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India is on the verge of witnessing a sustained investment in infrastructure build up. With construction component accounting for 42% of the total investment in infrastructure, the construction industry has been witness to a strong growth wave powered by large spends in housing, road, ports, water supply and airports development. The construction sector has grown at a CAGR of 16.5% during the last seven years and now accounts for 6.9% of India's GDP compared to 5.7% in FY00. The Planning Commission of India has proposed an investment of around US$ 500 bn in the Eleventh five-year plan (2007-2012), which is nearly 2.3 times more than the previous five-year plan.
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From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. During the tenth five-year plan (2002-07), the share of private players in the total investment was 18%, which has increased to 30% during the eleventh five-year plan. The balance will be borne by the public sector.
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The real estate industry comprising of construction and development of properties has grown from family based entities with focus on single products and having one market presence into corporate entities with multi-city presence having differentiated products. The industry has witnessed considerable shift from traditional financing methods and limited debt support to an era of structured finance, private equity and public offering.
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The construction sector is a major employment driver, being the second largest employer in the country, next only to agriculture. This is because of the chain of backward and forward linkages that the sector has with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, timber and building material are dependent on the construction industry. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.
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| Supply |
Past 2-3 years have seen a substantial increase in the number of contractors and builders, especially in the housing and road construction segment.
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| Demand |
Demand exceeds supply by a large margin. Demand for quality infrastructure construction is mainly emanating from the housing, transportation and urban development segments.
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| Barriers to entry |
Low for road and housing construction. However, high working capital requirements can create growth problems for companies with weak financial muscle.
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| Bargaining power of suppliers |
Low. Due to the rapid increase in the number of contractors and construction service providers, margins have been stagnant despite strong growth in volumes.
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| Bargaining power of customers |
Low. The country still lacks adequate infrastructure facilities and citizens have to pay for using public services.
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| Competition |
Very high across segments like road construction, housing and urban infrastructure development. Relatively less in airport and port development. |
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The North-South-East-West corridor was likely to be completed by the end of 2008. As of end-March 2008, only 2,010 km of the planned 7,300 km have been completed; 146 contracts covering 4,220 km of roads are under implementation, while over 11 % of project length has not yet been contracted. In power, two-thirds of the 16,335 MW generation target was achieved.
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The 2008-09 Budget saw increase in allocation towards various infrastructure development schemes. Allocation for National Highway Development Programme (NHDP) has been enhanced to Rs 129.7 bn in 2008-09 from Rs 108.7 bn in 2007-08. The budget gave special attention to development of roads in North Eastern region with the target of developing 300 kms of roads in 2008-09 as compared to 180 kms in 2007-08. The budget has also given considerable thrust to irrigation projects, where the outlay for 2008-09 had been increased to Rs 200 bn from Rs 110 bn in 2007-08.
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The government announced the reduction of CENVAT to 14% from 16% in the previous financial year. As such, this reduction will be a positive for the sector as it indicates government's commitment towards the Goods and Service Tax Act.
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Post the US subprime crisis and the slow down in the economy, the real estate developers are caught between sluggish housing demand and rising cost of capital. The increase in housing and capital loans have reduced immensely, causing a liquidity crunch for real estate firms, while a slowdown in the demand has led to a fall in real estate prices between the range of 15% to 30% even in the normally price–inelastic metro regions.
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Infrastructure investments continue to be the most important growth driver for construction companies. During FY08, the Planning Commission of India announced the eleventh five-year plan (2007-2012). The proposed increase in allocation in the plan will translate into business for construction companies.
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Real estate investments account for about 60% of the total construction investments. Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. In addition to this, demand for office space from IT/BPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, boom in organized retail is expected to result in huge demand for real estate construction. According to industry estimates, the Indian real estate industry is expected to grow at a compounded rate of 33% between FY05 to FY10, mainly driven by the residential segment.
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While long-term factors are likely to work in favour of the real estate developers, the outlook for the short term remains bleak. Also the fact that the realty companies have lined up huge projects, across all the segments – residential, commercial, industrial and retail, is likely to widen the supply-demand gap going forward. This may end up in softening of real estate prices, hurting the margins of the developers. The total area to be developed over the next few years by them is nearly 20 to 30 times the size of projects executed so far and hence, there are likely to be delays as well.
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