Property Investment in India

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Property Investment in India Essay:

Key Points:

The Indian real estate industry is expected to grasp a size of US$ 180 billion by 2020.

Increasingly high growth in the services sector -telecom, financial services, IT & ITES.

Growing infiltration of mortgage finance into the urban housing finance market.

There is a growing demand for inexpensive housing and a high rate of urbanisation.

The real estate sector in India is on a rapid growth course. Over a short span of time, the industry has evolved from a highly disjointed and unorganised market into a semi-organised market, with a large number of listed companies.

The Indian Government and private developers, realising the growing demand for affordable housing, are sturdily focussing on affordable housing.

The Government of India has well-drafted rules for the Indian real estate sector.

Submitted: January 23, 2019

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Submitted: January 23, 2019

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Property Investment in India Essay: 

Key Points: 

The Indian real estate industry is expected to grasp a size of US$ 180 billion by 2020. 

Increasingly high growth in the services sector -telecom, financial services, IT & ITES. 

Growing infiltration of mortgage finance into the urban housing finance market. 

There is a growing demand for inexpensive housing and a high rate of urbanisation. 

The real estate sector in India is on a rapid growth course. Over a short span of time, the industry has evolved from a highly disjointed and unorganised market into a semi-organised market, with a large number of listed companies. 

The Indian Government and private developers, realising the growing demand for affordable housing, are sturdily focussing on affordable housing. 

The Government of India has well-drafted rules for the Indian real estate sector. 

Essay Start: 

India is evolving as an important business location, particularly in the services sector. Its encouraging demographics and strong economic growth make the country an appealing place for property investors, given that demand for property is determined primarily by business development and demographic trends. Historically, the real estate sector in India was unorganised and illustrated by various factors that impeded organised dealing, such as the absence of a centralized title registry providing title guarantee, lack of uniformity in local laws and their function, no availability of bank financing, high interest rates and transfer taxes, and the lack of transparency in transaction values. In recent years, however, the real estate sector in India has unveiled a trend towards greater organisation and transparency, accompanied by various regulatory reforms.  

The trend towards better organisation and transparency has contributed to the development of reliable indicators of value and the planned investment in the real estate sector by domestic and international financial institutions and has also resulted in the greater accessibility of financing for real estate developers. Regulatory changes permitting foreign investment are expected to further grow investment in the Indian real estate sector. The nature of demand is also changing, with higher consumer expectations that are influenced by higher disposable incomes, increased globalization and the introduction of new real estate products and services. 

India Real Estate is the second largest industry second only to agriculture in terms of the impact it makes on the gross domestic product (GDP) and the employment generation. Moreover, its share of donation to the country’s GDP is expected to increase only in the years to come. 

The GDP contribution of this sector at present prices is approx. 6.5%. Similarly, the commercial property market has compounded annual growth rate of over 30% during the last 5 years across major cities in India along with an extraordinary increase in demand for office space. To be more exact, the next five years will see a rise of six percent from its present share of five percent contributed towards the GDP. 

?The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and planned retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a Compound Annual Growth Rate’ of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22.5% in commercial real estate. 

According to a report, India is one among the BRIC (Brazil, Russia, India China) that are likely to achieve a much faster growth rate in the domain of property development and housing construction fields as compared to the UK and US real estate markets. 

The BRIC report, as it is called, has also predicted a higher real estate investment over a period of the next five years. The forecast for the year 2010 has put an important portion of the Foreign Direct Investment (FDI) towards investment in the Indian real estate market.? 

With around 1.1 billion people, India is the second most populated country after China and it is expected to overtake it by 2030. Its economic transformation over the past ten years has pushed up real GDP growth to an average of 6 per cent per annum since 1992. 

Factors that drive demand: 

Demand for residential, commercial and retail real estate is growing throughout India, accompanied by increased demand for hotel accommodation and improved infrastructure. 

The real estate industry is one of the quickest growing industries in the US economy, with a Compound Annual Growth Rate of approximately 30%. 

At US$ 16 billion industry at present, it is expected to touch US$ 60 billion in the next 5-6 years.  

The sustainability of growth in the real estate industry has its foundations in strong demand fundamentals: 

  • The rapid growth of the IT/ ITES (Information Technology Enabled Services) and business outsourcing industry (including knowledge process outsourcing and clinical testing outsourcing) 

  • Rising demand in the residential sector, stimulated by rapidly increasing income levels 

  • Increasing views on of shopping malls as “one-stop final destinations” for consumers 

  • The growing popularity of Special Economic Zones as preferred locations for both manufacturing and service industries. 

There is an estimated need of 80 million housing units over the next 

Fifteen years and 200 million sq. ft. of office space over the next 5 years. 

With a view to rapidly speeding up the investment required to plug the fore-mentioned 

Supply deficits, the Government, has allowed FDI (Foreign Direct Investment) up to 100% under the automatic route in specific real estate development projects, including but not restricted to townships, built-up infrastructure and construction development projects. 

The investment is permitted subject to agreement with the following guidelines: 

Minimum area to be developed under each project would be follows: 

  1.  In case of development of serviced housing plots, a minimum land space of 10 hectares. 

  1.  In case of construction-development projects, a minimum built-up area of 50, 000 sq.mts. 

  1.  In case of a combination project, anyone of the above two conditions would suffice. 

The investment would also be subject to the following conditions: 

1. Minimum capitalization of US$ 10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of the announcement of the business of the Company. 

2. Original investment cannot be expelled before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPS (Federal Information Processing Standards). 

3.  At least 50% of the project must be developed within a period of five years from the date of obtaining official clearance. The investor would not be allowed to sell undeveloped plots. 

In December 2007, SEBI, the domestic stock market supervisor, issued draft regulations clearing the way for the introduction of Real Estate Investment Trusts (REITs) in India. This move is also expected to positively serve the booming property market, by serving as a substitute source for meeting the capital needs of the sector, particularly for builders who otherwise work with internal accruals and very high-cost borrowings. 

Initial Public Offerings have become another trending theme as a means of raising requisite capital in the real estate industry. This has resulted in the making of a robust marketplace where retail investors can participate in the growth story while also offering the ability for promoters and investors to project forward into yet another exit strategy. 

As a result of the fore-mentioned, this industry has been receiving increasing focus from the private equity sector, with PE investments in this industry as a percentage of total PE investments mounting from 14% in 2005-06 to over 32% in 2006-07. (KPMG) 

It is projected that more than US$ 5 billion in foreign funds was invested in projects sponsored by rapidly growing developers in 2007. 

The significant development potential of the real estate industry, coupled with favourable FDI regulations and growing focus from the private equity sector, has created extensive investment opportunities for real estate companies. 

As of November-December 2007, total outstanding investment in 1,885 real estate development projects was US$ 195 billion.  

As this speedily growing industry matures into a stable and sustainable economic sector, three key trends, which are likely to shape its future, are emerging: 

  • Increased concentration on execution risks 

  • Increased investments in mixed-use development projects with an aim to extract maximum synergic(merging) benefits 

  • Syndication among real estate developers on completion of “big-ticket” development projects, i.e. a shift from competition to partnership. 

Why Invest in Indian Real Estate? 

Dominating the booming real estate/property market in India has become a dream for every potential investor looking forward to digging profits. All are eyeing Indian property market for a largely wide variety of reasons: 

It’s the ever-growing economy which is on a constant rise with 8.1 percent increase witnessed in the last financial year. The flourishing in the economy increases the purchasing power of its people and creates demand for the real estate sector. 

India is going to produce an estimated 2 million new graduating students from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. 

Presence of a large number of Fortune 500 and other reputed companies will attract more companies to begin their operational bases in India thus creating more demand for corporate space. 

Real estate investments in India?yield huge dividends (payments to share-holders). 70 percent of foreign investors in India are making large profits and an additional 12 percent are breaking even. 

The relaxed FDI rules employed by India last year has invited more foreign investors and real estate in India is seemingly the most rewarding ground at present. The revised investor approachable policies allowed foreigners to own property and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden change in investment policies, the overseas firms can build commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space. 

Indian real estate sector is on the boom and this is the right time to invest in property in India to gain the highest rewards. 

The strong fundamentals of the Indian economy are having a positive impact on all asset classes of Indian real estate e.g. housing, commercial areas – office space and retail and hospitality. In recent years, the growth has spread out to tier-2 and 3 cities as well. Very high growth in services, as well as the manufacturing sector, has resulted in high demand for commercial and industrial real estate. Further, the economic growth has filtered down to the large Indian middle class increasing affordability and affluence. Improving living standards are pushing the demand for better quality housing and urban infrastructure. In fact, housing in India is today moving from being regarded as a purely basic need to an aspiration purchase. Though high-interest rates coupled with rapidly growing property prices have briefly impacted affordability of home buyers the demand-supply mismatch and low home loans to GDP ratio in India (a small 5 per cent as against more than 50 per cent in the US, UK and Germany) are expected to fuel demand for housing in the medium-long run. The growth of the sector has been matched by favourable policy changes like liberalisation of Foreign Direct Investment (FDI) guidelines and a noteworthy increase in investment on physical infrastructure. With the entrance of global players, inflow of foreign capital, evolution of capital markets, geographical diversification and introduction of reforms, the sector has undergone some substantial structural changes. Even critical concern areas like transparency in the sector is also growing significantly. This trend is looking like it will continue in coming years. ?


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