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Real estate: An outlook - Views on News from Equitymaster

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Real estate: An outlook

Jan 8, 2008

Over the last five years, the progress of real estate sector has been buoyant. This was mainly due to rising demand from the technology sector, higher disposable income and favourable government policies. In the coming years too, the demand will be robust mainly from the technology sector and retail sector too will contribute in a big way. All the three divisions of real estate namely residential, commercial and retail are expected to attract huge investments. The major shift came in March 2005 when the government allowed 100% FDI under the automatic route. With the opening of FDI, the real estate sector is expected to capture about 20% of the total FDI coming to India in coming years. The FDI in Real Estate is expected to have a favourable multiplier effect on the Indian economy. As an indicator, for every rupee spent on construction, 80% gets added to the GDP. The spillover effect of this initiative can also be witnessed in important sectors like the cement and construction industries, where the key players are expanding capacity to meet the soaring demand.

The Indian real estate sector will be a productive destination for foreign investors. The continued growth of the Indian outsourcing industry will provide excellent opportunities for real estate investors. The expanding middle class will continue to drive the demand for housing and retail space and the booming economy will generate demand for commercial spaces. The Indian real estate sector, if managed properly, could propel the growth of several other sectors in India through its backward and forward linkages. The only thing needed here is the intention of the government to take the sector forward.

However, there are potential constraints for domestic as well as foreign investors in real estate sector in India. First, there is no single regulator to monitor business practices in the Indian real estate market and this is perceived to be a risk factor by investors. Secondly, there are numerous ambiguities in guidelines relating to the real estate sector. The SEZ guidelines, which are issued by the Ministry of Commerce, are constantly modified, again creating uncertainty. Thirdly, there are no proper exit options for the investors. Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but non-availability of suitable exit options for such investments is still a very big factor, which the investors consider before entering the Indian real estate market. It is expected that the need for exit options will prompt foreign investors and other real estate players to devise financial instruments to enable them to divest their investments.

Creation of financial products and instruments will give the much-required maturity to the real estate market. With the SEBI all set to allow real estate investment trust (REITs) in India, foreign equity investors will have another exit option available to them. Also, retail investors will be able to invest in real estate with smaller investment through these REITs. The introduction of suitable financial instruments and REITs will make real estate similar to any other asset class and will enable investors to diversify their investment portfolio by investing in real estate through such options. Combination of foreign investment will also lead to adoption of international best practices by real estate players. Developers will get more organised, corporatise themselves and become more transparent to avail of these funds. All these factors will contribute in making the Indian real estate market more organised and structured.

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