By: Sunil Mantri, CMD Mantri Realty & President, NAREDCO
Track2Realty Exclusive: The real estate sector in India today is developing at a scorching pace. Factors such as higher levels of income and purchasing power and the growing need for entertainment, leisure and shopping, the government’s focus on infrastructure development, rapid urbanisation driven by rural-urban immigration and an emerging trend of nuclear families, greater availability of loans to finance real estate purchases, amongst others, have been instrumental in this development.
It is a sector of strategic economic importance too as it is the second largest employment generator, after agriculture and contributes about 6.3 per cent to India’s Gross Domestic Product (GDP). Looking ahead, according to the India Brand Equity Foundation (IBEF), this sector is expected to post annual revenues of US$ 180 billion by 2020 against US$ 66.8 billion in 2010–11, a compound annual growth rate (CAGR) of 11.6 per cent.
Market dynamics and cycles
The development of the real estate sector is becoming more broad-based. At one level, the growth of all four major segments–residential, commercial, industrial and hospitality-has picked up. At the geographical level, there has been a spread of townships and industrial parks beyond metros into smaller cities and towns and along major highways. However, this growth is subject to market cycles.
The industry faces periods of recession, recovery, expansion and contraction, which are closely linked to economic trends in the country. For instance, during the past decade or so, the period between 2001 and 2005 marked the beginning of a take-off with prices rising in the sector. This was followed by a high growth phase between 2006 and 2008. After the sub-prime crisis that rocked the global economy in 2008, the sector headed for a recessionary phase due to a dent in incomes and poor economic growth.
The sector has gradually recovered to move into a consolidation phase after 2011, wherein prices have been rising and demand has picked up in line with economic and income growth.
Issues facing the sector
The real estate sector has been evolving, over the years from a largely unorganised sector to a relatively organised industry. This has been due to various developments on the policy front and the participation of international real estate players, reputed Indian corporate houses and foreign investors. During the past decade, there have been reforms across a wide spectrum of the real estate issues from land acquisition and regulation to protection of customer interests, foreign investment allowed since 2005 and the introduction of Real Estate Investment Trusts (REITs).
While this current wave of innovation and energy in the sector has infused new life into it, there are still a number of issues that need focused attention, failing which the sector will not be able to achieve its full potential. According to the World Bank’s Doing Business 2012 Report, India ranked high in terms of need for housing and work spaces. However, it ranked as low as 181 in terms of construction permissions and processes out of 183 countries studied. The sector is mired by red tape, complicated land laws, volatility of raw material supply, labour issues and weak law enforcement and property rights. Further, the approvals of building plans by the planning authority or a municipal corporation result in abnormal delays.
Availability of funding for real estate development continues to be an issue. In general, the current regulations on foreign investment make it difficult for small developers to access low-cost capital. Ironically, while bank funding is the cheapest source of funds for the real estate sector, due to end-use restrictions and close scrutiny of the use of these funds in construction, the industry not been able to extensively use these funds for growth capital such as land acquisition.
According to data from the Reserve Bank of India (Deployment of Gross Bank Credit by Major Sector), bank credit exposure to the real estate and housing sector as a percentage of Gross Bank Credit declined from 10 per cent in FY10 to 7.9 per cent in FY13. In this space, however, NBFCs have been actively pursuing last mile funding opportunities, especially in projects with substantial investments but a lack of “last mile funding.”
…to be continued
