- Date: Aug 1, 2014
- Sector: Real Estate
- Advice: The sector is on a resurgence path with high upside potential for investors. At the same time, we have to watch out for the regulatory and project management risks
JainMatrix Investments has published an equity research report on a pick from the Real Estate sector for its Subscribers. As part of our commitment to them, we cannot share this yet with you. Instead we share this report on Real Estate Industry Insights.
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- Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s Gross Domestic Product (GDP). It is the second largest employment generating sector after agriculture.
- Apart from generating direct employment it also stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
- Rapid urbanization, positive demographics, growing nuclear families, infrastructure development and rising income levels are the key drivers for real estate development in India.
- There will be a shortage of 7.55 crore residential units by 2014 end (CRISIL).
- Commercial real estate demand is highly correlated to the GDP of the country, and the recent fall in growth has adversely affecting demand.
- In addition, the decline in demand is due to deteriorating macro-economic fundamentals such as increasing prices and recent regulatory changes (pertaining to development control rules), which have led to prolonged period of lull for the sector.
- Despite these headwinds, the $70-75 billion Indian real estate market size is expected to touch $180 billion by 2020, while foreign direct investment (FDI) in the sector is expected to increase to $25 billion in the next 10 years from present $4 billion.
Outlook including Budget Proposals
- Budget 2014: the govt. announced relaxed norms for FDI in real estate, which will give a huge boost to housing projects. The Center eased criteria for FDI by reducing the minimum size of projects from 50,000 sq. m. to 20,000 sq. m. and investment in projects from US$10m to US$ 5m (Rs 30 cr.)
- The budget also allowed (tax) pass-through status to real estate investment trusts (REITs). REITs allow small investors to own a share in big expensive commercial properties. This is expected to drive substantial investment demand into commercial property.
- The industry is overall poorly regulated and there are few norms around housing project launch, sale and execution by developers.
- Bank funding for developers has been a challenge, due to poor loans performance (by the sector) in the past. Hence debt costs are higher for developers.
- However the next few years could be positive for the sector in a scenario of improving GDP and economic activity, government thrust on investments and better regulation, falling interest rates, FDI, redevelopment, R&R and rising standards of construction.
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