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Real estate: Look who’s talking!

Apr 5, 2006

With more and more companies jumping into the bandwagon (cloth retailer Provogue being the latest kid on the block), the real estate development sector has suddenly become the ‘cash cow’ for India Inc. The sector has, in fact, witnessed tremendous traction over the past two years owing to the booming Indian economy, increasing demand for better quality housing and commercial spaces and consequently rising prices of land holdings. In this write-up, we take a brief look at the growth prospects of the sector and analyse where all participants (in the industry) can share the opportunity.The upsides…
A host of factors have contributed to the growth of the real estate sector in India. Amongst these, the important role of the government cannot be denied. Apart from extending fiscal incentives and simplifying property acquisition/disposal procedures that have gone a long way in giving a significant impetus to the sector, the government has also been adopting several measures to encourage foreign investment in the same. Towards this, in FY06, 100% foreign direct investment (FDI) under the automatic route was allowed in real estate. Now, apart from these initiatives from the government, demand side factors like increasing number of double income nuclear families, rising disposable incomes, relatively attractive property prices, historically low interest rates and easily availability of home finance have contributed in a significant manner to the resurgence in the real estate sector.

Going forward, the sector has the potential of becoming a key engine of economic growth because of its high yield on invested resources and a higher multiplier effect on large number of other industries. It is a known fact that increased activities in the sector leads to a faster growth of the economy (and vice versa), also leading to enhanced capacity utilisation of related industries such as steel, cement, capital goods and transportation.

As per the Federation of Indian Chambers of Commerce and Industries (FICCI), the Indian real estate sector is projected to grow at a CAGR of 30% over the next few years, to touch US$ 50 bn in size by 2008. As indicated, rising demand from the technology sector (in terms of setting up offshore development centres), demographic shift and favourable government policies are likely to change the face of the real estate construction sector in the country. As a matter of fact, residential, commercial and retail space development is expected to attract investments to the tune of US$ 120 bn during FY06 to FY08, which is a 10% growth over US$ 110 bn that have been spent in the past three years. This is, however, not considering the full impact of the special economic zone (SEZ) development that has been outlined by industrial houses and state governments over the past few weeks.

…and the downsides
Now, while the potential is huge, investors need to be cautious of news flows with respect to the companies, from across the spectrum, jumping on to the real estate development. A large number of these companies do not have any past experience in the sector, and considering the arcane land laws (with large land banks still with the government), volatile property prices, rapidly changing construction technology and crumbling support infrastructure (which will take much time to get better), there might be bumpers for many on the road ahead. In fact, some of the equity investment arguments these days have even been based solely on the quantum of real estate holdings that companies have, irrespective of their core business fundamentals. As such, it is pertinent to look very carefully as to who is talking real estate development.

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