Boom & Bust in Indian Real Estate Sector
Despite the stagnation period, Indian Birla Tisya Apartment sector has seen a remarkable evolution, fueled by a growing economy, favorable demographics, and a liberalized foreign direct investments regime. But, the unceasing phenomenon that is India’s real estate sector has begun to show signs of contraction.
What are the causes of this trend and what is the future direction? These are the questions this article attempts to answer.
Overview of Indian real-estate sector
The Indian reality sector has seen tremendous growth since 2004-05. The realty sector has experienced a 35 percent growth rate and is valued at US$ 15 billion. It is expected to continue growing at a rate of 30% annually over the next ten years, attracting foreign investment worth US$ 30 Billion. There are many IT parks and residential towns being built across India.
Real estate includes residential housing, commercial offices, and trading spaces like theaters, restaurants, bars, and retail outlets. It also includes industrial buildings, such as factories, and government buildings. Real estate includes the purchase, sale and development land, residential or non-residential buildings. Real estate also includes the construction and hosing sector.
This sector is the second-largest employer in the country and is a major source of employment. There are approximately 250 ancilary industries that have backward and forward links to the sector, such as cement, brick,steel, etc.
A unit increase in this sector’s expenditure can have a multiplier effect and the potential to generate income up to five times.
Housing accounts for over 80% of the real estate industry and is on the rise at a rate of 35%. The remaining components are commercial segments offices, shopping malls and hotels.
o Housing units
The cost of houses in the past was nearly 20 times the annual income, but today it is only 4.5.
The 11th five-year plan estimates that the housing shortage in 2007 was 24.71 millions and that total housing demand for 2007-2012 will be 26.53million. For the 11th five-year plan, the total urban housing sector fund requirement is Rs 361318 crores.
Below is a summary of the investment requirements for XI plans.
SCENARIO Investment Requirement
Housing shortage in the first XI plan period: 147195.0
Housing stock additions during the XI plan, including additional housing shortages during the plan period 214112.3.1
For the plan period, total housing requirements are 361318.1
Office premises: The rapid growth of the Indian economy has had a deluging effect upon the demand for commercial property that can meet the business needs. The burgeoning outsourcing industry, organised retail and information technology (IT), are driving the growth in commercial office space requirements. IT and ITES are estimated to need 150 million square feet in urban India by 2010. Similar to IT and ITES, organised retail will likely require 220 million square feet more by 2010.
Shopping malls: Urbanization has increased at a CAGR of 2% over the past ten year. The growth of the service sector has not only increased the disposable income of urban populations but also made them more brand-conscious. The Indian retail industry is valued at US$ 350 billion and expected to double by 2015.
This will result in a higher demand for mall space and strong growth prospects for mall development.
Multiplexes: Another growth driver in real-estate sector is the growing demand for multiplexes. These are the factors that have contributed to higher growth:
1. Multiplexes have 250-400 seats per screen, as opposed to 800-1000 seats in one screen theater. This gives multiplex owners an additional advantage and allows them to maximize capacity utilization.
2. Theatre developers also enjoy non-ticket revenues such as food and beverage, and extra revenues from the leasing of space to retailers.
o Hotels/Resorts – As mentioned, the rising boom in real estate is due to the rising incomes of the middle class. As a result, the income of middle class is increasing and they are more likely to travel and spend a portion of their income. This leads to a higher demand for hotels in the country. This is not all. India is becoming a major destination for international tourism, which is driving up demand for hotels/resorts.
The government has set the path
After a decade of stagnation, the sector has gained momentum thanks to Indian government initiatives. To unlock the sector’s potential and meet rising demand, the government introduced progressive reform measures.
All reality projects by automatic route allow 100% Foreign Direct Investment
o The minimum area that can be developed in integrated townships has been reduced to 25 acres, from 100 acres.
A large number of states have abolished the Urban Land Ceiling and Regulation Act.
o The legislation of special economic zones.
– Full repatriation after three years.
o 51% FDI permitted in single-brand retail outlets and 100% in cash and transport through the automated route
All of the factors mentioned above can be attributed to this incredible growth. This sector has a lot of potential for international investors, with significant investment and growing opportunities. Current estimates of foreign direct investment (FDI), into this sector range from US$ 5 billion to US$ 5.50 Billion.