Assignment of current issues in the Business Report on:-

CURRENT POSITION OF THE REAL ESTATE SECTOR

Submitted by :_ Name : Khalid Gowhar Ahmed. Course:MBA(IT). Rollno: A-08. Section:Rq3104. Date:12-04-2012.

subimitted to:Mss.Parmeet Kaur.

CONTENTS:-

Definition. Introduction. Current scenario of Real Estate. Characteristics of the Real Estate Industry. Demand for the sector. Driving forces responsible for growth. Categorization. Utilization. Real Estate Investment banking Real Estate consultants. Developers and Construction Companies. Domestic Corporate Houses. Real Estate and Financing Trends in India. Risks involved in the Real Estate Investment Market. Analysis. Opportunities and challenges. Conclusion.

Definition:- Land plus anything permanently fixed to it, including buildings, sheds and other items
attached to the structure. Although, media often refers to the "real estate market" from the perspective of residential living, real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of real estate include undeveloped land, houses, condominiums, townhomes, office buildings, retail store buildings and factories.

introduction:Real estate sector is in boom in India. In the last fifteen years, post liberalization of the economy, Indian real estate business has taken an upturn and is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. This growth can be attributed 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.

Current scenario:The real estate sector has witnessed a strong bull run over the last few years starting2004, before plunging in second half of 2008. With the rapid economic growth in the country, the income and surpluses in the hands of the people suddenly increased. Real estate being one of the only two perennial & traditionally preferred asset class and with the inborn desire of Indians to own a house, the sector became a natural choice for these excesses to be invested. This sudden spurt in demand caught the fancy of investors globally. Real estate sector was one of the key beneficiaries of the foreign fund inflows or hot money. However with the global crisis in 2008, this very fact went against the sector.Also, the crisis had its genesis in real estate sector and as took a steep plunge across all the countries, including India, even though Indias real estate market was safe and didnt face proportional impact. The sudden disappearance of the liquidity and the fear in investors minds resulted in steep fall in demand. Real estate companies in India which had taken huge leveraged positions for expansion in anticipation of booming demand saw their market cap erode quickly and had to hold projects due to negative cash flows. The share price unjustified levels even though the long term fundamentals of the Indian real estate sector havent changed. While economic growth returned and the markets improved by 2009, rationality has not come back to the real estate stocks. Though other sector indices have appreciated many folds over the past one year, the BSE realty index continues to underperform the broader market by a wide margin. This despite the fact that property prices are almost nearing and in fact even crossed their 2008 peaks in most places. Further demand has returned to the sector now and projects are being sold out within days of their launch. It is encouraging to know the premium housing is growing fast. Most

importantly the debt position and balance sheet of real estate companies have improved significantly over the past two years. This disconnect in high property prices and low realty stock prices unwarranted fear of fall in housing demand due to the anticipated interest rates hike and the fragile economic milieu in the western countries and their weak real estate stocks. As we discuss later, based on Indias and the sectors believe the Indian real estate sector is in a secular bull run and currently smartly covering out of the cyclical bear run.

Characteristics of the Real Estate Industry:The property market in India has traditionally been unorganized and fragmented. However, the recent past has seen a consolidation of positions in the market as developers are stretching their capacities to the maximum in order to meet the growing market demand, which in turn has encouraged large projects with sourced financing. The IPOs by large real estate developers like Sobha, Raheja and DLF have led to organization of the market in the Tier I cities, but the Tier II and Tier III cities still demonstrate the traits of an unorganized market. Whilst the Indian real estate market still lacks transparency and liquidity compared to more mature real estate markets, the increasing requirements of multi- national occupiers, as well as the influx of international property consultancies has led to the introduction of greater availability of market information, both in published and private form pushing the sector to an organized market form. Here are the some points which explain the main characteristics of Real Estate market :I. Most of the development typically takes place around existing urban agglomerations, akin to clusters or pockets of projects. These projects may be promoted by different developers but are typically located in close proximity to each other with very little to differentiate. As a result in normal times the developers chase customers and only in good times we find the reverse happening except for some exceptionally good projects.

II. Entry barriers are low and anyone having access to land can develop a project. Only real difference being the specific location of a project and the class of development. III. Brokers have a very strong say in the market and can influence the market greatly, hence marketing the project typically requires close co-ordination with the broker community. IV. Construction activities are funded in major part by the client who is required to make cash advances on various points of time during the course of development and construction of a project.

V. Generally commercial projects were yielding higher margins than residential projects. However ROCE was higher in residential projects due to the fact in case of a well located project it was possible to finance almost entire construction from client advances. VI. Commercial properties can either be sold or rented/leased. Lease rentals are then securitized to monetize income. Whereas, in case of residential properties leasing option is not available. VII. Developer carries huge contingent liabilities on account various performance guarantees and construction contracts. VIII. Large number of approvals required to start construction process. This is an extremely cumbersome process. IX. Peculiar nature of risks associated with the industry, economy risk, price risk, customer preference and some degree of credit risk is also associated with this industry.

Demand of the Real estate in the Indian market:Even though post crisis the real estate sector has taken a major hit, fundamentally things have only improved. Based on our top down approach and of the Indian economy we believe the Indian real estate sector is in a multiyear, stable growth phase. Following are a few of the key points that make us confident on the sector.below are the clearly explained points which explains the demand for realEstate:-

Domestic consumption story:We believe that the growth matrix in India has never been better. With a focused, proreform and a stable government at the center, there is no stopping for India. Even though the global economy is going through an unusually uncertain phase, we believe that over medium to long term the fundamentals would prevail and see a limited impact of the global developments on the real sector in case of a negative fallout. Unlike most other sectors, real estate is a pure domestic theme which is product consumed & sold domestically; global developments in US, Europe, China; et al have only an indirect impact on demand through confidence and capital channel. Its surprising to see that while all experts & financial gurus are stressing to invest in Indian domestic demand driven sectors, real estate has been given a total miss. We expect the real estate sector to grow step-in-step with the fast growing GDP. A large part of the savings is expected to flow into real having own abode and making a stable investment.

Demographics:Working age population

In contrast to the aging population and rising dependency ratios in many countries, India is blessed with a young and growing population. India has amongst the best demographic ratio globally and this would continue to improve over next three to four decades. This comes at a time when western economies have deteriorating demographic ratio. Even China is at fag end of its favorable demographic ratio which is expected to peak between 2012 & 2015 and decline sharply thereafter for next few decades. While demographic dividend is a double edge sword, if handled in a right way it can be hugely positive for a country. The rising proportion of persons of working age will stimulate savings as pressure on household and public budgets for the needs of dependent children & elderly comes down. Young workers are comparatively more mobile who are willing to take chances and ready to migrate where opportunity is available. The rapidly growing work force implies growing savings leading to higher demand for housing.

Exploding Middle Class

McKinsey Global Institute (MGI) predicts that the Indias middle class will reach 583 million from the current 50 million by 2025. Further it states that the average household mincome in India will triple over the next two decades and it will become the worlds 5thlargest consumer economy by 2025, up from 12th now. Another study shows that according to Indian standards, the middle class population in India is already more than the total population of the United States. With this exploding middle class the demand for real estate is bound to go up unidirectionally.

Changing trend towards nuclear families

The traditional joint-family system in India is rapidly breaking up. With increasing expenses and with more people migrating to cities for work, people are increasingly opting for nuclear and small families. This undoubtedly means more demand for residential segments.

Huge Surpluses:High savings

India is among the very few economies globally that has a high savings rate. A savings rate of approximately 34% of GDP implies savings of USD 400 million annually. Historically Indians have preferred two asset classes over others gold and real estate and an increase in savings would directly lead to an increase in demand for these asset classes. People in urban areas are increasingly investing in second homes too.

Parallel economy
The parallel economy or the black money as more commonly known in India is estimated to be anywhere between 40 to 100 percent of the stated GDP. Property is the easiest and most attractive place to park this huge amount of unaccounted funds. Cash component in real estate deals has been a very common practice in India. Other than acting as an invisible hand supporting the real estate market, the black or unaccounted component also provides a cushion to banks financing the sector.

Growing Income:Increasing Employment Barring the span of 12 to 18 months of the economic slowdown,the employment the employment for both blue and white collared workers has been increasing in India. With the strong economic recovery in India, companies have started hiring again. This entails increase in demand for commercial space. Further this increase in work force migration also means more housing requirement by these corporate.

Inclusive growth:There has been a notable shift in the growth in India towards a more inclusive growth. As a result of the broader based growth and the redistributive measures by the government, the surplus in the hands of the common man is fast increasing. The National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission and the governments increased focus on infrastructure would further boost the growth at the ground level. Moreover with manufacturing and service sector gaining traction in the mrural economy, the reliance on farm-based income has decreased substantially over the years reducing the income volatility.

Urbanisation
Approximately only 30% of the total population or 340 million people reside in cities.McKinsey Global Institute (MGI) predicts this number will go up to 590 million, in next 20 years. This addition of 250

million to urban areas will be at a very rapid pace requiring only half the time compared to the 40 years (1971-2008) needed to add the last 230 million to the urban population. Such rapid urbanization would need to be supported by rapid development in real estate may it be residential, commercial or hospitality.Historically all developed countries have seen a boom in real estate specifically during their fastest growing years characterized by rapid urbanization. A more recent parallel would be China, one of the few countries to experience such high rates of urbanization.The real estate growth there over the last decade gives a fair idea about the growth potential of the real estate sector in India.

Driving Forces:Stated below are the reasons that have led to the real estate boom in the country Booming economy; accelerated GDP to 8% p.a. Indias emergence as an attractive offshoring destination and availability of pool of highly skilled technicians and engineers ; Development of large captive units of major players include GE, Prudential, HSBC, Bank of America, Standard Chartered and American Express Rise in disposable income and growing middle class, increasing the demand for quality residential real estate and real estate as an investment option. Entry of professional players equipped with expertise in real estate development; Relaxation of legal rulings and processes by the governing bodies encouraging investments in real estate Improvement in infrastructure facilities

Categorization:The demand for new office space in India has grown from an estimated 3.9 million sq. ft in 1998 to over 16 million sq. ft in 2004-05. 70% of the demand for office space in India is driven by over 7,000 Indian IT and ITES firms and 15% by financial service providers and the pharmaceutical sector. In 2005 alone, IT/ITES sector absorbed a total of approx 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft. of space across major cities by 2015. This data clearly demonstrates the growth of the real estate sector in the country.

With reference to the availability of infrastructure facilities, following cities are currently attracting MNCs/corporate/real estate developers: Tier I cities, Mumbai (Commercial hub), Delhi (Political hub) and Bangalore (Technological hub): Preferred option for many new market entrants Command the highest international profiles and significant proportion of FDI Offer qualified labor pool and the best infrastructure facilities Exhibit development of sub-urban commercial real estate Yield of 9.5 10%

Tier II cities, notably Hyderabad, Chennai, Chandigarh, Kochi, Mangalore, Mysore, Thiruvananthapuram, Goa, Bhubaneshwar, Ahmedabad and Pune Yield of 10.5-11.5% Offer competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure, Attract high value IT, ITES and biotech corporate houses Tier III cities, like Cuttack and Jaipur Low liquidity and still highly unorganized. Special Economic Zones: 28 operational SEZs in the country, including those converted from Export Processing Zones (EPZ) to SEZ Development of SEZs in various segments such as multi-product, Information Technology, Biotechnology, Gems and Jewellery, Textiles and technology intensive industries Attract both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs)

Corporate Reliance Industries Adani Group TCG Refinerie Suzlon Hindalco Genpact Vedanta

location
Gurgaon, Mumbai. Mundra Haldia Combatore,udipi,vadodra Sambalpur Bubneshwar,Jaipur,Bhopal. Orissa.

Corporate interested in development of SEZs in India and the location of intere

As per utilization, the real estate space can be classified as follows:

Listed below are the salient features of each category:

Commercial Real Estate

Commercial real estate is divided into the following units :-

Office Space
Backed by strong infrastructure Promoted by increasing demand from IT industry Shift of focus from the traditional CBDs towards secondary centers owing sharply higher land prices in the city centers.

Retail Space
Growth of 25- 30% expected in the organized retail sector (malls and multiplexes) leading to an increased demand in real estate Affected by government policies for foreign retailers Pronounced in the Tier I, Tier II and Tier III cities.

Hospitality Space
Increasing demand of lodging in commercial cities such as Bangalore, Mumbai, Delhi etc. from business travelers. Established brands in this sector include Asian Hotels, Indian Hotels, ITC, Le Meridien etc are in expansion mode with many new players such as Accor Group, Marriot, Choice, IHG Group

Residential Real Estate

Development triggered by: o Low per capita housing stock o Rising disposable income o Easy availability of finance Currently growing at 30-35% per annum Driven by retail investors who view real estate as an attractive investment option as compared to mutual funds and stocks Geographically widespread with townships being built in both the metros and the tier II and III cities

Real Estate Investment Banking:Real Estate Investment Banking is an approach to real estate financing providing the client a host of services including the structuring of real estate projects, legal advice, operative management of real estate projects and support in marketing properties. The banking focus in Real Estate Investment Banking is on structured financing products and structuring of entire portfolios. Extending on similar lines is the importance of syndication that forms the base line of larger-sized transactions. Real estate investment banking focuses on the following target market as prospective client base:

Real Estate Consultants:-

The increase in transparency and liquidity in the real estate market in India is attracting international real estate consultants to India. These consultants offer end to end solutions for their clients real estate needs. These services include strategic consulting to developers, investors, advisors and lenders seeking assistance with existing assets, potential acquisitions, new development projects and properties slated for disposition, feasibility studies, concept testing, business planning exercises, investment advice, market research and analysis, demand forecasting, financial modeling and project structuring exercises, portfolio optimization and re-engineering strategies, expansion and occupancy, location and entry, brokerage services, legal documentation review, valuations etc. Real estate consultants also ensure that the financing needs of the client are well taken care of by liaising with banking/non banking institutions and providing them with investment and structured finance solutions including securitization and sale & leasebacks, structured finance facilitating equity/debt into development projects on behalf of private and government sector clients, structuring development financing, public - private - partnerships, joint ventures, portfolio transactions and privatization exercises. The recent players in the Indian market are Jones Lang Lasalle, Colliers, CBRichard Ellis, Frank Knight and Trammell Crow Meghraj.

Developers and Construction Companies

With the opening up of the real estate sector in the country, the construction houses are scaling up the commercial and residential constructions. An increasing number of developers are offering IPOs for fund raising. AIM too is a sought after solution to meet the fund requirements for these developers.

Group Parsvanath
Sobha Pyramid Saimira DLF Universal

Route/Market

IPO IPO IPO IPO

AIM

K Raheja Corp
Unitech Hiranandani Construction

AIM AIM

Fund raising options by developers

Domestic Corporate Houses:-

As the land prices in the Tier I cities have always moved upward, land was regarded as a safe investment which, regardless of how it was used, would produce capital gains far above the inflation rate. It was thus common for companies in the manufacturing and service industries to acquire real estate even though they themselves were completely unrelated to property rental or real estate investment, seeking collateral value and tax benefits from depreciated assets, and expecting unrealized gains to absorb business risk. Acquisition of real estate as an asset was further encouraged as part of a diversification strategy in the investment portfolio of these corporate houses.. As these real estate possessions are classified as fixed assets held for the companys own business purposes, it becomes feasible recent moves to increase real estate liquidity often involve the conversion of corporate real estate into commercial use. The corporate houses in India are also demonstrating a shift from ownership to leasing. With the advent of MNCs into the country, a growing number of companies no longer see real estate ownership as an absolute necessity. From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. This has been greatly encouraged by corporate restructuring and a return to focusing on core competencies. Thus, there seems an opportunity to tap the corporate houses who have a large corpus of real estate and are willing to trade this asset for want liquidity.

FDIs/FIIs
Post liberalization, the investment opportunities in real estate for the FDIs and FIIs have greatly opened up. Foreign investors can now purchase commercial development projects (under construction) over 50,000 sq m (540,000 sq ft), or plotted residential developments with a minimum size of 10 hectares. Foreign investors may purchase an equity stake in an unlisted real estate company and thereby partner in its growth plans across asset classes and cities. Listed real estate companies also offer good liquid investment opportunities routed into designated special purpose vehicles that hold the asset(s) being developed, thereby reducing risk. These investors look for innovative financial products to suit their investing needs.

Financial Institutions Real Estate Mutual Funds

Major financial institutions such as ICICI, HDFC, IL&FS and Kotak Mahindra have all launched real estate funds, either as joint ventures or sole investors. Most institutional funds operate on a pan-Indian basis, and are increasingly looking at opportunities in Tier III cities, in order to gain "first mover advantage".

Private Equity/Venture Capital Funds

As per the Securities and Exchange Board of India (SEBI), Foreign Venture Capital Investors (FVCIs) may invest in real estate assets, within the framework of SEBI. This has paved the way for capital infusion into the market and a significant weight of foreign capital is now chasing Indian real estate. Indirect real estate investments are made into a pooled investment fund; such funds are usually created in partnership with domestic developers or financial institutions. Such VC firms, partnered with developers form a potential client base, keen to invest in the real estate sector.

Real Estate and Financing Trends in India

Securitization and CMBS
From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate real estate. Securitization is primarily used by the corporate houses to convert the corporate real estate to commercial real estate.

Realty Funds/ Realty Mutual Funds in India

Initiated by SEBI, the REMFs true potential would be tapped only after the setting up of REITs, as they infuse confidence among investors by serving as custodians of title deeds. (REITs pool various real estate assets, including warehouses, buildings, industrial estates and parks, malls, commercial and residential premises and get listed on the stock exchange to enable investors to buy and sell. They afford an opportunity to diversify the portfolio within that limited sense as well. However, SEBI has not allowed the creation of REITs in India as yet, though REITs are well established in the more mature real estate markets. ) Currently the REMFs in the Indian market are targeted at the HNIS and corporate investors.

Risks involved in the Real Estate Investment Market:Liquidity risk

The real estate investment market is still in its infant stage. The time required for liquidity of real estate property can vary depending on the quality and location of the property.

Regulatory risks
In terms of property ownership, permission from the Reserve Bank of India is required for foreign investors. For capital repatriation, investors need to apply for approval from the RBI, and foreign direct investment is limited to a limited set of opportunities (e.g. townships). The REMFs work within the SEBI framework. Being a developing and growing sector, the rules, regulations and legalities demonstrate frequent changes, making it seem as a cumbersome investment option to the investors.

Property market transparency risk

The Indian property market has low transparency when compared to the more mature and developed real estate markets. Although market transparency has improved, reliable and consistent information on the Indian property market is still not easily available. There are also more professional due diligence and valuation institutions needed. This holds true even for the Tier I cities.

Macroeconomic risks
Interest rates, inflation and exchange rate risks are amongst the important macroeconomic indicators and have shown decreased volatility. The provision of facilities, is in many regions, still inadequate (education, transport infrastructure). These risk factors are not likely to disappear in the near future, impeding the development of the real estate sector.

Ownership and Land Title Issues

Lack of information and low transparency in the real estate segment in India, coupled with the age old property related issues discourages the investment of the large players in the semi urban and rural areas thus slacking an overall growth of the real estate sector.

Short Analysis:-

The size of the real estate industry in India is estimated by FICCI, to be around US$ 12 billion. This figure is growing at a pace of 30% for the last few years. Almost 80 % of real estate developed in India, is residential space and the rest comprise office, shopping malls, hotels and hospitals. This double-digit growth is mainly attributed to the off-shoring business, including high-end technology consulting, call centers and software programming houses which in 2003-04, is estimated to have accounted for more than 10 million square feet of real estate development. This is the ideal time to invest in the country as policy makers have begun to emphasize on developing adequate infrastructure for the country. Real estate companies would also do well to maximize their own performance and operational efficiency .For every Indian rupee invested in the construction of houses in India, INR 0.78 is added to the gross domestic product. The real estate sector is also subservient to the development of over 250 other ancillary industries. A study by a rating agency ICRA shows that the construction industry ranks 3rd among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. After agriculture, the real estate sector is the second largest employment generator in India. The sustained demand from the Information Technology sector also affected the urban landscape in India. As per estimates, there is demand for 66 million square feet of IT space over the next five years. Several multinational companies continue to move their operations to India to take advantage of lower costs of skilled manpower and logistics. With human resources being the key element in this industry, the hiring and housing of people, both at their work place and home assume great importance and therefore the need to create space for people to work and live, which in turn triggers the development of other related infrastructure. The predominant trend has been to set up world-class business centers, often campus-style establishments, bearing a distinctive corporate stamp. So distinct are some of these locations that they are being termed as the "temples of modern India" by the local press. This is just an indication of the extent of real estate development taking place. Indian and international real estate majors also envisage a major boom in the hotel project developments over the next five years. During the last five years, major chains such as the Orchid,Marriott, Holiday Inn, etc. have either tied up with local developers of property or they have started planning for their own real estate.

Though the real estate sector in India is proclaimed to be the most promising sector today, it is still hugely plagued by market uncertainties and inhibitions. This is manifested by an abysmally low mortgage penetration. In India the mortgage to GDP ratio is about 2%. This compares to a mortgage to GDP ratio of over 51% in USA. However, even if one were to benchmark with more comparable counterparts, the ratio ranges between 15-20% for South East Asian countries. Thus the penetration level of mortgages is miniscule when compared with the shortage of housing units. The real estate market in India predominantly continues to remain unorganized, fairly fragmented, mostly characterized by small players with a local presence.

OPPortunities and challenges:The opportunities for the real estate in the indian market are as highlighted as follows:1.There is a shortage of 12 million housing units in the urban areas. 2.There is scope for 400 township projects over the next five years spread across 30 to 35 cities,each having a population of 0.5 million. 3.Total project value dedicated to low and middle income housing in the next seven years is estimated at USD 40 million. 4.instruments such as a residential mortgage-backned security(MBS),commercial MBS and collateral debt obligations (CDO) are being used to make capital work more efficiently and de-risk project incomes From promoter risk while creating a robust secondary market for commercial real estate.

Conclusion:The Indian real estate sector promises to be a lucrative destination for foreign investors into the country. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages. However, there are potential constraints for domestic as well as foreign investments in India. Absence of a single regulator to monitor business practices prevailing in Indian real estate market is perceived to be a risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained. Maturity of the real estate markets will lead to infusion of foreign investment and adoption of international best practices by real estate players. Developers will get more organized, and become more transparent to avail opportunities emerging in the market. With the Indian securities market regulator SEBI allowing real estate mutual funds (REMFs) in India, equity investors will have an exit option available to them. All these factors will contribute in making the Indian real estate market more organized and structured, thus providing better investment opportunities

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