Real estate growth on firm ground as demand overshoots supply

Written by Mona Mehta | Anandita Singh Mankotia | Mumbai, New Delhi, Dec 28 | Updated: Dec 29 2007, 06:01am hrs
In broad terms, 2007 has been a good year for the $12 billion Indian real estate sector. All fundamentals are firmly in place, and there have been only isolated overheated pockets. The volume of residential sales had slackened, but is now picking up again satisfactorily. Too many funds chasing too few good projects was an area of concern, and the supply of quality spaces across sectors and geographies did not meet the existing demand. The year 2007 also did not resolve the question of whether SEZs in India are merely a real estate game or whether they will serve their intended purpose.

As for the key highlights, there were regular auctions and bid transactions of exceptionally high magnitude. SEBI has been proactive in improving on guidelines for property valuations. More developers went public and got listed, translating into increased sector transparency and enhanced public wealth. The sector continued to operate under considerable shortage of skilled manpower in the construction segment. The year also saw the IPO of India's largest real estate firm DLF, which had last year run into trouble.

The repeal of the Urban Land (Ceiling and Regulation) Act (ULCRA) released major tracts of land in Maharashtra, most significantly those held by the Godrej and Wadia groups as well as the Indian Railways. There were landmark auctions of property in Mumbais Bandra Kurla Complex (BKC) involving Wadhwa Developers, TCG-Hiranandani and Reliance Industries.

Besides, there were other major land deals which were struck across India involving DLF, Nitesh Estates and LIC. Auctions, of various magnitudes, continue to feature under the purview of the Delhi Development Authority (DDA), Jaipur Development Authority (JDA) and Vizag Development Authority (VDA), among others. The 2011 Commonwealth Games have catalyzed new real estate and infrastructure enclaves in Delhis NCR region.

Bahrains Gulf Finance House has signed up with the Maharashtra government to invest Rs 40,000 crore for the establishment of a SEZ on 1600 acres near Panvel in Mumbai. DLF and Dubai's Nakheel have announced a joint venture with plans to invest more than $10 bn to build two townships on 40,000 acres. Shapoorji Pallonji struck a $290 million deal with foreign investors, including CVC International and Singapores GIC. This is the largest land deal in the history of Indian real estate. Merrill Lynch & Co bought a 49% stake in seven of DLF's residential projects for Rs 1,481 crore.

"The real estate sector currently is on a high. This is mainly because of the high economic growth, shortage of residential spaces (about 24 million housing shortfall), and growth in IT/ITES segments and retail. The focus though would now shift more towards tier II and tier III cities since the metros are getting saturated. Also, we can now expect growth to happen from other sectors such as biotechnology, finance, warehousing and logistics. Similarly, the hospitality sector would also lead to a growth since there is a shortage of about 110,000 rooms," Ganesh Raj, partner and national leader, E&Y, told FE.

The coming years will witness more rationalised role of regulators, the institutionalisation of the real estate sector as a whole, the training of sector-specific manpower and commercial real estate making a decisive footprint in Tier II and Tier III towns in the form of IT/ITeS, with greater focus on value housing. There will also be rationalisation of countrywide mall mania.

The most serious bottlenecks in the Indian realty market lies in absence of title insurance against defective titles, difficulty for foreign investors in finding suitable Indian partners for FDI, varying rules in different states, difficulty in executing projects due to shortage of skilled manpower resources apart from overheated land prices. There can be no timeframe for the resolution of these bottlenecks, however, it is certain that the final introduction of pending reforms and transparency guidelines will ensure that these issues are resolved.