Indian Real Estate

Real Estate is now the second most important industry in India only after Agriculture in terms of its contribution to the country’s GDP (which is expected to further increase from 5% to 6%). Residential property development comprises 80% of the total Indian Real Estate market, remaining consists of commercial space including shopping malls, hotels and hospitals.

Experts opine that, driven by faster economic growth, property markets of BRIC nations will recover faster than US and UK markets. No doubt that Indian property market is expected to attract around $12 billion over the next 5 years. Moreover, construction project in India generates higher profits compared to US. As per a recent McKinsey report, average profit from construction in India is 18 per cent, almost twice the profitability from a construction project undertaken in US.

The Indian government has been introducing several stimulus packages to unlock the huge potential of real estate industry. Last decade has seen several progressive reforms undertaken by the government to attract foreign capital and to introduce professionalism to this industry. One of the most important reforms was allowing 100% FDI in realty projects through automatic route. This coupled with the decrease in minimum area allowed to be developed under integrated township resulted in massive inflow of FDI in both residential and commercial space. Single-brand retail outlets and cash-and-carry outlets are now allowed to bring in upto 51% and 100% FDI respectively. RBI now allows banks to give special treatment to real estate sector, further boosting the credit flow.

Sensing the revenue potential of SEZs, Union Ministry of Commerce & Industry initiated progressive steps by simplifying the process and reducing the time taken to develop SEZs.

Despite growth incentives infused by government, global slowdown due to sub-prime crisis hit Indian Real Estate industry which was on a high since 2006. From January 2006 to January 2008 the BSE Realty index rose almost 6 times, only to fall 89% thereafter until March 2009. All major realty players including DLF and Unitech experienced a drastic fall in sales and profits. Ironically, these companies had massive expansion plans an intended to expand their operations abroad. Unfortunately, all expansion plans were stopped and liquidity crunch suddenly creped as buyers preferred postponing their purchase decision. Emaar MGF withdrew its maiden public offer of Rs.7,000 crore in February 2008 due to bad market conditions.

While losses of industry players were capped by timely intervention of RBI which increased interest rate since 2006, scenario still remains unsteady. However, driven by the global economic recovery and macro-economic and sector-specific factors, experts believe that capital will start flowing in this sector.