Real Estate Investment

[br] Investment in Real Estate: How is it unparalleled?

[br] Investment in Real Estate: How is it unparalleled?

“Indian realty will certainly be the next BIG thing by 2010”, according to Cherian Varkey, vice-president of Builders Association of India. Real estate is considered as a leading indicator
of economic growth required by a third world country for attaining escape velocity. The real estate has flourished in India and the direction in which it seems to be moving looks quite harmonious with predictions. The real estate industry of India is expected to grow by more than three times. This specifically means that the market size may magnify to a size of Rs 2,00,000 crore by 2010 against the current size of Rs 60,000 crore. The single ticket investments nowadays are worth somewhere between $250-$300 million whereas two years ago they were valued to be $50-$100 million. This short run prosperity is not an euphemism. It is backed by genuine growth in middle class, in services sector (specially the IT and ITES) and in organised retailing to name a few.

Capital raising going gaga

Many Indian property developers are looking forward to the stock exchange to raise money for expanding their operations. Till now, seven real estate companies have accessed the IPO route to Indian capital market. Some of the names worth mentioning are: DLF, Omaxe, HDIL, IVR Prime etc. There is the news of another 10 realty companies planning to hit the capital market soon. Estimates show that private equity players have a strong faith in the performance of Indian real estate. About $15 billion is already committed in this sector. This comes to $2-$3 billion every year since most of them are seven year vehicles.

Government liberalises foreign capital flow:

The concept of pre-IPO by FIIs in the Indian real estate was quite hazy till now. The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry has elucidated the issues concerning FIIs (Foreign Institutional Investors) and VCFs (Venture Capital Funds). Accordingly foreign investors will have to lock-in atleast $5million ($10 million in case of joint ventures) and will have to wait for 3 years before they can completely exit the company. FIIs and private equity investors in the property market and will face a minimum of 1-year lock-in period, if the investment has been made within the last 12 months before the IPO.

Role of Banks in real estate investment

According to FICCI, India’s commercial and residential real estate is growing at a rate of 30 percent. Predictions say that the prices of real estate may rise by as much as 10 percent in the near future. Below we present the trend followed by interest rates charged on home loans. As can be clearly seen the trend line is U-shaped. Banks provide fixed as well as floating rate loans. The trend line has been moving southwards in the beginning of the real estate magnification as government thought it necessary to supply cheap credit so that the real estate growth remains unhindered. However RBI later realised that the property market is getting over-heated with surplus funds available. Then RBI started monitoring liquidity and this compelled the banks to raise the home loan rates since 2005. Repo rate and CRR(Cash Reserve Ratio) are the two instruments used by the RBI to attain this objective. In its last credit policy released on 31st July 2007, RBI raised the CRR by 50 basis points to 7 percent. This CRR hike is expected to absorb Rs. 13,500 crore. However, any further rise in home loan rates will depend on the absorptive capacity of banks.

However raising interest rates had adverse impact on the assets of the banks. Borrower’s now have to pay a huge 12 percent against 8 percent three years ago. This has increased the number of defaulters. The monitoring of loans(for investment in real estate) has become important from the bank’s point of view as the State Bank of India and Punjab National Bank saw their NPAs (Non Performing Assets) rise by 6 and 22 basis points respectively in the first quarter of 2007. According to CSLA analysts Aashish Agarwal and Rahul Jain “Private banks’ non-performing loans (NPLs) increased due to changing loan mix in favour of unsecured credit. For government banks, recoveries declined and fresh slippages rose marginally due to a rise in lending rates”. So far, so good. According to Finance minister P. Chidambaram “What you need to look at is the real interest rate. With inflation around 6%, it works out to be only 6%. When inflation comes down, interest rate will also come down”. This indicates that banks, especially the RBI has a multidimensional role in the home loan management. It thus regulates the optimum liquidity and rate of inflation in the economy. [br]

Indian Vs China: How they fare in the Real Estate Investment Competition

India has been a follower in the real estate sector but is expected to outshine China soon. China started reforming its economy since 1978 with the advent of free market systems whereas India started its LPG (liberalisation, privatisation and globalisation) policies only in 1991. The real estate boom in China is heavily supported by its world-class manufacturing sector whereas India’s real estate bonanza is fueled by its burgeoning IT sector. This fact has facilitated India’s property segment as investment in IT is comparatively easier with less (mandatory) infrastructure development.

The second important distinction is the mode of financing. India has limited scope for pre-IPO financing(which is a major channel of real estate investment in China) and has to rely heavily on IPOs . This has led many Indian and foreign companies explore the Indian real estate. Chinese real estate market is highly competitive and the major property developers have a share of mere 2-3 percent of the market. Secondly most of them are new players in the communist China. On the other hand, Indian real estate developers like Unitech, DLF etc. are experts in their fields. Also, an investor in India earns a net profit of 30-40 percent as compared to his China’s counterpart earning 15-25 percent. This has added glitter to the image of Indian real estate industry and made it a pleasant investment destination.