No other sector perhaps grew as fast in contributing to the GDP of the country as the realty sector did in 2007.
What a year it has been—it saw the sector spawning the mother of all IPOs, the arrival of global funds on a large scale and the abolition of a decades-old urban land law in Maharashtra which had artificially suppressed land supply. The year also saw the rise of retail investment vehicles for high net worth individuals to indirectly invest in realty.
The year saw the sector’s size at $48 billion, which is expected to reach $140 billion by 2012 -- implying a compounded annual growth rate of 21 per cent.
DLF staged the mother of all initial public offers (IPO) which resulted in its chairman Kushal Pal Singh emerge as the world’s hottest realtor billionaire.
The year also saw many old economy companies unlocking the value of their real estate properties, while realty companies, flush with cash, saw room for diversification into fields such as telecoms, logistics and hospitality.
“Over the past few years, the real estate sector has grown at an unprecedented rate of about 30 per cent and is expected to grow at 25 per cent for the next 3 to 4 years. The year 2007 saw the Indian real estate space grow at a remarkable pace in view of the large number of private equity investments and IPOs. The market capitalisation of the real estate sector in India is just about 4.2 per cent of the total market capitalisation, which is below the global norm of approximately 15 per cent, thus reflecting the scope available for growth of this sector, industry experts say.
“Another significant development during the year was that major real estate players who earlier restricted their projects to a particular region took on a pan-India role,” says Ganesh Raj, Partner and National Leader, Real Estate Practice, Ernst & Young.
From the policy perspective, to rein in spiraling real estate rates and dissuade speculators, RBI put restrictions on interest rates. The repeal of the Urban Land Ceiling and Regulations Act and Land Ceiling Act in Maharashtra is likely to be emulated by other states with similar laws that curb land supply.
Local developers tying up with consumer goods and retail firms to develop logistics and warehousing facilities will be a trend to look out for in the coming years. This trend is primarily fuelled by unfulfilled demand for warehouses and logistics as this segment is largely governed by unorganised players.
Raj says an estimated shortage of 24 million home dwellings, sustained growth in IT and IT-enabled services and high economic growth overall are driving the sector’s new highs.
“The focus would now shift more towards the Tier 2 and Tier 3 cities since the metros are getting saturated. Also now we can expect growth to happen from other sectors such as biotechnology, financial services, warehousing and logistics. The hospitality sector would also lead to a growth since there a shortage of about 110,000 hotel rooms.”
Adds Sanjeev J. Aeren, managing director, AEZ Group, “The sector has today emerged as an organized industry and second largest economic activity after agriculture. But this is just the beginning and by no stretch of imagination does it resemble a bubble that will burst. An unhindered growth for the next 20 years is almost sure,” he says.
Aeren said the annual domestic real estate market is expected to be worth $14 billion in which foreign direct investment contribution is estimated to be between between $5 and 5.5 billion.
He cites industry estimates to say that nearly 30 million sq. ft. of organized retail space is currently available. Another 90 million sq. ft. is likely to be added by 2008 from over 265 mall projects. While the industry grew in size and scope, in terms of prices, it saw a softening of appreciation from heady highs of the previous four or five years. Speculators moved to smaller towns and left metro markets in a relatively stable condition.
“If the launch of many IPOs was the high point of real estate, it was very slow and stable in terms of sales,” says Sunil Jindal, CEO, SVP Builders India.
“Some years ago, there were hardly three or four major developers in the market. Companies could pick and choose people. However, with the emergence of hundreds of new players, it’s getting increasingly difficult to find qualified manpower. The shortage is more pronounced in senior positions,” says Sandeep Goel, MD, MSX Developers Pvt. Ltd.