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Contents
Executive Summary 1
01
1.1 1.2 1.3 1.4 1.5
INTRODUCTION
Growth Machine: Indias Economy Construction Behemoth: Indias Real Estate Sector A Billion People Opportunity Opportunities and Challenges Facing the Sector Challenges and Government Intervention 3 5 6 7 8
02
2.1 2.2 2.3 2.4
03
Executive Summary
A decade of economic renaissance
India has witnessed strong economic growth in the last decade primarily on account of economic reforms that ushered in an era of liberalisation and provided for increased participation from the private sector. Opening up of the economy for investment was instrumental in spurring broad-based fundamental growth across various sectors, thereby leading to accelerated consumption and heightened investment activity in the economy. This growth has percolated to the construction and real estate industry as well, which is a conduit for growth in a large number of ancillary industries in the country.
The real estate sector has a share of approximately 6.3% in the GDP; will employ almost 7.6 million people in the year 2013.
01
20 15
INTRODUCTION
1.1 Growth Machine: Indias Economy
India introduced large scale economic reforms in the year 1991 and implemented structural changes across sectors such as services, financial and industrial. Led by liberalization of the economic processes along with broad-based fundamental growth across various sectors, Indias economy has exhibited healthy growth rates in the last decade. The average growth rate registered over the period 2000 2012 was about 7.2%1. This growth has been on the back of increased consumption, higher investment activity as well as productivity gains. Surviving on domestic demand and enhancing consumption levels, the manufacturing and services industries have also posted healthy growth levels in the past few years. Sustained economic growth in the last decade has not only propelled India into the league of leading emerging economies alongside China, Brazil and Russia, but also implied that the country is making an important contribution to the overall increase in the global economic output.
Indias Economic Growth over the years
8.5 6.9
9.5
9.6
0 2012 - 2013* 2013 - 2014* 1998 - 1999 1999 - 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011 1997 - 1998 2011 - 2012
-5
-10
India
Brazil
China
Japan
European Union
However, over the past two years stagnating global economic conditions have led to a slowdown in the countrys growth. GDP growth continued to inch downwards in 2012-13, declining to 5% during the finacial year, compared to 6.5% during the previous year2. This was accompanied by persistently high inflation and declining industrial growth. However, as a positive step towards dispelling the general feeling of gloom, the government has continued to maintain its momentum of introducing structural reforms in the economy. Foreign direct investment in sectors such as multi brand retail, single brand retail, banking, pension and broadcasting was approved by the union cabinet, while a new Companys Bill was recently approved by the lower house of the parliament; the government is also working on deregulating fuel prices and reducing the subsidy burden on the economy, thereby focussing upon fiscal prudence, controlling inflation and propelling India back into the high growth trajectory.
Foreign Investment Inflows in India
50 40 30 22.82 USD Billion 20 10 0 2005 -06 -10 -20 FDI inflows Source: Department of Industrial Policy and Promotion * till February 2013 FII inflows 2006 -07 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 2012-13* 8.96 41.87 34.83 37.74 32.9 33.91 46.84
The industry has reacted positively to this wave of economic reforms, supporting the government in its drive towards reinstating economic growth. The real estate and construction industry has been particularly enthusiastic about relaxed guidelines on foreign investment in sectors such as retail and low cost housing. While these reforms might have a moderate impact on the countrys immediate growth prospects, the industry expects that in the long run, these steps will support in creating a positive sentiment amongst global investors for positioning India as a key investment destination.
Assessing the Economic Impact of the Real Estate Sector
9% 8% 7% 5% 4% 3% 2% 1% 0%
Share (%)
6%
2012 - 13*
Source: Department of Industrial Policy and Promotion * till February 2013 Construction Development includes townships, housing, built-up infrastructure and construction-development projects
The real estate sector has partially risen from the liquidity crisis it was entrenched in 2009, when bad debts and declining demand led to a dip in the market. However, post 2009 the sector witnessed recovery in investment and construction activity. An indicator of this recovery is the level of construction activity witnessed in the real estate space in the country from 2010 to 2012; a total of 200 million sq ft of investment grade commercial office, retail and residential real estate space is lined up for completion across the seven cities of National Capital Region (NCR), Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata in 20133. The sector has also emerged as the most prominent investment option for the countrys urban households, taking priority over gold, fixed deposits and stock exchange trading. The following graph highlights the prominence of real estate as an investment asset for an average urban household in India4.
Segmentation of Investment by Urban Households in India
2% 2% 3% 4% 10% 3% Real Estate Gold and Arts
30%
Bank deposit Insurance and Pension Post Office Mutual Funds Consumption
19% 27%
Equities Others
Source: Reserve Bank of India, National Council for Applied Economic Research
The synergies between the construction and the real estate sector cannot be ignored as real estate accounts for a significant portion of the construction segment. India is expected to become the third largest construction market in the world by 2020, with the real estate sector expected to reach a size of USD 180 billion5. Increased activity across various industry verticals combined with rising domestic consumption of goods/services have contributed towards increased demand levels for real estate across segments. In addition, an untapped housing demand (estimated housing shortage of 18.4 million units by 2012)6, has also provided developers with an opportunity of catering to buyers across the affordability spectrum in multiple cities and towns.
250 200 150 100 50 0 NCR Mumbai Bangalore Residential Chennai Retail Hyderabad Office Pune Kolkata
The investment grade commercial office real estate in the country has grown tenfold from about 37 million sq ft in 2003 to about 370 million sq ft in 2012, with another 100 million sq ft lined up to be completed till 2015. This growth was spread across leading cities such as Delhi, Mumbai, Bangalore, Chennai, Kolkata, Pune and Hyderabad. However, substantial opportunity lies for further growth as the commercial office real estate space in major commercial hubs in India is still lesser when compared to other developed cities in the world The total size of organised retail real estate in the country has also increased tenfold from about 5 million sq ft in 2003 to about 52 million sq ft in 2012, with another 15-20 million sq ft lined up to be completed till 2015. This growth has largely been concentrated in prominent retail hubs such as Delhi, Mumbai, Bangalore, Chennai, Kolkata, Pune and Hyderabad; more than 200 shopping malls have mushroomed in these leading cities, gradually pushing the share of organised retail in the country upwards More than 150 million sq ft of investment grade residential real estate space was launched by private developers in the country in 2012. This was instrumental in driving construction activity across cities such as Delhi, Gurgaon, Mumbai and Bangalore The sector attracted foreign direct investment worth USD 11.5 bn (INR 62,000 crores) from April 2005 February 2013; this was about 4% of the overall FDI across all sectors during the same period8. The sector received total private equity inflows of about USD 15.7 bn (INR 80,000 cr) from 2005 2012. This was about 24% of the entire private equity investments across all sectors of the economy9
5. Oxford Economics and Global Construction Perspectives 6. The estimates as per the National Urban Housing and Habitat Policy 2007 were apprx. 26.53 mn units. Recent government estimates put housing shortage for 2012 at 18.4 mn units 7. All real estate numbers in this section are from CBRE Research 8. Department of Industrial Policy and Promotion Assessing the Economic Impact of the Real Estate Sector 9. Grant Thornton
Growing Urbanization
Urbanisation in India has been increasing at an unprecedented rate, with almost 71 million people added to the urban population from 2001 to 2011. At this rate, close to 534 million people (greater than the combined population of the United States, Russia and France) will live in Indian cities by 2026. This offers tremendous opportunities for real estate development, particularly for housing.
Urbanization to Fuel Housing Demand in Leading Cities
600 500 Population in Millions 400 300 200 100 0 286 357 432 534 27.8 30.0 32.2 38.2 45% 40% 35% 30% 25% 20% 15% 10% 5% 2001 Urban population Source: Population Projections for India, 2001-26, Registrar General of India 2011 2021 2026 0%
Rural
Urban
2015
2009
2015
6.7
6.5
63
69
74
88
101
4% 3% 2% 1%
2008
2009
2010
2011
2012
0%
Contribution to GDP(%)
02
2.1 Key Findings
3.6 billion sq ft 22 million Tonnes 140 million Tonnes 49,000 million bricks 1 million Tonnes 102 million cubic meters 4 million cubic meters
10. The real estate sector considered for this analysis does not include sub sectors such as infrastructure projects organized industrial, hospitality, semi-investment grade retail and office space, residential in rural areas, etc. 11. Calculated basis statistics from the Census of India 2011
10
Potential employment generated on the building site during the construction of 3.6 billion sft in 2013
Source: CBRE Research, CREDAI
2.2 Overall Economic Impact of the Real Estate Sector in the year 2013
Assuming industry standards for costs of construction for commercial office, retail and residential assets, following is a broad estimate of the economic footprint of the real estate construction sector in the year 2013.
Total Estimated Real Estate Supply (2013) Total Revenue Potential of Real Estate Construction in 2013 Estimated Gross Domestic Product (2013)
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6.3%
7.6 million people INR 254,000 cr
11
As highlighted above, the real estate sector is expected to contribute approximately 6.3% to the economy in 2013-14. Additionally, this sector is expected to provide employment opportunities to about 7.6 million people during the same period. This compares well with the contribution of other essential sectors such as Information Technology (7.5%)13, Steel (2%)14, Electricity, Gas and Water Supply (2%)15, Mining and Quarrying (2%)16 and Telecommunications (2%)17.
In 2013
In 2025
Source: CBRE Research, CREDAI *covers organised office, retail, residential, unorganised residential (urban) only
The economic contribution of the real estate sector is projected to increase significantly during the period, from 6.3% in 2013 to almost 13% in 2025. This spiralling of growth can be attributed to the significant construction opportunities offered by the housing sector, largely accentuated by the intensifying demand for residential space in the expanding urban limits of our cities.
7.9
8.6
9.2
9.9
10.6
11.4
12.2
13.1
14.1
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Source: CBRE Research, CREDAI *covers organised office, retail, residential, unorganised residential (urban) only 13. Indian Brand Equity Foundation 14. Secondary Research 15. Ministry of Statistics and Programme Implementation (MOSPI) 16. Ministry of Statistics and Programme Implementation (MOSPI) 17. Secondary Research
The real estate and construction sector would continue to remain one of the largest employers in the economy. Annual employment opportunities generated in the sector are expected to increase by more than 200%, from 7.6 million in 2013 to almost 17.2 million in 2025, offering tremendous opportunities for socio-economic transformation in our urban centres and supporting the government in bridging the employment gap in the country more effectively.
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5 4 3 2 1 0
3.6
3.8
4.1
4.4
4.7
5.1
5.5
5.8
6.3
6.7
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Source: CBRE Research, CREDAI *covers organised office, retail, residential, unorganised residential (urban) only
Increasing urbanisation, demand for new housing, expanding spread of organised real estate and introduction of new construction technologies are some of the factors that are likely to be a pivot for the growth of real estate construction activity in the country. The annual real estate supply in India is expected to increase from about 3.6 billion sq ft in 2013 to about 8.2 billion sq ft in 2025. Majority of this space is expected to be concentrated in the residential sector, with an underlying thought that a sustained focus would be provided by the government not only towards bridging the existing housing shortage in the country, but also towards developing new housing in the expanding urban limits of our cities (especially the tier II and tier III cities).
Easing of Funding
New instruments of funding should be permitted for the sector, amongst the most prominent of which are the Real Estate Investment Trusts (REITs). REITs could provide an additional exit route for investors and enable retail money to be channelized into the sector through a regulated network. The introduction of REITs would propel the sector by spurring capital inflows and bringing institutional credibility. Other key steps that can be undertaken to promote funding for the sector include expanding the credit limit for realty projects from the present 2.8% to as high as 25-30%, reducing borrowing costs for developers (especially from banks and non-banking financial companies) and reduce the risk weightage attached to the sector. These measures can be further supported if the government provides an infrastructure status to real estate projects (particularly large integrated townships). This will help the sector in securing long term loans at lower cost, and also avail the tax benefits provided to infrastructure sectors such as power and railways.
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03
CONCLUSION
There is no doubt that Indias real estate sector is poised for significant growth, thriving upon opportunities such as growth in income levels, increasing urbanisation and demand for new housing. With a share of 6.3% in the countrys Gross Domestic Product, the sector makes a sizeable impact on Indias economic growth, both in terms of employment generation as well investment creation. However, this footprint is restricted by numerous challenges inhibiting the sector such as high borrowing costs, lack of institutional funding, lengthy approval processes and slow & uneven infrastructure development. Once these bottlenecks are addressed, we can expect the economic contribution of the sector to increase considerably, with its share of the GDP to more than double from 6.3% in 2013 to almost 13% by 2025. This will be a direct consequence of the voluminous construction churn generated by the projected completion of more than 8.2 billion sq ft of real estate space in 2025, up from about 3.6 billion sq ft in 2013. Additionally, the sector is expected to contribute significantly towards bridging the employment gap in the economy, by generating employment opportunities for almost 17 million people in 2025. However, this projected expansion of the real estate sector can be achieved at an earlier stage before 2025, if the government provides relevant policy measures to create a more conducive environment for growth in the sector. CBRE has provided a set of recommendations to assist the sector in achieving its full potential in the long term. An effective implementation of these recommendations will undeniably push the growth of the sector to a higher trajectory.
Once the bottlenecks concerning the sector are removed, its share to the GDP might increase from 6.3% in 2013 to about 13% by 2025.
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About CREDAI Established in 1999, The Confederation of Real Estate Developers Associations of India better known as CREDAI is the apex body for private real estate developers in India, representing over 9,000 developers covering 22 states and 128 city chapters across the country. CREDAI has worked hard to make the industry more organized and progressive by networking closely with government representatives, policy makers, investors, finance companies, consumers and real estate professionals. Following are the major objectives of CREDAI To perpetuate an ethical code of conduct, which is self imposed and mandatory for all members, to maintain integrity and transparency in the profession of real estate development To represent developers/builders across India by communicating and representing with government authorities for the formulation of proactive policies for this profession To encourage and support the developments/builders to increase their efficiency in the development/ construction activities by introducing latest technologies To disseminate the data, statistics and other related information in this profession of real estate development To promote the interest of construction workers and to educate them on the best practices To encourage research in the profession of construction and real estate development To facilitate easy housing finance availability by working in close coordination with the leading house finance institutions and banks Being on board of prestigious committees of the sectors reforms like on the panel of Housing and Habitat Policy 2007, Steering Committee for Urban Developing, the committee of Housing and Poverty Alleviation for the 11th Five-Year Plan along with various committees of the Bureau of Indian Standards, Bureau of Energy Efficiency, Planning Commission and others have resulted in CREDAIs initiative of abolition of urban land ceiling, rationalization of stamp duty, the modification of the environmental impact assessment rules, several amendments related to service tax, Land Acquisition Policy and much more. CREDAI also represents the Steering Committee on Construction for the 12th National Plan (2012-2017). Linking private real estate developers to the government and customers through numerous initiatives and activities, CREDAIs success in bringing the majority of organized private real estate developers under a single umbrella is a potent force that promises the rapid development of the realty sector, one that knows itself as a major driver of Indias economic growth. Confederation of Real Estate Developers Associations of India CREDAI - National Secretariat, 703, Ansal Bhawan, 16, K.G. Marg, New Delhi 110001 Ph: 011 - 43126200, 43126262, Fax : 011 - 43126211 Email: sghoshal@credai.org www.credai.org
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CBRE Group, Inc. CBRE Group, Inc. headquartered in Los Angeles, is the worlds largest commercial real estate services firm (in terms of 2012 revenue). We are a Fortune 500 and S&P 500 company with unparalleled intellectual capital, unmatched global capabilities, in depth local market knowledge, and a business platform built on leadership in every major market. CBRE was the first International Real Estate Services firm to set up an office in India in 1994. Since then our operations have grown to include more than 2,800 professionals across 9 offices with a presence in over 25 cities in India. As the leading real estate services firm, we provide our clients with a wide range of real estate solutions including Strategic Consulting, Valuations/ Appraisals, Capital Markets, Agency Services, Asset Services and Project Management. Our guiding principle at CBRE is to provide tactical and strategic solutions that make real estate holdings more productive and economically efficient. Every day, we partner with our clients to ensure that their real estate strategy is aligned with their business strategy. And our RISE valuesRespect, Integrity, Service and Excellenceguide all our efforts. Our professionals are committed to providing the highest quality offerings to developers, investors and occupiersthroughout India and around the world.
CBRE South Asia Pvt. Ltd. Ground Floor, PTI Building 4 Parliament Street New Delhi 110001 Ph: 91 11 42390200; Fax: 91 11 23317670 www.cbre.co.in
Contacts - CREDAI Lalit Kumar Jain Chairman (CREDAI) Confederation of Real Estate Developers Associations of India chairman@kul.co.in
Contacts - CBRE Harish Nair Director (Consulting) CBRE Consulting, India harish.nair@cbre.co.in Abhinav Joshi General Manager (Research) CBRE Consulting, India abhinav.joshi@cbre.co.in Vidhi Dheri Assistant Manager (Research) CBRE Consulting, India vidhi.dheri@cbre.co.in Sachi Goel Senior Associate (Research) CBRE Consulting, India sachi.goel@cbre.co.in Amritha Marshall Manager Corporate Communications CBRE South Asia Pvt. Ltd amritha.marshall@cbre.co.in
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