Realty Round up - Real Estate Rides on Recovery Wave

After having remained in a dormant condition in the recent past largely due to high debt, curtailed demand and severe financial crunch, Indian real estate sector has bounced back opening brisk business opportunities across metros, satellite towns and tier-II and tier-III cities. Increasing business avenues, rising incomes, increased pace of hiring and easy access to home loans are said to be the key demand drivers guiding it to its current growth trajectory. Currently, builders are showering freebies and financial institutions offering attractive mortgage schemes sprucing up sales and cash flow. To top it all, scores of successful fund raising attempts and recent realty IPOs drawing overwhelming response from investors made it crystal clear that Indian realty sector heads for rosy days ahead. Reports Jeet Singh.

Government Initiatives

At a time when the global economy reeled under severe recession, displaying an amazing acumen, our policy makers deftly handled debt structure and fired scores of financial stimulus triggering mass movement of funds parked on the fence by investors into the market bringing the much sought after first phase of recovery. Adding to the momentum, banks start shifting their non performing assets into liquidity and pushed the pace of lending to investors with unrelenting focus on mid and affordable housing projects. Available trends indicate that currently an average value of property in metros, tier-II tier III cities, including satellite towns has outpaced the pre-recession peak rates attracting big industrial houses including Tatas, Birlas, Wadias and Bharatiyas to pick their pie in the great Indian property business.

Demand Outstrips Supply

In spite of heightened construction activities across the country, huge demand for housing in certain segments is all set to outstrip supply in the next couple of years. The increased demand for more housing is expected to stem from top class urban areas followed by metros, tier II and tier-III cities thereby pushing both the property prices and its returns to new high.

The reasons behind the fast approaching demand supply mismatch is due to slow pace of housing supply because of the curtailed construction activities in the past two years largely due to dwindling housing demand. As a result of which over a period of time demand across top cities is estimated to be three times higher than the supply. This ratio is expected to differ within segments and the affordable and mid-segments are expected to witness about three times higher demand while in the economically weaker sections it would be six times higher than the upcoming housing stock. Similarly, the high-end segment in tier-I top cities is also heading for a similar demand supply mismatch of about 1.5 times, despite the current over-supply scenario, said an expert.

Demand Drivers

Cushmen and Wakefield India in its recent study on Indian realty concluded that more than 50% of the total targeted pan-India residential demand in the next three years is expected to stretch across metropolitan cities, NCR and in Mumbai and its suburban areas it is expected to account for about 40% of the total demand. In the emerging trend, Mumbai is likely to witness the highest cumulative demand of 800,000 units followed by the NCR. After NCR and Mumbai, it is Pune that is expected to witness the highest demand of about 300,000 units in residential sector during the given period. The increase in demand for residential units in Pune has been attributed to the growing population and fast improving economic environs largely led by noticeable surge in IT and manufacturing sectors.

Realty Regulator

Real Estate Regulatory Bill, which was to be introduced by the government to streamline the functioning of the sector, continues to hang in fire for quite some time now indicating that the authority seems to be not in a hurry to introduce it. The Union Development Ministry, which had drafted the Model Real Estate Management (Regulation and Control) way back in 2007 to rein in errant builders and real estate players, must be made a law as the sector is always under scanner for money laundering because it is easy to be a developer with no regulation to adhere to. Currently, there is no effective system in place to protect the gullible buyers against unscrupulous players in the sector. As more and more players are entering into the sector, the introduction of the regulator is expected to bring more transparency in the realty business, which is growing fast across the country and holds huge business potentials for future as well.

Towns Trounce Metros in Demand

The satellite towns on the outskirts of Delhi have recorded a sudden spurt in housing demand as residential units are comparatively cheaper in these areas largely because of the availability of cheaper land and labor. The building of the improved infrastructure including roads and metro line links in certain areas of the national capital region (NCR) also pushed the housing demand there. Cashing in on the emerging trends, builders in large numbers have announced large scale new launches in mid and affordable segments of housing categories. A large number of projects have been launched in the mid-segment category in Noida, Greater Noida, Ghaziabad, Raj Nagar Extension, (Ghaziabad) Faridabad, Kundli, Gurgaon and Manesar. In Noida and Greater Noida, innumerable new housing projects have been launched in the affordable price segment. In all new launches, the home buyers are getting a good deal as the developers are not able to raise prices and the cost remained stuck in the range of Rs.1,800-3,000 per sq feet. However, in the next couple of years, as the supply will be absorbed by the huge demand, prices of homes in these areas are likely to go up, says an analyst.

But in other micro markets like Gurgaon and Manesar, wherever the supply is limited, prices have gone up by 25% to 40%. According to a recent report even the premium segment properties have witnessed appreciation over the last quarter, indicative of a steady revival of the residential market in these areas.

Regions on Realty Turf

Cashing in on the rising demands for property in tier II and tier III cities, builders are targeting home buyers as economic growth is a bit faster in these areas pushing the demand in the housing sector. The DLF has recently launched DLF Garden city project in Indore and Ansal properties has also started residential projects in Jaipur, Jodhpur, Agra, Ajmer, Kundli and Panipat. Similarly Omaxe has 40 residential and integrated township projects in these cities. These projects are primarily located in Haryana, Uttar Pradesh Rajasthan, Madhya Pradesh, and Punjab. The Life Insurance Corporation of India (LIC) is investing Rs.1,000 crore on building a mega mall cu‎m office complex in Mohali on the outskirts of Chandigarh.

Similarly, the real estate market in the downstream south has witnessed a noticeable spurt in construction activities with large number of mainline builders launching new residential and commercial projects. The country's real estate giant, the DLF Limited is currently building multiple housing projects at an investment of Rs.14,400 crore. The company has targeted an investment of Rs.3,500 crore for its two residential complexes and has lined up Rs.900 crore to build high end luxury housing project named as Commander's Court in Chennai. Similarly, Chennai based KGS Developers announced projects at an investment of over Rs.11,000 crore across southern states and has forged a partnership with Anil Dhirubhai Ambani Group (R-ADAG) in which the joint venture has planned multiple residential projects and shopping malls-cu‎m multiplexes at 30 locations across 17 cities, besides building 150 acre real estate projects near the upcoming Chennai international airport. The Ozene group is building a cluster of housing projects stretching across 164 acres in Devanahalli area of Bangalore at an investment of Rs.2,800 crore. Godrej properties is also setting up four middle income housing projects in cities including Chennai, Mangalore, Kochi, Bangaluru and Hyderabad.

Cashing in on the fast recovery in the realty market, big industrial houses including Birlas, Godrej, Mafatlal Industries, among others, have not just unlocked their land bank for the real estate sector but also announced mega real estate buildings in and around Mumbai metropolitan city. Apart from this, real estate sector also witnessed the entry of new players into the market. The national textile corporation (NTC) has recently disposed off its mills land for over Rs.2000 crore. The Gitanjali Gems Limited has launched a residential housing project at Borivli, in the Mumbai western suburb. The Lavasa Corporation, an arm of the Hindustan Construction Company, has targeted an annual investment of Rs.2,300 crore in its city project spreading across 20,000 acres on the outskirts of Pune in Maharashtra. The Mahindra Lifespace, an arm of the $7.1 billion Mahindra Group, has recently launched 'Angelica' – the final phase of its project Eminente in Goregaon (West) in Maharashtra.

Hospitality Adds to Realty

It is not just the leading lights of the Indian hospitality sector announcing their aggressive expansion forays across the country, but small times players are also adding to the ongoing realty boom by spreading their wings to smaller cities. In an instance, Royal Orchid chain of hotels, which has drawn up plans to build hotel properties in areas including Mussorie, Shimoga and Hospet, is also adding 700 rooms by building five star hotels in Hyderabad and Jaipur. The company is exploiting the untapped markets in Hospet in Karnataka where it is expecting brisk business. The south India based hotel chain, which currently operates a total number of 1,200 rooms in 13 hotels across seven cities, has also drawn up plans to add 600 to 700 more rooms in the next one year. Likewise, the multinational conglomerate, Zuri Hotels and Resorts, has drawn up a multi faceted expansion approach for its hotel chain within and outside the country entailing an investment of Rs.,200 crore. It is building its own brand and taking up management contracts as a part of its strategy to push the number of its wholly owned hotel properties.

Office Space Lacks Pace

The metropolitan cities of Mumbai, Delhi, NCR and Bangalore contributed about 70% of the market value of commercial office space currently under construction, while tier II cities including Chennai, Pune, Hyderabad, Lucknow, Chandigarh, Mohali and Kolkata are contributing about 21%. Similarly, other cities falling in tier III category contribute investment grade development of about 9 per cent of the pan India market value being developed currently in the country. The share of tier 1 cities is about 62% of the commercial retail space under development and tier II cities supply about 27% of the total space.

In totality, the residential sector has been the most resilient during the recent recession, aided by the high demand for housing in India. The market value of the residential properties under construction is $66.5 billion, contributing 66% of the value of total real estate under construction across the country. Depicting true picture, available statistics indicated that investment in the real estate currently under construction has gone up from $69.4 billion in 2006 to $101.3 billion at the end of the first quarter of this fiscal. On the other hand, the market valuation of commercial and retail sector under construction has remained range-bound during the period. Even the PE firms investing in residential real estate are expecting a return of 20 to 25% post tax, which is nearly the same what was before the downturn, said Consultancy firm, Jones Lang LaSalle India, Chairman and Country Head, Anuj Puri, adding that this can be attributed to the fact that housing sector is seen as self liquidating asset class whereas this is not the case in the commercial real estate and is still lacking in pace in the Indian realty arena.

Reining Realty Tremors

Ever since realty rattled the Lehman Brothers in the US sending recessionary waves across the globe, developing countries including India have adopted cautious approach by way of repeatedly regulating liquidity, interest rates and tax structures. In a recent instance, while checking the skyrocketing prices of property threatening its political stability and financial system, China has imposed housing limit making it mandatory for residents in big cities like Shanghai, Beijing and Shenzhen that one family can only buy one home. Similarly, India is also controlling tax and interest structures adopting various regulatory measures as situation demands. For example, the prevailing high rate of interest regime, which is creating hurdles for builders with high debt constraining them by paying high interest impacting their margins. As a matter of fact pricing is the key for realty sector to sustain growth. In case pricing mechanism is curtailed at the current levels, the volumes would be robust enough for developers to generate sufficient cash flow. However, the increased RBI's focus on controlling inflation will take care of this phenomenon benefiting both builders and home buyers alike. Similarly, the impact of rising borrowing costs for prospective home buyers is likely to be balanced by factors including hiring outlook and enhanced salaries, said Edelweiss in its recent report on realty.