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Indian real estate

Some year’s back, real estate would bring in mind shady images of brokers but now with reputed builders and international property consultants joining the fray, this image has strengthened and evolved into a professional corporate image. The real estate sector in India today is on upturn and driven by sustained demand that slowly but surely is expected to make India into a preferred destination for real estate activity.

The real estate market in India is opening up. 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% growth rate for the organized retail segment by 2010. The organized segment is expected to grow from a mere 2% to 20% by the end of the decade. There are still some barriers to real estate development like unclear titles, tenancy laws and low property taxes. Two major steps taken by the government will however be key catalysts in fuelling growth in real estate sector in India. In its bid to improve things, recent moves have been made by the Government to allow foreign direct investment in real estate in India. The investment would be in integrated township which would include housing, commercial premises, hotels and resorts, while the urban infrastructure would comprise roads and bridges, Mass Rapid Transit Systems and manufacture of building materials. The minimum area that can be developed is 100 acres designed keeping in consideration the local bylaws and regulations. The minimum capitalization would be US $ 10 million for a wholly owned subsidiary and US $ 5 million for a joint venture with an Indian partner. FDI (Foreign Direct Investment) is however not being allowed in the retail sector.

Generally speaking, real estate prices have stabilized to a great deal as the role played by speculation has started declining. There are a lot of changes being introduced in the Indian real estate sector especially with the cheap labour, pool of people. The other major event is the introduction of REIT (Real Estate Investment Trusts). Currently mutual funds are not allowed to have direct exposure in real estate but they can make debt and equity investments in the company. The Indian version of REIT- REIS (Real Estate Investment Schemes) would enable investments by the small investor in the real estate sector and thus earn dividends on the rental income being paid.

Also with globalization, businesses are being forced to take into consideration contingency plans both in terms of additional space and geographical diversifications of their supply and manufacturing chains. In India, access to a large pool of labour with good technical skills is resulting in the establishment of back office. The lower interest rate regime has seen interest rates on housing loans come down from 17-18% to 7-8% average. With fiscal incentive and factoring inflation the real interest rates on housing loan is only 3-4%. This has brought in a sea change in the profile of the home purchaser across the spectrum. The average age of the home buying customer has drastically reduced. We find young working couples in early and mid twenties also buying residential flats. The other major change witnessed in the industry is the recognition of industry status itself. Five years ago, the real estate activity was considered to be a speculative activity with other negative connotations. This is not the case any longer. The Government has made it mandatory that 3% of the incremental deposits of the banks would be deployed to the housing industry.

With many banks like IDBI Bank, ICICI Bank, CanFin Homes, HDFC and PNB Housing were having slashed down the interest rates - it is extremely beneficial for the Consumers.

This has provided a boost to residential sales. Research estimates that Indian Real Estate market is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. 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 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. The industry faces many problems- one of them being the high stamp duty rates in the Indian states. These range in most Indian cities between 6% and 15 %. Some states even have a double charge incidence, first – the stamp duty on sale of land and then the charges on its development. The stamp duty levied in developed countries like Singapore and Europe is about 1-2%. It is an irony that India’s own National Housing and Habitat Policy 1998 recommends a stamp duty of 2-3%. It is imperative that the stamp duty is lowered as otherwise it gives rise to a parallel economy which leads to a huge loss of revenue for the Government.

Global real estate funds are making a beeline for cities like Gurgaon, Pune, Bangalore, Noida etc. to make sure that they get a share in the country’s booming real estate pie. So are the Indian real estate funds, global and Indian real estate developers and other non-dedicated funds.

This is because of the growing number of IT and ITES companies setting up shop in the cities aforementioned, and shooting up the real estate demand. Also, because of their huge talent pool and proximity to Metros, cities like Gurgaon, Noida and Pune are attracting huge number of IT/ITES companies. Consequently, almost all the leading builders and developers are finding that funds are knocking their doors — left, right and centre.