wipro, Satyam etc groups. All of these sudden changes in
Indian and US market created a point of thinking to investors and
individuals that where it will go and what will be the best option in real
estate investment. The market rates in India are also dropped by 10 to 30
per cent in most of prominent as well as upcoming cities and the trend
appears to be still continuing, till it recovers from the ill effects of financial
crisis.

With a slump in the Indian real estate sector due to excessive credit crunch
and demand slowdown, home buyers can expect a further correction in real
estate prices in the range of 15-20% in next six months. There are several
factors working against the Indian real estate sector that can bring about
such a price correction. With the Reserve Bank of India (RBI) tightening
money supply and increasing interest rates to fight inflation, the developers
are facing liquidity crunch. Banks are getting jittery over loan disbursals to
real estate developers. Even if the developers manage to get loans from
banks, they are hardpressed to keep more collateral with the banks.

The five-year boom in India’s realty industry came to a crashing halt in

2008, following an acute liquidity crunch, falling sales and rising interest
rates. The year, though, started on a positive note. The Dubai-based
Emaar MGF raised $1.64 from the primary market in late January, and two
motnhs later, Delhi-based realtor BPTP registered the country’s largest
land deal, shelling out over Rs.50 bn ($1 bn) for 94 acres of land in Noida,
on the outskirts of the national capital. But after that, the fairy tale run for
the industry ended. As apartment prices shot through the roof, and interest

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rates soared, buyers turned away, which immediately hit sales.

Subsequently, over the rest of the year, realty stocks began to get
hammered on the bourses.

13.5 MIGHTY BUILDERS TUMBLE

9.5.1DLF FINANCIAL REPORT FOR FY06

The meltdown being witnessed around the world is having a significant

effect on the state’s real estate business. Property dealers, who were
already seeing a decline in their income, have seen a decline of 60 per cent
in their earnings. New deals are hard to come by and deals already
finalised are also being called off by buyers due to the liquidity crunch,
though the prices remain static.

“We have been sitting idle for many days,” said Parminder Singh, a
property dealer in Jalandhar.

NRI buyers are also not as keen on buying property here as they have
been in the past. Kewal Singh, a US-based NRI from Jalandhar, said the
recession in USA has made it difficult for NRIs to invest here. “We are
unable to manage our own installments in the US as most of the things are
bought on loan there,” he said.

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The construction sector has also got a hit as NRIs are not investing in big
projects and only concentrating on the old projects, according to Anil
Chopra of PPR, a leading real estate developer.

The number of NRIs visiting India for vacations have also decreased this
time as many of them are doing over-time to manage their loans there, said
Nihal Singh, another US-based NRI.

“The travel expenses are huge and many of our friends who used to come
here every year are not coming this time,” said Parkash Raman, a UK-
based NRI from Hoshiarpur district.

Mohinder Singh, who organises various foreign tours in collaboration with

SOTC, a known brand in arranging tour packages, said the travel business
too has gone down by more than 50 per cent.

Sales manager of Bhabhi Boutique, which has several NRIs as regular

clients, said that usually by this time their business would pick up, but their
sales have reduced by 50 per cent this year.

 Sobha’s net profit fell by 88% to Rs7.5 crore and revenue by 49% to
Rs181 crore in the December quarter against the same period a year
ago. The developer is also in the last leg of restructuring its debt of
Rs1900 crore. “We are restructuring over Rs1,000 crore and are in
the final stage of getting approvals from various financial institutions,”
said Sharma

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 Big developers like DLF, Unitech, Ansals API and HDIL were
particularly hit as Lehman Brothers, along with Merrill Lynch, another
cash-strapped investment bank that had to be sold, had direct
investments in these companies. “What hurt the overall housing
sentiment was the increasing borrowing rate. The current cost of
borrowing for the company has risen to between 15.5 percent and
16.5 percent, compared with 12.1 percent for the year ended March
3. The liquidity risk was accentuated by the slowdown in the overall
real estate market and the increasing reluctance of financial
institutions and banks to fund real estate developers.

 The impact of slowdown was also reflected in developers downsizing

their manpower or whittling down pay packets. Unitech laid off 10
percent of its employees and DLF retrenched 12 percent. Similarly
Parsvnath cut salaries of its employees in the top and middle level
management by up to 20 percent, while Omaxe, which fired 70
employees, also cut the remuneration of those who were retained by
10 percent. Looking ahead, the industry does not foresee any
upswing in fortunes in the immediate future, though the government
and the central bank have been taking steps to infuse additional
liquidity into the system, especially for sectors such as housing.

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9.5.2 REACTION TO RECESSION

 STALLING OF PROJECTS

DLF stalls 2 of its biggest projects ,2008

Facing acute liquidity crunch and poorer sentiments, the country's biggest
property developer, DLF, has reportedly stopped work at two of its biggest
mid-income housing projects.
The New Delhi-based builder has halted construction at DLF New Town
Heights in Gurgaon Sector 90 and Express Greens in sector M1 in
Manesar, both in Haryana. The two projects were launched in January and
August 2008, respectively.
Even after a year, the company has merely begun some basic work at its
New Town Heights project, according to a report by Nomura Financial
Advisory and Securities. In the Town Heights project, DLF has merely
undertaken excavation work while in the Express Greens project, the
company has just marked the boundary with its bill boards, the report said.
According to sources, the company has sold most of its apartments in New
Town Heights in the first few months, offering 3 and 4 BHK apartments at
Rs 2,125 and Rs 2,505 square feet, respectively.
However, sales in the Express Greens that offers 3 and 4-bedroom
apartments for Rs 1,760 and Rs 2,125 respectively have not been very
good. DLF did not respond to a detailed questionnaire sent on Friday.

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DLF's third quarter profit has dropped by 69 per cent to Rs 670.79 crore.
The developer has stalled work on nearly 16 million square feet of office
and retail mall space out of the 62 million square feet under development.

However, ers who have booked houses at the DLF projects may be partly
compensated if DLF fails to complete the project in 36 months after the
launch, a company official, who declined to be identified, said. The
company's debt has spiralled by Rs 1,500 crore to reach Rs 14,800 crore in
the third quarter of FY09, compared to the previous quarter, according to
sources. DLF had recently announced that new mid-income housing
projects in Panchkula, Gurgaon, Hyderabad, Bangalore and Chennai to
cater to the increased demand in this segment. However analysts say if the
company could not start construction on its already sold mid - income
housing projects, it is unlikely that the company can come up with any new
projects.

 Unitech defaults on Rs 150-cr payments

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Unitech, the country’s second largest real estate company, has

defaulted on two payments on a housing project in Greater Noida

in Uttar Pradesh. Unitech has not paid two installments worth Rs 150 crore
to the Greater Noida Authority for the 100 acres it had purchased for its
ambitious Uniworld City project.

The company is trying to reschedule the payment, but risks harming the
land deal if it doesn't pay up, the sources say. The company insists the
payment was stopped due to farmer agitation. Officials of the Greater
Noida Authority understand that real estate companies have been hit by
liquidity crunch and will be “understanding” to Unitech’s request. DLF group
chairman K P Singh says the financial crisis has hurt the real estate
business, particularly “fly-by-night operators”.

DLF defers projects and cuts workers

Bloomberg cited Mr Kushal Pal Singh chairman of DLF Ltd as saying that it
has deferred some projects and plans job cuts to cope with the economic
slowdown.

Mr Singh said that prices have come substantially down, so much that
projects will shut down. He said that “There is a lack of money supply to

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developers. It is paying 12% to 13% interest on loans.”

He said that home mortgage loans should be brought down to 7% to boost

demand. State run Bank of India on November 6th reduced loan rate to
10% from 10.75% on 15 year loans for up to INR 5 million.

Mr Singh said that “There will be takers only when you bring down home
loans.”

Mr Singh recently said that the decline in raw materials costs including
steel and cement would help bring down property prices.

 Sobha Developer Cuts Workforce by 30%

Sobha Developers Ltd, a leading realty firm in south India, has witnessed
its monthly revenue reduce by more than half, from Rs120 crore to Rs 50
crore. With sales down, Sobha has been forced to cut its 3,000-strong
workforce by about 30%, to 2,170. However, with revenue from the real
estate sector going down, the company’s other source of income, its
contractual business, has been the saving grace. “Unlike the real estate
sector, the income from our contractual business has been steady and we
don’t really have to look out for customers,” said J.C. Sharma, managing
director of the Bangalore-based company, which is expecting a Rs400
crore turnover from the contractual business by 2010 and has completed

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over 120 contractual projects for various corporate customers such as

Infosys

The company is also looking at various funding options ranging from equity
dilution, private equity funding at project level as well as land sales. Mint
had earlier reported that the developer would try to sell parts of its 3,000-
acre land bank—the process seems to have started. It has managed to sell
land worth Rs100 crore over the last few months. Sales have not picked up
even after developers such as Sobha are trying out various out-of-the-box
marketing techniques such as its recent Home Mela. The two-day property
exhibition that showcased 18 different properties of the company concluded
with only six apartments being sold.

Sobha, which till now, focussed on high-end and luxury apartments and
villas is finally joining the affordable housing bandwagon. It is launching its
first budget housing project in the next three-four months in Bangalore,
though officials didn’t divulge pricing details. “Contractual work in real
estate has also been hit as most corporates have stalled expansion plans.
Which is why, we find lot of contractual business coming in for developers
from industrial or education sectors. Like Sobha, we will find more
developers going in for debt restructuring to pull down high interest rates on
short term loans and converting them to long-term loans,” said Abhinav
Bhandari, research analyst (construction and infrastructure) with Pioneer
Invest Corp Ltd.

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RATE CUTS

 DLF cuts rates by 20-30 percent in Chennai, Bangalore

Country’s largest real estate developer DLF has cut its prices in its on-
going projects in Chennai and Bangalore by 20-30 percent, and has
extended this benefit also to those customers who had earlier bought
homes in these projects.

Existing customers, who have paid more than the revised apartment
price, will be eligible for refund, although there may not be many such
cases, as most have made only part payment, the company said.

DLF’s decision, which international property consultancy firm DTZ

described as “bold”, is likely to force other realty companies to bring
down prices. DLF may also bring down prices of its projects in other
cities as well, a company official said.

DLF’s move is similar to what country’s largest bank, State Bank of

India, did in the home loan and auto loan market. The SBI has slashed
home loan rate to 8 percent for all new borrowers for the first year of the
loan term, fuelling a turf war with private sector mortgage lenders. But
unlike DLF, the bank didn’t extend this facility to its existing customers.

DLF has revised it prices downward by 17 percent to Rs 2,650/sqft in its

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Garden city DLF OMR project in Chennai, comprising 3,500 apartments,

of which 2,000 have already been sold.

The company has slashed prices by 32 percent to Rs 1,850/sqft in

Bangalore’s Bannerghatta Road. The Bangalore project has a total of
around 2,000 apartments. The company also recently launched a
housing project in Hyderabad at Rs 1,850/sqft, which is substantially
lower than the market price.

A DLF spokesperson said the company’s decision to reduce prices was

in response to the changed conditions in the real estate sector due to
unprecedented global events and changes in the raw materials costs.

DLF’s latest move is in line with the thoughts expressed by its vice
chairman Rajiv Singh at the quarterly earnings announcement almost a
month ago. He had said that the property prices would fall by 15-20
percent. He had also highlighted the need to take the lead and quickly
turn in products that are required in the current market.

“By the time one gets ready with products, the business cycle has
already turned and there are not many takers for such products,” he had
said.

Several analysts have been saying a 30-35 percent decline in prices

was essential to spur demand for property. Customers, wary of high
property prices and finance cost, and uncertainties regarding their own

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future due to poor job market scenario, slid into the wait and watch
mode late in the second half of last year. As sales dried up, credit
became expensive and private equity funds vanished, property firms
faced major pressure on their cash flow.

Developers though have been slow in reacting to the market changes.

DLF’s latest decision to cut price can potentially influence the entire
market. “DLF’s bold move will prompt other companies as well to reduce
prices,” said DTZ India CEO Anshul Jain.

DLF’s closest rival, Unitech, which hasn’t launched any new project of
late, said it is still watching the market. Unitech head of strategy and
planning R Nagraju said company’s new launches will surely be at lower
price points.

DLF’s move to extend the benefit to existing customers in ongoing

projects is being seen as particularly important. Most realty companies
had, so far, refused to bring down prices in existing projects saying that
they will have to cut prices even for those apartments already sold.

DLF, as all other realty players, has been facing pressure on sales and
has put construction on more than half of its commercial projects on hold
due to lack of demand. The company reported a 69 percent decline in
profit in December quarter.

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 Developers Likely to Slash Prices

Indian real estate developers are expected to cut prices by 30% and more
over the next three to six months. At a recent TiE-Indian Angel Network,
summit in the capital, industry players including real estate developers,
private equity players and real estate brokers and consultants, all answered
in the affirmative when asked whether they see the possibility of a price cut
in future. The Indian realty sector has been in a meltdown over the past few
months. Prices for both commercial and residential property have come off
by 20-25% over the past few months. Industry experts and players say they
expect them to go down further.

LAYOFFS

 DLF confirms layoffs, freezes projects Tuesday, November

18, 2008

The liquidity squeeze-induced slump in demand has forced real estate

leader DLF to fire some employees, put a number of hotel and housing
projects on hold and yearn for 7 per cent home loan rates.

"We must have laid off some employees somewhere," DLF Chairman K P
Singh told reporters on the sidelines of India Economic Summit, but did not

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give the number of jobs that were cut.

The company has also deferred some of its projects due to poor demand.In
hotels, residential and commercial everywhere... deferred because of lower
demand and liquidity crisis, again without sharing the specifics.

Singh also said high interest rates have taken a toll on demand. "There are
no takers for housing sector... Ideally, the interest rate should be around 7
per cent."

Asked if the current prices of the realty projects are inflationary, Singh
denied and said: "It cannot be inflationary as it has to be competitive. It also
depends on supply and demand."

Because of demand going down, many projects have been closed down by
many developers across the country, he added.

 Brokers Take Advantage of Recession in Real Estate

Property brokers are taking advantage of the slowdown in the residential

real estate market by increasing the commission they charge from
developers. As house and apartment sales sag, brokers, who typically
charged 2-5% of the value of the property as commission, are demanding
as much as 8-9%. “The slump in sales is so dramatic that developers are
willing to pay a higher commission,” says Sanjay Sharma of
Gurgaonscoop.com, a website on the real estate market in Gurgaon, a

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New Delhi suburb. “Earlier, an 8-9% commission was given by weak or

smaller developers… Now the trend is even developers of large luxury
projects are giving 8-9% commission.”

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Chapter 14
“RENOVATING REAL ESTATE” -EFFORTS
TO COUNTER RECESSION

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14.1 EFFORTS TO COUNTER RECESSION

 Low interest rates

LEADING real estate developer DLF has called for a 5% cut in home loan
interest rates. DLF chairman K P Singh told ET that projects in the realty
sector are getting delayed because of the current liquidity crunch. “Home
loan interest rates should be slashed from the current 13% to 8% in order
to revive the real estate market and prevent the economy from sliding into a
recession,” he said. He also added that a 5-10% correction of property
prices is expected in the coming months. A temporary slowdown of the
economy can lead to a recession and ultimately even a depression. If the
government does not take any bold actions, recession is inevitable.
Emphasizing the importance of the multiplier effect of the sector, Mr Singh
said that the housing industry is the indicator of an economy’s health
across the world.Mr Singh also said that the government should aim at
making housing a key sector in the economy and make borrowing easy.

 increased government spending

Hit hard by the global slowdown, export, housing and financial sectors
will get a fiscal as well as monetary package from the Government and
RBI. The Government and Reserve Bank may further ease money

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supply, provide interest subsidy for specific sectors and come out with
tax cuts for boosting demand. Despite RBI injecting around Rs 2,75,000
crore into the system, various sectors are facing liquidity problem and
there is demand for further steps from the central bank to ease money
supply.

 Private real estate markets need to correct-–lenders must force

distressed owners to become motivated sellers.

 Debt capital needs to flow-–lenders will need to learn to deal in a

more stringent regulatory landscape. The commercial mortgage-
backed securities (CMBS) market must "reformulate."

 Regulators need to restore confidence in the securities market. The

government will insert itself into overseeing mortgage securitization

markets. Systemic overhaul promises more measured debt flow.

 The economy needs to improve. Falling demand for space won’t

affect real estate markets severely until 2009.

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 OTHER GOVERNMENT POLICY MEASURES

A high-level task force of the government has recommended setting up of a

“real estate regulator” and a dedicated institutional framework to look into
the issue of providing affordable houses to the people. The regulator could
serve as a single window for overseeing and monitoring the affordable
housing agenda and promote policy reforms like stamp duty and
registration and protect consumer from real estate fraud, the task force,
constituted by the Ministry of Housing and Urban Poverty Alleviation, said.

Besides, it can coordinate digitisation of land records, the task force

underlined. The recommendation assumes significance as high price has
put housing projects in metros and emerging towns beyond the reach of the
common man.

 NEW SCHEMES TO ATTRACT BUYERS

With real estate prices continuing to fall, builders have been forced to come
up with innovative schemes in order to woo buyers. Price guarantee
scheme is one such sop being offered by the builders. This scheme —
being offered by the members of Confederation of Real Estate Developers’
Association of India (CREDAI), Karnataka — is unique as it benefits the
buyers and not sellers. As per the scheme, the buyer would get back the

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difference amount if the builder sells the apartment at a lower price than the
amount received from the former. While a few of them honour the price
guarantee scheme, others (fly-by- night builders) never bother to refund the
difference. Suresh Hari wanted buyers to approach a reputed builder as
they can address the problems which are bound to arise in future

 MEASURES BY DEVELOPERS

Unitech, India’s second largest listed real estate compan, is looking at

restructuring a Rs 800-crore loan from public sector banks, as it attempts to
save itself from sinking under the huge debt burden. The company is
pinning its hopes on debt restructuring, asset and stake sales to private
equity (PE) funds to pay a debt of Rs 2,500 crore, which is due by March
’09. “We are in discussions with public sector banks for rescheduling our
loans,” Unitech head of strategy and planning, R Nagraju told ET. Another
company executive, requesting anonymity, said Unitech was seeking to
restructure a loan of over Rs 800 crore.

Unitech is also looking at raising funds through private equity infusion at

company and project levels. Unitech is holding an extraordinary general
meeting (EGM) on January 19 to seek shareholder approval to raise Rs
5,000 crore by issuing fresh equity or convertible instruments. The RBI had
raised the ceiling for FII holdings in Unitech to up to 100% in November
2007. The company has been holding negotiations with multiple PE players
to raise between $300-$500 million by issuing convertible debentures at the

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company level and around $200 million by selling stakes in mid-income

housing projects.

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Chapter 15
CONCLUSION

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Indian real estate landscape is expected to be dotted withSEZs,

international standard warehouses and specialized industrial spaces. Large
integrated developments can become a norm among the working
population. The Indian Property Market is fast going through a learning-
curve. Rising interest rates have impacted the credit availability to the
sector, global economic conditions seem to have subdued the demand
from investors and occupier’s alike, Indian real estate stocks are down by
more than 50 per cent from their year long high and the once soaring real
estate values appear to be plunging. This, no doubt is the reality.
Nonetheless, it is hoped that this is a transitory phase and the picture that
would emerge once the churn is over will be a high growth curve.

The economic liberalization in the 1990s and the ensuing information

technology revolution have been instrumental in giving the real estate
market its present form. MNCs-led demand for quality office space resulted
in modern buildings springing up in new suburban locations. Increased job
creation and rising disposable incomes coupled with lower interest on
housing loans, had in turn fuelled demand and affordability for residential
space. The change in attitude and the spending habits of the consumers
led to an increase in consumption and demand for retail malls.

Relaxing the FDI regulations for the real estate sector opened the
floodgates for foreign capital inflow into realty sector. The much-required
capital in the last few years has facilitated widespread development of
residential, office, retail and hotel space in the country. It has also been
instrumental in organizing the market to a large extent and bringing it closer
to real estate markets in other developing countries around the world. We
are excited about these developments as the growth that we witness today
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is a sign of the emerging far-reaching and long-term trends that will drive
robust growth for the sector in the years to come.

Foremost would be the institutionalization of the sector and the definite

change in the ownership structure. Instead of individuals, private equity
funds, hedge funds, insurance companies, pension funds, banks and other
financial institutions would own, invest or manage real estate assets in
office, residential, hotels, industrial, retail space etc. Public sector
organizations like Life Insurance Corporation of India, UTI, Public Provident
Fund, other pension funds of central and state would hopefully become
active investors in the real estate industry.

This will also lead to sophistication in the financial structuring of real estate
investments. They will provide access to capital, both debt and equity
capital from public and private sources. Apart from offering an exit route for
the developers to revolve funds and improve their margins, it will also allow
individuals investors to be a part of the real estate market.

On the product side, there will be further advancement in construction

management and project management techniques in order to optimize
costs, meet construction timelines and achieve environmental and health
and safety guidelines, intelligent, energy efficient green buildings will
become the norm of the day. Property and facilities management services
will also undergo a facelift. The provision of a good working and living
environment as well as the enhancement of the asset lifespan will be key
considerations and these services will be outsourced much more to firms
specializing in these functions.

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Real estate activity will become more widespread and will take many
smaller towns and cities in its fold. Improved infrastructure, the potential of
untapped markets, increased access to capital together with the saturation
and spiraling cost of metros will play a vital role in promoting new growth
centers. Infrastructural projects including roads, airports, ports and inter-city
connectivity will witness increased private sector participating and evolve
as real estate play. This will significantly augment the availability as well as
the quality of these services in the country.

Rental housing as well as rented office space can become common as

corporate entities will look at reducing their fixed asset liabilities, change in
ownership structure would also bring in standardized, accepted practices
for property valuations. Property transactions will become easier due to
availability of research data, computerized land records and simpler
processes for transfer of land titles and taxation. Hopefully, all these would
be the prerequisites for evolving transparency and uniformity in the market.
After witnessing periodic highs and lows, the interest rates and real estate
process will undergo a rationalization and will finally be market driven. The
above listed trends are some key real estate events that are most likely to
take shape in next decade.

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Chapter 16
FUTURE SCOPE

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 Real Estate Sector- potential for more sophisticated

Infrastructure

Anecdotal reports are that activity in the property market has been slowing
- but that does come after an especially frenetic couple of years.

The real estate sector in India has grown by 30% to 35% during the past
five years, reflecting the rapidly increasing demand for office, commercial
and industrial space, as well as for bigger homes, that coincided with the
economic boom.

To some extent, property development may have failed to keep pace with
demand because of an underdeveloped investment market.

Owing to oversupply, downward pressure on rents seems a likely outcome

in the coming months, making occupier demand look vulnerable in the
Indian property market.

On the retail front, the likely effect of an economic slowdown will be to

depress discretionary spending and that may subdue retail rental growth, at
least over the next year or so.

However, once the current global downturn is through, the Indian economy
should rebound, supported by a large, young workforce; gradual but
consistent liberalisation reforms; and a high rate of consumer and private-
sector savings.

The growing population and economic expansion will mean that India
needs not just homes but offices, schools, hospitals, and entertainment
centres.

Addressing infrastructure needs is also an important priority to support this

property market development. Special Economic Zones can play an
important role. On the investment side, the expected development of real
estate investment trusts (REITs) in the future could expand the property
investment opportunities in India.

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In the longer term, there is a great potential for more sophisticated

infrastructure and a greener future.

 Understand Social Responsibilities- Banking

Experts to Developers

In a brainstorming session on ‘Opportunities and Challenges in Finance

and Banking for Real Estate Sector’ on Wednesday, banking experts told
real estate developers to realise their social responsibility of providing
affordable housing to the masses. Held under the aegis of the Gujarat
Chamber of Commerce and Industry (GCCI) and Gujarat Institute of
Housing and Estate Developers (GIHED) at Hotel Grand Bhagwati, stress
was also laid on providing cost-effective housing for the low income groups,
as this had remained largely unexplored.

According to GIHED vice-president Suresh Patel, a developer, this was

because in the boom period of the last four years, majority of big players
had worked towards meeting the needs of only top 12 per cent of the
market. He felt affordable housing at lowest rate was possible. He
wondered how ‘board room analysis’ by bankers born in the 1980s could
decide the fate of a 50-year-old sector. The good repayment figures shown
by these bankers to prove their banking prowess could not be taken at face
value because of limited exposure, he said.

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Vijay Shah, a prominent real estate developer, lamented that banks were
reluctant in extending project loans to developers. He said developers also
felt difficulty in sourcing down payment of loans lately. Shah pointed out
that banks had reduced valuation of assets for credit from 80 per cent to 60
per cent. S Srinivasan, chief executive officer of Kotak Real Estate Fund,
was optimistic about the real estate scene of Ahmedabad. He said it was
much better than other cities like Mumbai and Bangalore. He said nowhere
else was any developer able to offer a price of Rs 1,500 per square feet,
but in Ahmedabad. He said if a buyer called a price of Rs 2,000 as
unaffordable, it was a matter of mindset.

According to him, developers had capital in the past and yet had the luxury
of saying no to new investment in the last one year. That was time of
excessive commitments and it would take time to correct that situation in
the real estate sector. Srinivasan wondered over the abysmally small
number of developers who could declare business size in excess of Rs 150
crore. “Most developers have not built their balance sheets over the years,
though they borrowed a huge amount of Rs 72,000 crore from banks… this
calls for hard thinking. For, you have no choice but to prepare your balance
sheet if you want to build your business in the long run and if you do not
want to confine yourself to relationship banking,” he said.

Srinivasan said the Reserve Bank of India was often cursed for enforcing
restrictions on banks’ lending parameters, but it should be remembered
that this cautious approach was in the developers’ interest. He felt that
banks must first be able to build confidence in the lending activity to build
up stable banking operations. He also advised developers to work closely

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with the planning authorities, especially when planning shopping complex

after complex in a close range. “There is a disaster waiting to happen in
terms of viability and lessons must be drawn from what happened in places
like Gurgaon,” he said. HDFC general manager Irfan Kureishi also spoke
on the occasion.

 Indian realty goes ‘Green’

The Indian Real estate sector is taking the initiative to contribute to the
save the environment by developing green buildings. Jones Lang LaSalle
Meghraj, in its research report titled, ‘Greenomics,’ states that the Indian
construction industry is growing at 10% as compared to the world average
of 5.2%, and that the country is expected to develop 110 million sq ft of
green space over the next few years. The report focuses on the cost
benefit analysis for green buildings. One of the major findings from the
analysis is that a green building aiming for LEED (Leadership in
Environment and Energy Design) – GOLD certification can recover its
additional costs in a payback period of 2-3 years.

Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj,
says, “The challenges faced inherent in the development of green buildings
in India are the extra investment in an unstable real estate market scenario,
and the difficulty in sourcing green building material and sustainability
consultants. Extra investments can be recovered in the medium-to-long
term from the non-sustainability discount, which gives green buildings a

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higher rental value than conventional buildings in their vicinity, and via the
carbon credits that can be earned from the reduced GHG emissions.”

Most green buildings in India are coming up in Mumbai and Chennai.

Mumbai, being India’s financial hub, is more preferred by large MNCs,
especially financial conglomerates. Similarly, Chennai has seen a
tremendous influx of IT and multinational manufacturing firms. The concept
of green buildings is gradually catching up in other cities like Kolkata, NCR,
Bangalore and Hyderabad. Green Buildings are more energy efficient,
consume less water and reduce construction waste. The intangible benefits
are generated from a healthy living environment and better working
conditions within the building.

Growing awareness on the benefits of green buildings among international

and domestic occupiers is decisively driving the demand for green
buildings. The green building movement has also catalyzed the emergence
of various green rating systems that provide tools to enable comparison of
building on their sustainability credentials. Among all these rating systems,
Leadership in Environment and Energy Design (LEED) has emerged as the
most popular and is followed in 24 countries across the globe - including
India.

The Government has launched the Energy Conservation Building Code

(ECBC) under the National Building Codes and Standards to promote
green buildings in India. The Confederation of Indian Industries (CII), along
with the Indian Green Building Council (IGBC) and other professionals, is
also working to mitigate the challenges green buildings will face, thereby

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enabling developers to develop and operate green buildings with ease. As

the green building industry matures, the green funds industry will also
emerge. Therefore, the entire green ecosystem is ramping up in India,
opening new investment opportunities for developers and giving them good
reason to get involved in developing sustainable buildings.

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Annexture

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Estate

References

 Duetsche Bank Research Report – Building India.

 Urban Land Institute --- Emerging Trends In Real Estate,PWC.

 Real Estate Sector -- EFG Hermes

 Substantial Real Estate Development - GMR Group Study

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Bibliography
Books & Journals

 The Complete Real Estate Encyclopedia, Denise L. Evans & O.

William Evans.

 Real Estate Report - Realty Times, 2008.

 Indian Real Estate Sector, Equity Research, ICICI Securities.

 Real Estate Market Predictions, Economy Watch, February 2009.

 Indian Real Estate Repot, Northridge Capital, June 2008.

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Websites

 www.IndianRealEstateForums.com

 www.RealtyTimes.com

 www.chicagotribune.com

 www.Moneycontrol.com

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