Real Estate & FDI In Real Estate In India

Batch-XIII (B)
Gaurav, Kishore & Shravan
Macro Economics
Dr Gulnar Sharma
Case Study On
Real Estate & FDI in Real
Estate in India
Presented by
Gaurav Patel (KH08JUNMBA65)
Kishore Gulhane (KH08JUNMBA74)
Shravan Bhumkar (KH08JUNMBA100)

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Presentation Flow
Real Estate in India
Current Trends
FDI & Real Estate in India
Gaurav Patel Kishore Gulhane
Shravan Bhumkar

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Demographics and Development
Between 1950 and 2005 the global urban population has more than tripled to reach 3.15
billion. While urbanization has considerably slowed down in developed countries, the
enveloping world is where cities are growing the most. It accounted for 68% of the urban
population in 2000. By 2020, 77% of the global urban population is expected to be in
developed countries.
In India, Urban population has been increased from 20% in 1971 to almost to 34% in 2006
and contribute over 50% to GDP.(Source : www.unhabitat.org)

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Indian Economy
• Indian Economy currently stands among the world’s 4th largest growing economy in
terms of PPP(Purchasing Power Parity).
• India’s GDP is estimated to be the third largest in the world by 2020.
• India is also considered second most attractive country in world for FDI investments
of about US$ 11.14 Billion in 2007 with rise of 36% in terms of rupee and 54 in
terms of US dollars. (Source : Economic Budget 2007-08)
• India performance has been steady over past 3 years with an average Annual
growth rate of 8%.
• In recent years, the broad based growth in service sector has been principle driver
of GDP growth.
• India has a well developed road and rail network. Large investments are underway in
areas of:
- Highway development
- Air-connectivity (Domestic & International)
- Up gradation of ports with their privatization
- Power sector

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Real Estate in India
What is Real Estate Market ?
The term ‘real estate’ is defined as land, including the air above it and the
ground below it, and any buildings or structures on it. It is also referred to as
realty. It covers residential housing, commercial offices, trading spaces such
as theatres, hotels and restaurants, retail outlets, industrial buildings such
as factories and government buildings. Real estate market involves the
purchase, sale, and development of land, residential and non-residential
buildings. The main players in the real estate market are the
landlords, developers, builders, real estate agents, tenants, buyers etc. The
activities of the real estate sector encompass the housing and construction
sectors also.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
History of Real Estate Market
Source: Circular NHB(ND)/HFC(P&D)/15.3/6065, National Housing Bank

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Why invest in Indian Real Estate ?
• The Size of Indian Real Estate Market is
estimated at USD 15 billion and is currently
growing at rate of about 30% annually.
• The second largest employing sector
including construction and facility
management.
• Strong and Improved economic growth,
proactive policy initiatives like relaxation of
FDI in construction and availability of
finance driven demand for real estate
across all sectors -
Commercial,Residential,Retail,Hospitality
and SEZ in India.
• There has been rising demand for quality
infrastructure across various segments of
the real estate sector.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• In India demand for new office space
has grown from an estimated 3.9 million
sq.ft to 45 million sq.ft in 2006-07.
• The demand for office space is driven by
more than 7000 IT and ITES firm,
Financial service provider and other
sectors.
• As Indian IT-ITES industry has absorbed
a total of approx. 30 million sq. ft and is
estimated to generate a demand of 150
million sq. ft of space by 2010.
High Demand Commercial Real Estate

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• The Residential property market in India
constitutes almost 75% of the real estate
market in terms of value.
• Low per capita housing stock ,rising
disposable income coupled with easy
finance from housing finance company and
banks are driving demand in this sector.
• Average house loan borrowers have
decreased to 30-35 years from 40-45 years
a few years ago.
• Housing sector is growing at 30-35% per
annum.
• The demand for housing is also driven
from investor who view it has an attractive
investment option as compared to mutual
funds and stocks.
High return on Residentail Real Estate

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• The Retail industry in India continues to be
dominated by individual small format stores with
floor space of less than 500 sq.ft.
• Total number of retail outlets is estimated to be
around 12-15 million, indicating a retail density of
12-14 outlets per 1000 people, which is one of the
highest in the world.
• The contemporary retail sector is reflected by
shopping centers and Multiplex-mall contributing
large scale investment in real estate.
• The retail sector in India is currently estimated at
USD 230 billion.
• But the organized retail activity is 7 billion which is
mere 3% of total retail sector and is growing at 25%
- 30% per annum is expected to be worth over USD
30 billion by 2010.
Retail sector facilitating real estate growth

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• Hospitality industry is in India is growing at an annual rate of 8%.
• The number of foreign tourist arrivals (Major driver) in country was approx. 4.4
million in 2006-2007.
• More than 55% of total demand for hotels in country is generated by foreign leisure
tourists and business travelers.
• Service Apartments ,Hostels, Wellness space gaining popularity.
• With growth in demand for rooms at five star hotels at 18% another 65000 – 85000
rooms will be needed till 2010, results in high level of activity in construction of
hotels which will fetch more investors in this sector.
High Demand for Hospitality real estate

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• The upcoming realty trend in India after multiplexes and mega housing projects are
the Special Economic Zones(SEZ).
• Currently only 28 SEZ are operational in country, including those converted from
Export processing Zones(EPZ) to SEZ.
• Approx. 189 proposals have been granted approval since SEZ Act,2005 came into
force.
• SEZ’s are in various segments such as multi-product, Information technology, Bio-
technology, Gems and Jewellery, textiles and technology initiative industries.
• Major Players RELIANCE,ADANI,SUZLON Infrastructure, HINDALCO etc.
SEZ’s – The emerging investment option

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• With the opening of the sector for 100% FDI under automatic route, the real estate
sector is estimated to capture about 18-20% of the total FDI coming to India in
2005-06.
• The FDI in Real Estate is expected to have a favorable multiplier effect on the
economy.
• As an indicator, for every rupee spent on construction, an estimated 75-80% gets
added to the GDP.
• The spill-over 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.
FDI – inviting real estate investments

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI
(Foreign direct investment)

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
What is FDI?
• Foreign direct investment is the acquisition of assets in a
country by foreign entities for the purpose of control .
• FDI in India was initiated in 1992. Streamlining of the
procedures and substantial liberalization has been done since
1995. As of now, Indian corporate/Registered partnership
firms are allowed to invest abroad up to 100% of their net
worth and are permitted to make overseas investments in
business activity. FDI is now ownership of at least 10% of a
business .

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI limits for other sectors
are as follows:
• Banking - 74%
• Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100%
• Insurance - 26%
• Telecommunications - 74%
• Private petrol refining - 100%
• Construction development - 100%
• Coal & lignite - 74%
• Trading - 51%
• Electricity - 100%
• Pharmaceuticals - 100%
• Transportation infrastructure - 100 %
• Tourism - 100%
• Mining - 74%
• Advertising - 100%
• Airports - 74%
• Films - 100%
• Domestic airlines - 49%
• Mass transit - 100%
• Pollution control - 100%
• Print media - 26% for newspapers and current events.
511618.62, 3
8%
320195.21, 2
4%
164910.23, 1
2%
125148.95, 1
0%
95978.61, 7%
93978.61, 7% 21985.64, 2% Services
Computer Software &
Hardware
Telecommunication
Construction
Activities
Housing & Real
Estate
Automobile Industry
Mechanical
Industries

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Foreign Direct Investment is encouraged and permitted, subject to certain conditions, in
the following real estate sectors in India:
• Hotel Development:
• Tourism
• Hospitality
• Township development
• Developing Commercial Real Estate
• Built-up infrastructure
• Housing and construction projects
• Building Resorts
• Building Hospitals
• Building Educational institutions
• Building Recreational facilities
• Infrastructure projects: regional and local level
• Special Economic Zones (SEZ's)
Foreign Investment (FDI):
Real Estate Sectors in India

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI Inflow in Real Estate
0.5 0.75 0.9
2.6
2.91
3.94
5.43
8.2
0
2
4
6
8
10
12
2003-04 2004-05 2005-06 2006-07E
Real Estate Other Sectors
Source: ASSOCHAM, E&Y Research
Amount in US $ Billion

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Investing in India – Entry Routes
Automatic Route
Prior Permission
(FIPB)
Investing in India
General rule
No prior permission
required
Only information to the
Reserve Bank of India
within 30 days of inflow/
Issue of shares
By exception
Prior Government
Approval needed
Decision generally
Within 4-6 weeks
FIPB: Foreign Investment Promotion Board

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Guidelines for FDI in Real Estate

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI Policy Liberalization Path
• FDI Policy Liberalization Path

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Guidelines for FDI in Real Estate in India
• Conditions for Development
• Minimum 10 hectares to be developed for serviced housing plots.
• For construction-development projects, Minimum built-up area of 50,000
square meters prescribed.
• In case of a combination project, any one of the above two condition
should suffice.
• At least 50% of project to be developed within 5 years from date of
statuary clearances.
• FDI is not permitted in the business of buying and selling of property.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Conditions for investments
• Minimum capitalization of US$10 million for wholly owned subsidiaries &
US$ 5 million for Joint ventures with Indian partners.
• Infusion of fund within 6 months of commencement of business.
• Original investment cannot be repatriated before a period of 3 years from
completion of minimum capitalization.
• Investor may be permitted to exit earlier with prior government approval.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Miscellaneous Conditions
• Investor not permitted to sell undeveloped plots
• Project to conform to norms and standards laid down by respective state
authorities.
• Investor responsible for obtaining all necessary approval as prescribed
under applicable rules/ by-laws / regulations of the state.
• Concerned Authority to monitor compliance of above condition by
developer.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Business & Investment Models for FDI
Business Models
• Large Scale Direct Entry
Independent approach for undertaking real estate projects
• Establishment of Umbrella Joint Venture
Foreign developer/investor enters into a joint venture with a local
partner to carry out projects
• Multiple Joint Ventures
Joint ventures with different local partners on project-to-project
basis
• Investment through creation of Capital Fund
Facilitating the local developers through funding their ventures

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Investment Models
Private Equity/Real Estate Funds
• The investors pick up equity stake
in unlisted real estate firms and
collaborate in business plans
• Lowers the transaction costs and
provides an easier exit route
Joint Venture
• Long term partnerships or project-
specific
• Mitigates the risk of entering the
new market
Source: E&Y Analysis

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Wholly Owned Subsidiary
A relatively less preferred arrangement, few overseas developers are
developing projects on a stand-alone basis
Public - Private Partnership
Government takes a proactive role and collaborates with foreign
developers

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Major Foreign Developers in India
• Real estate FDI inflow up nearly five-fold in 2008.
Housing
and Real
Estate
Service
Sector
Software
and
Hardware
Telecome
constructio
n activities
Automobile Power
Petroleum
and Natural
Gas
2006-07 2121 21047 11786 2155 4424 1254 713 401
2007-08 8749 26589 5623 5103 6983 2697 3857 5729
0
5000
10000
15000
20000
25000
30000
AmountinUS$Millions
FDI Inflow

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
INVESTOR COUNTRY PROJECT LOCATION
Emmar Group Dubai Hyderabad
Kontur Bintang /Westport Malaysia Gurgaon
Singapore Housing Board Singapore Hyderabad/Chennai
Keppel Land Singapore Bangalore
Salim Group Indonesia Kolkata
Ascendas Singapore Hyderabad
Lehman brothers US Mumbai
Lee Kim Tah holdings Singapore Chennai/Mumbai
Major Foreign Developers in India

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI Experience in Indian Real Estate

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI contributing to an organized Indian real estate
• To become more organized sector
• Fastest growing economy
0 171
2121
8749
1510
696 667
4424
6989
895
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2004-05 2005-06 2006-07 2007-08 till April-2008
Real Estate Construction Activities
US$ in million
Source: RBI & Department of Industrial Policy and Promotion (DIPP)

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
FDI in real estate on the high growth path
Growing at the rate of 30% p.a (Source: ASSOCHAM)
Share of foreign investments will be US$ 25-28 billion by 2010.(Source: ASSOCHAM)
Source: Industry sources, E&Y Research
4.50%
10.60%
16.00%
26.50%
38.50%
47.60%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Share of real estate in FDI

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• Majority of the direct investment
is from West Asia with overall
commitment of US$ 9.7 billion
from Dubai based developers
• Further, investor from USA and
Europe have shown keen
interest with the launch of
several RE funds
Source: Industry sources, E&Y Research
59%
25%
10%
2%
4%
Dubai
Indonesia
Singapore
Malaysia
Others
Major Countries investing in India

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Most Preferred Cities for Investment
I. Delhi
II. Noida
III. Gurgaon
IV. Mumbai
V. Pune
VI. Kolkata
VII. Hyderabad
VIII. Bangalore
IX. Chennai
Many more…

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
I. Vizag
II. Vadodara
III. Dehradun
IV. Indore
V. Nashik
VI. Guwahati
VII. Chandigarh
VIII. Nagpur
Many more…
Most Preferred Tier II Cities
for Investment

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Advantages of FDI in Real Estate
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Bring Superior Technology
Induce Healthy Competition
Create More Professionalism
Organize the Sector
Ranking of Advantages of FDI
Source: FICCI, India

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Advantages of FDI in Real Estate
0 0.5 1 1.5 2 2.5 3 3.5
Best Designs
International Quality and Construction
Tech.
Make Available Huge Funds
Edge of FDI over domestic investors
Source: FICCI, India

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
The Impact of Macroeconomic Factors
on Demand & Supply of Real Estate
Economic Growth - Broad based GDP growth rate of 8-9 % per annum forecast
- Demand driven by the growth in services sector
Inflation - Has significant role in supply-demand of real estate
- Continues to remain a major concern
Money Supply - Growth is higher than RBI estimates
- Liquidity is key to inflation and over-heating
- Restricted availability to reduce options for builders/developers
Interest Rates - Higher rates lead to higher cost of borrowing
- Developers seeking other options, consumers are re-evaluating options
- Investors are revaluing returns from the sector
Credit Take-off - Easy availability of capital has led to growth in valuations
- Concern over exposure of Banks towards the sector
Economic Growth - Liberalization of FDI has led to an interest from new players
- Valuation standards and greater transparency
- Service tax on commercial rental to affect retail space
Source: RBI, E&Y Analysis

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Market Trends and Outlook
Parameters Characteristics/ Trends Outlook
Market
Concentration
• Highly concentrated within top 6- 8 cities in
the country
• High concentration leading to significant
property price rise in such cities
• Growth to be driven primarily by Tier-II
and Tier-III cities in the near future,
across segments
• Emergence of at least 10-15 new cities
as growth centers
• Increased development of planned
cities
Competition • High competition with 4-6 key national
players and numerous regional players
• Shift in competition towards product
focus/ differentiation

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Parameters Characteristics/ Trends Outlook
Financing • 30-40% annual increase in the home loan
disbursements loan disbursals from Indian
housing finance companies
• Loan tenures have increased: 150 months
(2001) to 173 months (2006) due to declining
age of borrowers
• Larger mortgage penetration
• Introduction of globally accepted
instruments/modes such as
REITs
Extent of Regulations • Moderate-No functional regulatory body
• Region/Location specific building laws
• 100% FDI is allowed under the automatic
route
• Stringent regulations expected to
be introduced inline with
international norms
• Reforms in local development
guidelines
Market Trends and Outlook

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Key Opportunities
Low–cost Housing
• 72% of the total population is still rural areas
• Current housing shortage of 22 million units at an estimated cost of US$ 88 billion
• Increasing shift from rented to owned house
• Nuclear families increasing the demand for housing
Education Infrastructure
• Huge market with untapped potential and low competition
• Growing interest of leading global educational institutions in setting up institutions in
India
Logistics & Warehousing
• Booming trade – Domestic & International
• Agriculture Logistics – proper cold chain management and opportunity
• Logistics for large infrastructure and Engineering Projects
Healthcare Infrastructure
• Healthcare BPO
• Medical Infrastructure

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• Nagarjuna Construction to invest up to Rs 500 cr in airports,Ports (July 17, 2008)
• QVC Realty to launch first project in Bangalore soon (July 17, 2008)
• Realty developer Bearys starts Montessori schools (July 17, 2008)
• Emaar to infuse $150 m into specific projects (July 15, 2008)
• Era Infra bags BHEL contract (July 15, 2008)
• Foreign firms to pick up stake in Eldeco Infra for Rs 196 cr (July 15, 2008)
• Maytas Properties to develop three IT SEZs (July 14, 2008)
• Subhash Projects forays into urban infrastructure (July 13, 2008)
• JP Morgan invests Rs 250 cr in BPTP (July 11, 2008)
• New JMD for Parsvnath SEZ (July 11, 2008)
• GMR Infrastructure (Rs 94.10): Buy (July 11, 2008)
• Johnson Controls inks pact to manage Lodha projects (July 10, 2008)
Real Estate &
Construction Markets: 2008

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
• Marathon Group to develop Rs 1,800-cr SEZ in Navi Mumbai (June 29, 2008)
• HT Media acquires stake in realty major Sunil Mantri (June 27, 2008)
• Lanco contract for Hind Const (June 27, 2008) NCC bags Rs 333 cr worth orders (June
26, 2008)
• Retail blueprint: Parsvnath to open 5-10 stores in 2008-09 (June 21, 2008)
• Maytas-led consortium lays foundation for Shimoga airport (June 21, 2008)
• Emaar MGF, Leighton venture to focus on Palm Springs project (June 20, 2008)
• Suncity in talks with PE firms to raise Rs 350 cr for IT SEZ project (June 18, 2008)
• Mantri Developers to re-enter Pune with realty projects (June 11, 2008)
• Punj Lloyd inks pact with Singapore firm (June 06, 2008)
• Nagarjuna Const bags 4 orders (June 04, 2008)
• K Raheja joins hands with Servcorp (June 03, 2008)
Real Estate &
Construction Markets: 2008
Source : Business Line

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Road Ahead….

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
Road Ahead….
• Negative Impact on the credit profiles of Real Estate companies.
• Weeding out weaker entities, thereby increasing the relative strength of larger
companies.
• Liquidity risks remain a key challenge across the board.
• Materially high rates of interest end up refinancing by small players.
• Monetization of stakes by attracting PE would remain a key for managing overall
funding and liquidity requirement.
• Liquidity pressure for project execution and general slowdown in property sales.
• Reducing list price for enhancing demand and to avoid risk of liquidity pressure.
• Higher construction cost could also impact margins.
• Large players with an attractive portfolio of ongoing development and an
established track record will enjoy access to loan market and also attract capital
through PE route.
• Finally, Short-term outlook is Negative.

Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
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Batch-XIII (B)
Macro Economics
Dr Gulnar Sharma
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