The real estate sector in India

The real estate sector of India is estimated to have a total pipeline of nearly 3.6 billion square feet lined up for completion in 2013, out of which 98% is concentrated in the residential areas. The real estate sector, an inherent component of the construction industry, has a tremendous potential in our country. The proper tapping of the real estate sector will also generate considerable economic opportunities.

Real estate is also an employment intensive sector and the predictions are, it will generate employment for at least 17 million people by 2025. However, exhaustive cooperation of the Government is necessary for the real estate to become an economically viable sector contributing consistently to the national GDP. The 2013 statistics of the real estate sector shows that an investment of Rs 2,54,000 crore is necessary for the implementation of the construction projects in the available land mentioned in the CBRE (Commercial real estate service) report which in turn will generate a revenue of Rs 3,70,000 crore and provide countrywide employment opportunity for 7.6 million people.

Challenges faced by the real estate sector:-

·         The growth of the real estate sector, in spite of its immense potential to contribute to India’s economic development and its wide employment providing capacity, is restricted by many factors. Borrowing costs are extremely high, a creaky infrastructure undergoing very slow development, approval processes after crossing numerous red tapes prove to be extremely lengthy, a majorly choked supply line and of course lack of proper institutional funding are some of the major impending factors.

·         Real Estate consultancy, Cushman & Wakefield, furnished a report on private equity (PE) in real estate investments according to which, “Around US$ 2 billion (Rs 11,854 crore) is available with PE firms for deployment in the Indian real estate sector”. However, PE investments plummeted by 46% in the first half of 2013. The PE investments recorded in the first half of 2013 was a discouraging US$ 276 million (approximately Rs 1,638 crore), as compared to last year’s valuation of US$ 514 million (Rs 3,050 crore) for the same period.

·         Year 2013 also witnessed a very low number of major real estate deals. Cushman and Wakefield attributes this to an uncertain market, and the sudden deceleration in India’s economic growth, the major factors for which are the record devaluation of rupee against dollar and political deadlocks (factors that has been plaguing numerous industries all over the country).

·         However, Sanjay Dutt, executive managing director, Cushman and Wakefield, South Asia, commented, “It is noteworthy that despite a slowdown in the construction market and reduced number of investment worthy projects in India, real estate features as the fourth most invested sector by PE funds. Currently, it was estimated that about US$ 2 billion is ready to be deployed in the real estate sector of the Indian market.”

·         Though PE funds are still interested in investing in the real estate sectors, the market sentiments paint an entirely different picture. Because of the current shadow of uncertainty looming over the market, funds other than the PE funds are only interested in investing in real estate deals with solid basis, so the exploration for the right projects continue, which is slowing down the development of the real estate sector.

Points of encouragement:

·         Real estate has always been a much preferred investment sector due to the supernatant nature of the sector. An educated guess on the positive side is Indian economy will be able to turn around in time to arrest the free fall of rupee against dollar. That will definitely help to lift the shadow of uncertainty currently hovering over the market and prove to be a shot in the arm for the real estate sector. Besides the keenness of the PE funds to invest in the real estate sector is definitely another encouraging factor.

·         Once again a positive anticipation would be that the Government will show further understanding and cooperation towards the real estate sector of our country and be proactive in resolving the political stalemates and introduce timely economic reforms that are posing to be major hindrances in the development of this extremely potential sector. Once the real estate sector gathers the necessary impetus, new doors to more investable options will be flung open, attracting a hefty investment from the core investors, both domestic and abroad.

·         The demand for ready office spaces is increasing steadily, which has already witnessed an investment of over US$ 1.3 billion (Rs 7,705 crore) in the past three years. 2013 also witnessed the highest PE fund investments in the real estate sector namely US$ 131.6 million in Pune (Rs 7.8 billion), US$ 67.5 million in Mumbai (Rs 4 billion), US$ 38.8 million in NCR (Rs 2.3 billion) and US$ 16.9 million in Bengaluru (Rs 1 billion). In spite of the 46% slump in the real estate sector, the contribution of this sector towards the National GDP has been an estimated 6.3%, quite impressive considering the volatile market.