1. Overview

In India, the real estate industry is fast becoming a mature industry due to increasing demand from both residential and commercial customers and the entry of corporate players. The Indian real estate industry is expected to touch USD 50 billion by 2010 which is around 5% of India’s GDP. The real estate market can be divided into the following categories

a.     Residential space

b.    Commercial office space

c.     Retail space

d.    Hospitality space

Among these, residential real estate is the biggest one having almost 80% of the real estate market.

2. Sub Segments

2.1           Residential Space

Increasing urbanization and decreasing average household size have increased  demand for the residential space. Also the increase in the number of rich households, working people and a maturing home financing market have resulted in a growth of around 18% CAGR for residential real estate. Though the market is still very much fragmented and controlled by small regional players, a few regional players are trying to expand their pan-India presence. The market is further sub-divided into low cost, mid market and premium housing categories depending on the price and facilities available in those dwelling units.

2.2           Commercial Office Space

Rapid growth of services, particularly that of IT/ ITES industry, has fuelled the demand for commercial space. Though the market is dominated by large national players, some  regional players are also trying to catch up with the market. Also more and more real estate players are moving away from upfront sales model to lease and maintenance model to create more flexibility in the business. This sector is growing at a CAGR of 20% to 22%.

2.3           Retail Space

With the rapid growth of Indian retail industry, the demand for retail space also has increased a lot. The possibilities of allowing foreign direct investment in retail will also accelerate the demand for retail space.

2.4           Hospitality Space

The tourism sector is growing very rapidly in India due to increasing demand for medical tourism, emergence of India as a meeting/ exhibition destination, international events like commonwealth games, government initiative like “Incredible India” campaign etc. Though the major corporate players are present in the high end sector, the budget hotel market is still dominated by small players particularly in the tier-II and tier-III cities.

3. Regulation

To accelerate the growth of real estate industry and reduce the shortage of housing units as well as quality commercial units, the  government has allowed FDI in real estate with some conditions. For FDI, a minimum of 10 hectares should be developed for serving housing plot or minimum 50,000 sq ft has to be developed for construction-development project. Also 50% of the project should be completed within 5 years from the date of statutory clearances.

There is also a minimum capitalization requirement for FDI. For wholly owned subsidiaries it is USD 10 million and for joint ventures with Indian partner, it is USD 5 million. The funds should be invested within six months of commencement of business. To avoid speculation, there is a lock-in period of three years from the date of completion of minimum capitalization and within this period, the original investment cannot be repatriated. 

4. Challenges

One of the biggest challenges in the real estate industry is the lack of a clear tile for a good number of properties in India. Also varying tastes of population across various geographies, difficulties in mass land acquisition in new areas, absence of proper business infrastructure to market projects in new locations, a huge difference in local laws in terms of land acquisition and construction and several approvals needed from local authorities at various stages of construction have prevented the real estate players from expanding their operations across India.

Another big challenge is the heavy fluctuation in the price of raw material used for construction. In most of the cases, the booking starts before construction which means the revenue is pre-determined and the realization of the revenue is staggered across the period of construction. So the adverse price changes in the cost of raw materials like cement, steel, bricks, wood, sand, gravel, paint etc. affect the bottom line of the developers

Though the housing finance market is mature enough in India, the cost of financing is still high due to high interest rate. Tax benefits on home loan is one of the driving factors in fuelling the demand for residential units and the removal of these benefits will adversely affect the real estate business.

Some state governments have still not amended the Urban Land Ceiling Regulation Act which prevents big corporate houses from purchasing big pieces of land for real estate development. The rental law for residential properties in some states is also not favourable to the owner which discourages people from purchasing  residential property for any use other than personal use.