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India is on 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 12.7% during the last four years and now accounts for 6.9% of India’s GDP compared to 5.9% in FY03. The Central Government’s proposed infrastructure spend increased from US$ 88 bn in the Ninth Plan to US$ 140 bn in the tenth five year plan (2002-07).
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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. A substantial chunk of the above mentioned investment target is likely to come from the private 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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As per the economic survey, nearly 93% of the Golden Quadrilateral (GQ) project was completed in November 2006 and the NS and EW corridors are likely to be completed by December 2009. The delay in timely completion of NHDP includes delays in land acquisition, removal of structures and shifting of utilities.
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The 2007-2008 Budget saw increase in allocation towards various infrastructure development schemes. While allocation towards Bharat Nirman was increased by 32% to Rs 246 bn, Jawaharlal Nehru National Urban Renewal Mission (JNNURM) witnessed a 9% increase in allocation to Rs 499 bn.
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While the government announced the withdrawal of tax benefits under Section 80 IA of the Income Tax Act, there is a lot of confusion regarding its interpretation. While some companies are of the opinion that they can no more claim benefits under this section (i.e. they will have to pay taxes at marginal rate), others feel that the benefit has been withdrawn only on the subcontracted work i.e. they can still claim tax benefits on self-executed projects.
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Since government spending on infrastructure is the most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects. It is estimated that the government spend on infrastructure in the Eleventh Five-Year plan will increase to US$ 229 bn, as compared to US$ 140 in the previous plan.
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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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Demand for residential properties tends to be highly price-sensitive. Though the underlying demand for housing is huge, increasing property prices and higher interest rates lead to postponement of purchasing decisions and thereby result in slower off-take. Furthermore, most of the real estate companies have lined-up huge development plans going forward. 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 delays.
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