May 25, 2007

Real Estate India Boom Attracts Investors

A boom in the Indian real estate market has diverted the attention of investors these days. Because of high returns on investments they prefer investing in property rather than in other sectors. INDIA HAS certainly firmed up in the world business space forcing global business to sit back and take a fresh look. In spite of nature’s fury or other global shocks, the Indian economy grew well in last two years. India is fast establishing itself as an alternative to China. The most spectacular resurgence has been that of the real estate sector, which is back in business with a bang. New projects, superior quality products, new growth corridors, increased infrastructure spending, falling cost of interests on the loans are some of the key reasons behind the real estate boom. With stock market being highly volatile, investment in real estate has started looking more competitive with typical yields of 10-12 per cent per annum. Of course return is always linked to property specific factors, dynamics of real estate market and the overall economic performance. Real estate is fast turning out to be a compulsive investment bet as compared to other investment vehicles such as capital and debt markets, bullion etc. It attracts investors with a possibility of stable income yields, moderate capital appreciation, tax structuring benefits and higher security. Besides these prime factors there are several other micro factors responsible for good returns on the investments and these are location of the property in macro and micro context, the usage of property, the quality of tenant, the capital value and achievable rental, the prevailing structures of property tax and stamp duty etc. The government has opened up the real estate sector for limited foreign participation. It has allowed 100 per cent FDI for development of townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems and manufacture of building materials. The 2004-05 budget had provided a major thrust to the infrastructure and tourism projects. Over 13,000 kms of highways are being developed. Rs 100 crore is sanctioned for facelift of airports at New Delhi and Mumbai. Townships are being developed for the rapidly growing affluent urban middle class. City level infrastructure such as roads, bridges, IT parks, sanitation and water supply etc are in the process of up gradation. Overview of the market The property market in India was always seen as an unorganised market with fragmented growth. However, the past three years have seen a big shift in the fundamentals that drive the growth. This has attracted private equity players and other real estate funds from abroad. In addition, existing and new players in the development business are eyeing viable and profitable projects. The market continues to grow in all major markets of the country. In past few years cities like Mumbai, Delhi, Bangalore, Chennai and Hyderabad, attracted number of IT and ITeS companies, who are either setting up their bases or looking for expansion. The suburban localities in these cities are experiencing massive activity due to the easy availability of land for constructing big floors and building the infrastructure as per the requirement. With number of IT/ITeS companies are coming up in these suburban areas, a rise in the demand for rental space has also been noticed here. Hence it provides a good opportunity to investors to invest in the property for high returns. Investor’s profile The two most active investor segments are high net worth individuals (HNI’s) and financial institutions. Both these segments are particularly active in commercial real estate. While the financial institutions like HDFC and ICICI show a preference to commercial investment, the high net worth individuals show interest in investing in residential as well as commercial properties. Apart of these two categories, there is a third category of Non-Resident Indians (NRIs). They mostly invest in residential properties than commercial properties. The reasons could be their emotional attachment with the native land and the future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside India, NRIs are showing more interest in investing in Indian real estate market.