Introduction
The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The Indian real estate market has become one of the most preferred destinations in the Asia Pacific# as overseas funds accounted for more than 50 per cent of all investment activity in India in 2014, compared with just 26 per cent in 2013. The real estate sector comprises four sub sectors – housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.
The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP). In the period FY08-20, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs.
Private Equity (PE) investments from foreign funds in the Indian realty market increased at a Compound Annual Growth Rate (CAGR) of 33 per cent to US$2,220 million* in year ending December 2015.Deal sizes have also increased in 2015, and residential projects both luxury and affordable have attracted a substantial amount of capital.
Private Equity (PE) funds and Non-Banking Financial Companies (NBFCs) in India are seen increasingly investing jointly in real estate projects, in order to hedge risk and undertake bigger transactions. Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR). Also, Delhi-NCR was the biggest office market in India with 110 million sqft, out of which 88 million sqft were occupied. Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. India’s office space absorption stood at 35 million sqft during 2015@, which is the second highest figure in the India’s history after 2011, and was driven by corporates implementing their growth plans. India had the strongest activity in office leasing space in Asia and accounted for half of Asia’s total office leasing in third quarter of 2015, with Delhi being the most active market##. Delhi’s Central Business District (CBD) of Connaught Place has been ranked as the sixth most expensive prime office market in the world with occupancy costs at US$ 160 per sqft per annum.
The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.19 billion in the period April 2000-March 2016. Some of the major investments in this sector are as follows: Mr Nandan Nilekani, co-founder of Infosys Limited, has invested around US$ 25 million in a real estate non-banking finance company (NBFC) unit of KKR India, one of the local arms of the US-based private equity firm KKR & Co LP. Brookfield Asset Management, a global property and infrastructure investment company, plans to acquire Hiranandani Group’s commercial real estate assets in Powai, for around Rs 6,700 crore (US$ 993.2 million). Piramal Fund Management, one of India’s largest real estate investors, has invested Rs 425 crore (US$ 63 million) in realty firm Lodha Group’s residential project in central Mumbai through the structured debt route. NestAway Technologies Pvt Ltd, a home rental company, has raised US$ 30 million in Series C round of funding from US-based Tiger Global, Russian billionaire Yuri Milner, and IDG Ventures India, which will be used to scale up operations and build technology. The International Finance Corporation (IFC), investment arm of the World Bank Group, plans to invest around US$ 38 million in Non-Convertible Debentures (NCDs) issued by three Housing Finance Companies (HFCs), namely Aspire Home Finance Corporation Ltd, Micro Housing Finance Corporation Limited (MHFC), and Aptus Value Housing Finance India Ltd, which are focused on affordable housing finance segment in India. Altico Capital, the Non-Banking Finance Company (NBFC) of Clearwater Capital Partners LLC, plans to invest around US$150 million in the commercial office properties and infrastructure sector over the next 12-18 months. Real estate private equity fund of the Kotak group, Kotak Realty Fund, has raised US$ 250 million from institutional investors for equity investments in realty projects across India’s top six property markets including Mumbai, Delhi, Pune, Bengaluru, Hyderabad and Chennai over the next 24 to 36 months. Tata Capital, the financial services arm of Tata Group, plans to raise Rs 2,000 crore (US$ 296.48 million) for its real estate fund, from State General Reserve Fund (SGRF), the sovereign wealth fund of Oman. Indospace, a developer of industrial realty and logistics parks, plans to invest US$ 1 billion in India over the next five years, increasing its development pipeline in the country from 20 million square feet to 50 million square feet. Peninsula Brookfield Investment Managers Private Limited, a joint venture of real estate firm Peninsula Land Ltd and global alternative asset management firm Brookfield Asset Management, has invested Rs 100 crore (US$ 14.82 million) in mid-income housing projects of Bengaluru-based property developer Mahaveer Group. Housing.com has raised additional funds of Rs 100 crore (US$ 14.82 million) from Japan’s SoftBank Corporation to drive its new strategy of building scalable revenue streams and going deeper in the real estate value chain. Edelweiss Alternative Asset Advisors Ltd plans to raise US$ 1 billion for its first residential real estate fund called the Edelweiss Real Estate Fund, which will finance investments in five property markets in India – National Capital Region (NCR), Mumbai, Pune, Bengaluru and Chennai. Quikr, an online classifieds platform, has acquired real estate portal Commonfloor.com for US$ 200 million in a stock-cum-cash deal. Edelweiss Alternative Asset Advisors and Milestone Capital are investing Rs 7,200 crore (US$ 1.07 billion) in India’s real estate sector while private equity firms like Goldman Sachs, Warburg Pincus and Singapore’s GIC are exploring viable projects for investments, as a result of government’s effort to boost real estate sector. Macquarie Infrastructure and Real Assets (MIRA), the realty investment arm of Australian Macquarie Group Ltd, plans to invest in real estate projects in India and is in talks with Tata Housing Development Co. to jointly set up an investment platform. Google Capital has invested in Bengaluru-based online property search platform, CommonFloor.com. Omkar Realtors and Developers Private Limited is in discussions to raise Rs 400 crore (US$ 59.3 million) from KKR India, the local arm of PE firm Kohlberg Kravis Roberts and Co. Goldman Sachs bought shares worth Rs 255 crore (US$ 37.8 million) in Vatika Hotels Private Limited, a company owned by real estate and hospitality firm Vatika Group. SoftBank, Falcon Edge Capital and a few others invested US$ 90 million in Locon Solutions Private Limited, which runs Housing.com – a realty website. Real estate firm Supertech has planned to invest about Rs 2,000 crore (US$ 296.5 million) in Gurgaon over the next few years by launching several luxury and affordable projects. PE firm Warburg Pincus invested Rs 1,800 crore (US$ 266.8 million) in Piramal Realty for a minority stake in the company.
The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives: The Make in India initiative has helped to accelerate leasing of commercial property by the manufacturing sector, which has outpaced the Information Technology (IT) sector by registering two-fold increase in office transacted space in the first six months of 2016###. Brihanmumbai Municipal Corporation (BMC) has introduced a single-window clearance for construction which will cut the time taken for getting approvals for a building project and lead to correction in prices of residential property, thereby giving a fillip to Mumbai realty. The Securities and Exchange Board of India (SEBI) has proposed easier regulations for real estate investment trusts (REITs), such as raising the cap of investment of REITs’ assets in under-construction projects from 10 per cent to 20 per cent, in order to attract the interest of developers, and also plans to relax the rules for foreign fund managers to relocate to India. The Government of India has brought into force the Real Estate (Regulation and Development) Act, 2016 which is aimed at making necessary operational rules and creating an institutional infrastructure for protecting the interests of consumers and promoting growth of the real estate sector in India. The Securities and Exchange Board of India (SEBI) has allowed Foreign Portfolio Investors (FPI) to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III alternative investment funds (AIFs), and also permitted them to acquire corporate bonds under default. The Rajya Sabha or the upper house of the Parliament has passed the Real Estate (Regulation and Development) Bill, 2013, which aims to protect consumer interest, ensure efficiency in all property related transactions, improve accountability of real estate developers, increase transparency and attract more investments into the realty sector in India. The Securities and Exchange Board of India (SEBI) has issued the consultation paper for public issue of Real Estate Investment Trusts (REITs), which include provisions such as capping of allocation to qualified institutional buyers (QIBs) at 75 per cent, among other topics. The Government of Rajasthan became the first state to initiate private investments in affordable housing by signing four Memoranda of Understanding (MoUs) with private players for an investment of Rs 5,400 crore (US$ 800.49 million). The Ministry of Housing and Urban Poverty Alleviation (HUPA) has commissioned a study by Indian Institute of Technology, Kanpur on testing of new construction technologies, with the objective of promoting new housing technologies in the country. India’s Prime Minister Mr Narendra Modi approved the launch of Housing for All by 2022. Under the Sardar Patel Urban Housing Mission, 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy. The Government of India has relaxed the norms to allow Foreign Direct Investment (FDI) in the construction development sector. This move should boost affordable housing projects and smart cities across the country. The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). This move will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors. The Government of Maharashtra announced a series of measures to bring transparency and increase the ease of doing business in the real estate sector. The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of software called ‘Sanketham’. This will ensure a more standardised procedure, more transparency, and less corruption and bribery.
Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering. The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards. Exchange Rate Used: INR 1 = US$ 0.0148 as on July 11, 2016
