Demand Supply of Real Estate

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 are numerous, 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, growing consistently 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 and forward 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.

Methodology

We 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 vice versa. 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, Cb, Cr, T, Ti, Ps}

D- Demand for real estate.

I- Income of consumers

P- Price of housing

Cb- 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 boost housing 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 and unorganized 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 Supply

The 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 segments account 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 are estimated 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 in future. 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.

HyderabadOf 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 down witnessed during the last few quarters.

Impact on Economy

Real 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 the highest 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 the real estate sector itself which again was a function of the information technology boom in India in 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 a number 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 growing numbers of real estate companies in India comes as no surprise. India real estate companies have witnessed growth in business in the last few years. The government, 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. The government 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 certain specialized 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