17673545 Demand Supply of Real Estate

8/8/2019 17673545 Demand Supply of Real Estate

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Introduction

The Indian real estate sector has witnessed a revolution, driven by the booming economy,

favourable demographics and liberalised foreign direct investment (FDI) regime. Growing at a

scorching, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to

grow at the rate of 30 per cent annually over the next decade, attracting foreign investments

worth US$ 30 billion, with a number of IT parks and residential townships being constructed

across-India.

This substantial growth has been the result of increasing demands from off-shoring businesses.

Off-shoring consulting houses and call centres have generated demand for real estate to the

extent of more than 10million sq.ft. Every year, 78 percent of the money spent on real estate goes

to the GDP (Gross Domestic Product). About 80 percent of the real estate development in India

has been in the field of residential housing. The remaining 20 percent of the real estate includes

office, shopping malls, entertainment centers, hotels, multiplexes and hospitals.

What prompts an average person to try his fortune in the real estate sector? The reasons arenumerous, the first and foremost being the myth that the real estate business is riskless. The

second reason is the growing Indian middle class with a low propensity to consume and more

botheration about future. Thirdly,the ever growing housing needs fueled by low interest rate.

Last but not the least, herd behaviour leading to the 'keeping up with the Joneses' notion i.e.

investing in the sector where everywhere else does can also be cited as one of the important

factors leading to heavy investment in this sector.

Overview

The Indian economy has transformed substantively over the last two decades, growingconsistently at an average of 8 percent and is poised to take place among the leading economies

in the years to come. The economic performance of India has provided strong impetus to the real

estate sector, which has been witnessing heightened activity in the recent years. Substantial end

users and investor interest, large scale investment in infrastructure and rapid urbanization have

contributed to the growth trajectory of Indian real estate. The real estate growth story is clearly

visible in urban centres such as Delhi, Mumbai and Bengaluru which have acquired global

character and recognition. Growing at a rate of 30 per cent, the real estate sector has emerged as



one of the fastest growing investment areas for domestic as well as foreign investors. The sector

will remain as a booming sector and more investment is expected in the coming years.

Construction and allied sectors are considered as one of the largest employing sector in India

(including construction and facilities management). This vital sector is linked to about 300

ancillary industries like cement, brick and steel. So this sector has a strong backward andforward linkages and the growth will translate into an overall positive impact on these ancillary

sectors too. Resultantly, a unit increase in expenditure in this sector has a multiplier effect and

the capacity to generate income as high as 4.5 times.

According to Mckinsey report the average profit from construction in India is 18%, which is

double the profitability for a construction project undertaken in the US. Five per cent of the

country’s GDP is contributed by the housing sector. In the next three or four or five years this

contribution to the GDP is expected to rise to 6%.

According to ‘Housing Skyline of India 2007-08’, a study by research firm, Indicus Analytics,

there will be demand for over 24.3 million new dwellings for self-living in urban India alone by

2015. As a result of this, this real estate sector is likely to throw huge investment opportunities.

In fact, an estimated US$ 25 billion investment will be required over the next five years in urban

housing, says a report by Merrill Lynch.

Scope:

"If the human race wishes to have a prolonged and indefinite period of material prosperity, they

have only got to behave in a peaceful and helpful way toward one another." -Winston Churchill.

The heresy of typical Indians has changed the orthodox mindset of building and designing a

house to live in it. A ramification of this is that houses are nowadays counted as a transitory

asset. The idea of buying a house that will last a lifetime has gradually vanished. The buzzword

nowadays is 'investment'. Both the policymakers and the stock-brokers share an united view in

this aspect.

The second largest employing sector in India (including construction and facilities management),

real estate is linked to about 250 ancillary industries like cement, brick and steel through

backward and forward linkages. Consequently, a unit increase in expenditure in this sector has a

multiplier effect and the capacity to generate income as high as five times. The scope of this

project is to analyze the demand/supply pattern in the Indian real estate industry. Also, it will

give you a detailed insight to the impact of the real estate industry on the Indian economy.



Objective:

• Analyze Demand dynamics of the Indian Real Estate Industry.

• The supply analysis of this Industry.

• Current Scenario

• Analysis of the real estate market in certain regions of India

• Impact of the economy of the country on the real estate industry

• FDI in real estate

• Economic role of the Government: Its effect on the Indian real estate industry.

MethodologyWe have collected secondary data from journals, magazines, newspaper articles and the

internet. Thereafter we have analyzed the data to find out the following:-

• Demand and supply pattern of the real estate industry in India,

• Factors affecting the demand and supply of real estate

• Impact of the economy on the real estate industry

• Current scenario and future prospects of the industry.

Limitations

Due to time constrain we have relied only on the secondary data taken from internet and

newspaper articles. We have taken the demand and supply conditions of certain regions of the

country which we believe are the major contributors of this sector. Our analysis is based on the

demand and supply prevailing in these regions.



Demand Side Analysis

Law of Demand

The law of demand states that, citerus peribus, demand decreases with increase in price and viceversa. There are various other factors which affect the demand for real estate. Based on these

factors we can derive the demand function for real estate.

The demand Function is

D= f {I, P, C b, Cr, T, Ti, Ps}

D- Demand for real estate.

I- Income of consumers

P- Price of housing

C b- Cost of borrowing

Cr-Availability of credit

T- Consumer’s preferences

Ti- Investors’ preferences

Ps- Price of substitutes and compliments



Rising income levels of a growing middle class along with increase in nuclear families, low

interest rates, modern attitudes to home ownership (the average age of a new homeowner in 2006

was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young

working population from that of 'save and buy' to 'buy and repay' have all combined to boosthousing demand. Simultaneously, the rapid growth of the Indian economy has had a cascading

effect on demand for commercial property to help meet the needs of business, such as modern

offices, warehouses, hotels and retail shopping centres.

Growth in commercial office space requirement is led by the burgeoning outsourcing and

information technology (IT) industry and organized retail. For example, IT and ITES alone is

estimated to require 150 million sq. ft across urban India by 2010. Similarly, the organized andunorganized retail industry is likely to require an additional 220 million sq ft by 2010.

With the economy surging ahead, the demand for all segments of the real estate sector is likely to

continue to grow. The Indian real estate industry is likely to grow from US$ 12 billion in 2005 to

US$ 90 billion in by 2015. The IT/BPO sector is expected to generate 100Mn sq ft of demand for

office space over the next five years. The rising middle class and its consumer demand is driving

the retail boom – around 22 malls are under development.



Income of consumers, price of housing, cost of borrowing, availability of credit, consumers preferences, investors preferences, price of substitutes and compliments are the major

determinants of the demand for housing. The large shortage in the housing sector will continue to

fuel the growth in the residential market. The real demand is not in the high end residential

market but in the affordable housing segment and this will be the driver for the residential

market.

This huge demand will spill over to all parts of urban India. Lease rentals have been picking up

steadily and there is a strong demand for quality infrastructure. A significant demand is also

likely to be generated as the outsourcing boom moves into the manufacturing sector.



Supply Side Analysis

Law of SupplyThe law of supply states that other things remaining constant, more of a good is supplied at a

higher price and less of it is supplied at a lower price. However, in examining the forces

determining the supply curve, we need to analyze the factors upon which the supply of a good

depends. The factors determining supply of real estate can be stated in the form of a supply

function:

S= f {P, A, B, Cr, L}

S- Supply of real estate property

P- Price of the property

A- Availability of land

B- Efficient builders

Cr- Easy accessibility of credit

L- Skilled labor

In future, a high proportion of supply of IT/ITes space will come from Special Economic Zones

(SEZs). According to the C&W report, of the 366 formally approved SEZs in the country, 62%

are dedicated IT-ITes SEZs. The availability of space within SEZs is expected to reduce the

attractiveness of STPIs, as both developers and occupiers will enjoy considerable tax benefits

within SEZs.



The residential sector, which accounts for 75-80 % of the turnover of the entire real estate sector,

has been on a high growth path. According to the ministry of housing and urban poverty

alleviation, there is a shortage of 24.7 million houses in the country. The LIG and EWS segmentsaccount for a majority of this shortage. However, in the luxury segment, there is already an

oversupply in some pockets of the country, such as the NCR.

Another major development within the residential real estate segment is the development of

integrated townships. The demand for quality lifestyle and walk-to-work concept are some of the

drivers of demand for integrated townships that offer commercial, retail, residential, and leisure

facilities within a given area. Approximately, 400 townships are expected to be developed over

the next five years around 30-35 major cities in the country. Hiranandani Gardens (Mumbai), JP

Nagar (by Keppel Land Development in Bangalore), DLF's 9,178-acre township at Bidadi near

Bangalore, and Magarpatta City near Pune are some of the examples of integrated townships.



So far, the situation in both the office and the residential market has been that whatever is built

gets sold or rented. In future, as supply increases, developers will have to be more careful about

factors like location and target those segments for which they are developing their products. In

this supply-rich environment, accurate demand estimates will become very important.

Currently, the real estate sector is quite fragmented with most players having presence limited to

select cities or regional geographies and relatively few players having national presence. Ernst &

Young expects a radical change in the next 2- years with most of the larger regional players

anticipated to expand aggressively across the country. While at least 10 major developers areestimated to have a national level presence, some of the well known city focused developers are

expected to venture out into other locations based in that region. Larger regional developers

increasing their footprints across the country include Rahejas (Mumbai), DLF (NCR), Ansals

(NCR), Unitech (NCR), Sobha(Bengaluru) who have already started penetrating other regions

and have announced several projects.



Analysis of the Industry in Key Regions

Mumbai

Mumbai is a mature and well-developed Real Estate market. It is a demand-motivated market;

where the property is bought for current use and not with the aim to speculate and sell it infuture. This has led to the burgeoning of the Mumbai Real Estate market. The spurt in demand

as well as supply of Real Estate products and the consequent increase in capital values are

encouraging High Networth Investors (HNI) and other investors to make active investments in

the Mumbai Real Estate market.



Chennai

Chennai real estate is a budding market. Chennai being the fourth largest metropolitan city has

regional offices of all major corporate houses and is among the trade capitals of India. It thus

offers tremendous real estate influx and is a hub of some of the top real estate builders and

developers of India. Chennai Real Estate Builders follow a trend of the best quality at the most

affordable prices.

Delhi

Absorption across NCR was approximately 6.6 million sq ft during 2007 and recommitments

amounted to an additional demand of 4 million sq ft. Gurgaon Accounted for 4.64 million sq ft or

70 per cent of total absorption in the NCR. Noida, the next biggest market, accounted for 1.37

million sq. ft or 21 per cent of total absorption. Delhi witnessed absorption of 0.66 million sq ft

Of this approximately 3.28 lakh came from new developments in Jasola, while the remaining

2.95 lakh sq ft came from older, second-generation developments in the CBD and South CBD.

The total supply in the NCR amounted to 11.53 million sq ft. Gurgaon accounted for the largest

share of approximately 6.4 million sq ft Noida and Delhi accounted for 4 million sq ft and 1.7

million sq ft respectively.

Availability of land, improving infrastructure, and better connectivity are some of the factors

why most of the supply came in the suburban areas. Prime locations and buildings in most micro



markets have low or negligible vacancy. Demand for grade-A Properties Continues to rise in

NCR, as is evident from the pre-lease commitments signed

Kolkata

Kolkata is one of the oldest urban agglomerations in the country. Kolkata lost its position as the

erstwhile commercial capital of India to Mumbai due to the socialist manifesto adopted by the

West Bengal government post independence. Now JLLM believes the state is witnessing a

resurgence driven by government policy and support for the service industry and infrastructure

development that is once again attracting industry and capital to the city.

Bangalore

Real estate values around Bangalore have shot off the charts since 1991. Land on the

outskirts of Bangalore that was selling for US $0.10 per square foot rose to $2.00 per sq. ft.

Prices started to drop in 1995 and are now beginning to show gains again. Real estate investors

and real estate developers in Bangalore have been on a wild ride.



Hyderabad Of late, Hyderabad has witnessed a remarkable growth in real estate business, thanks to a

predominantly information technology driven boom in the 1990s and the retail industry growth

over the last few years spurring hectic commercial activity. However, the real estate prices have

spiraled only in some hot spots of the city and continue to be flat mainly due to the slow downwitnessed during the last few quarters.

Impact on EconomyReal estate has been instrumental in India emerging as the top destination in Asia (excluding

Japan) in attracting private equity investments during the first ten months of this year. Real estate

accounted for 26 per cent of total value of private equity investments, with 32 deals valued at

US$ 2.6 billion. And according to industry estimates, another US$ 10-20 billion would pour into

the sector in the next three years.

The flow of private equity continues in 2008. During the first five months of 2008, PE

commitments into the Indian real estate companies has surpassed US$ 3 billion, which

incidentally is the total PE investment into the Indian real estate companies for the whole of

2007.



Current Scenario

India is on a growth path with a significant element of consistency & fundamental strengths to

boot. Economic indicators such as the GDP (Gross Domestic Product), Per Capita Income, Forex

reserves, FII's (Foreign Institutional Investments) & Industry growth rate which includes the

manufacturing & farm sector are all at their record highs. Also a tender Stock Market & a

significant shift from a traditional agriculture & manufacturing based economy to a service

oriented one, especially in Urban & Semi-urban segment; are factors which most economists

would support. Mumbai, Delhi & their respective suburbs have predominantly witnessed thehighest growth; with some projects being benchmarked against global standards. Rationalization

by the respective state governments with regard to allowing divestment of non-operational textile

mills & other such manufacturing units which had so far occupied large tracts of land in prime

locations; have been an important factor responsible for exciting new creations. Also, quite a few

home-grown family run property development companies have truly gone professional while

facing competition from real estate off-shoots of larger corporations from the organized sector.



The road ahead, while needing a well chalked out vision & infrastructure support, does in fact

seem bullish.

Another case in point is Gurgaon, a suburb of New Delhi, which has seen a radical change in not

just its skyline but also in its basic urban demographics. Gurgaon was once described as just a

little town built on a cow pasture. But in the past three years, Gurgaon has budded six malls -

with five more under construction and has a skyline of shiny new office buildings and call

centers. Gurgaon is a shopper's paradise and the malls are vertical versions of their US

counterparts: five story high bazaars, housing almost every international brand be it Nike, Nokia,

Tommy Hilfiger, Levi and McDonalds along with multiplex cinemas, escalators and huge

parking lots. The advent of call centers, programming houses and other such BPOs in India has

led to an influx of over 785,000 new jobs. Outsourcing has changed the face of commercial real

estate in India, but its greater impact has been the demographic shift characterized by rising

disposable incomes and increased consumerism.

The real estate market in India predominantly continues to remain unorganized, fairly

fragmented, mostly characterized by small players with a local presence. Traditionally,

developers were viewed with an element of skepticism. Developers were often identified with

dealing with large amounts of unaccounted money, lacked transparency and would use

unscrupulous means to obtain various regulatory approvals. Lending to developers was perceived

as being risky as builders were known to borrow for one project and utilize it for another or

overstretch their limits and not have sufficient funding to complete the building. But things have

clearly changed today: for starters, developers have realized the merits of corporatizing

themselves and enhancing transparency in terms of their financials. While earlier even the

reputed builders had difficulty accessing formal channels of credit, today almost every bank and

housing finance company has relationship tie-ups with developers and are keen to lend to them at

competitive rates. Lenders are also monitoring the projects more closely. For instance, lending to

developers is often through a mechanism which ensures that funds are utilized only for that

particular designated project. Today specific projects of developers are also being rated. The

objective of the ratings is to help the financers as well as the end users to take a decision while

investing in a real estate project. The rating system also means a greater amount of

transparency and disclosure on the part of the developers.

India real estate companies have increased in number in recent times due to the boom in thereal estate sector itself which again was a function of the information technology boom in Indiain the last few years, accompanied by the growth of the Indian economy at 8%.The soaring prices of real estate in India have led to corporate attention to this sector, with anumber of India real estate companies jumping onto the real estate bandwagon in recent years.

The demand for property is constantly getting steeper in India and as a result, the growingnumbers of real estate companies in India comes as no surprise.India real estate companies have witnessed growth in business in the last few years. Thegovernment, however, needs to keep an eye on this sector to ensure that the infrastructure provided by these companies is of international standards, at least in the IT sector. Thegovernment also needs to ensure that India real estate companies are fair in their dealings with people.



FDI in Real Estate

In 2002, the Government of India permitted 100 per cent foreign direct investment (FDI) in

housing through integrated township development. The merits of FDI are well known - it

provides the much needed investment in the sector brings professional players equipped with real

estate expertise and facilitates the introduction of new technology. However, the FDI rules in its

current form are rather stringent - prior approval of the Foreign Investment Promotion Board is

required which admittedly can be rather tedious and there is a lock-in for repatriation of original

capital invested for a period of three years. What is rather self-defeating is the stipulation of a

minimum land holding of 100 acres. Getting 100 acres of free land in an urban area is almost

impossible and consequently barely a handful of projects have been approved. If the minimum

area restriction is reduced at least by half and repatriation of profits after the construction period

is completed is allowed, FDI in this sector will certainly pick up. In this aspect, I think we have a

lot to learn from our Chinese compatriots. Recently, the Securities and Exchange Board of India,

India's capital market regulator has permitted venture capital funds to invest in real estate - this

augurs well for the industry.

ROLE OF FDI IN REAL ESTATE IN INDIAN ECONOMY

According to the Associated Chambers of Commerce and Industry of India

(Assocham), the Indian realty sector is likely to see a growth rate of 40-45%in 2008. The organization expects that more than $ 10 billion worth of FDI is likely

to flow in the sector by the end of the year. Also the organization believes that the

rate of growth is likely to be stable for the next three years when it might go down a

little. Also most of the FDI investment is still predicted in the tier 1 cities.

Since FDI in Real Estate is beneficial to economy, measures should be taken to increase to

provide congenial investment atmosphere to foreign direct investors. There is also a need to



completely overhaul the union and state legal system governing various aspects of real estate.

There is need to open up more avenues to facilitate long-term finance for the housing sector.

Computerizing land records and circulation of and access to this database, would be one of

the most useful features of reform in this country.

Like the IT, banking and insurance sectors, the real estate sector too should have certainspecialized institutions and vocational courses for professionals.This will go a long way in

shaping the real estate scene in the country.

Moreover, foreign design and consultancy companies should be encouraged to set up offices

in the country to introduce world class designs and technology

Conclusion

17673545 Demand Supply of Real Estate

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