The real estate industry cluster, broadly defined, consist of a collection of industrial and services sectors of he economy, such as construction (housing construction, as well as construction of commercial offices, retail and industrial buildings, and infrastructure projects such as dams, roads and bridges), brokerage services, real estate finance services (mortgage banking, real estate investment), real estate operations, property management, architecture and design. A number of the other sectors of the economy are also intricately linked to the real estate cluster. These include the cement manufacturing industry, the power sector, the furniture and appliances industry, the finance cluster as well as a range of other downstream and upstream sectors. The cluster is therefore critical for the health of the nation as its impact is felt throughout the economy.
Real Estate as a whole, and housing in particular, is the single largest asset class and wealth holding of individuals and households globally. The development of the housing sector is an integral part of economic development. in addition to its size in the economy, its importance also arises from the positive externalities and spillover effects, and their impact on the social and political climate. In the most countries, and particularly in developing countries, housing is very large proportion of a households expenditure and takes up a substantial part of lifetime income. The backward and forward linkages to land markets, durable goods manufacturing the contribution to the development of labour markets with depth and mobility further underscores the significance of this sector, particularly in the process of economic reform and transition.
By a number of criteria India seems poised to jump onto a higher growth path. The gamut of industries comprising the real estate cluster can not only play a critical role in this economic transformation, but can also serve as an engine of future growth. A number of reforms however, need to be carried out and bottlenecks impending the natural growth of industry removed before the inherent potential can be realised.
The real estate market in India predominantly continues to remain unorganized, fairly fragmented and mostly characterised by small players with a local presence. There are various challenges facing the real estate sector such as the tenancy laws which are not in favour of owners of the land. A high percentage of land holdings do not have clear titles. Lands are typically held by individual / families. Thus there is non-corporatisation. This restricts organized dealing and hinders transfers of titles.
Two major steps taken by the government will however be key catalysts in according an industry status to real estate which in turn will fuel the growth in real estate sector in India. Some years back, real estate would bring in mind shady images of brokers but now with reputed builders and international property consultants joining the fray, this image has strengthened and evolved into a professional corporate image and a sector assuming the shape of an industry.
In its bid to improve things, recent moves by the Government to allow foreign direct investment in real estate in India. The investment would be in integrated township which would include housing, commercial premises, hotels and resorts, while the urban infrastructure would comprise roads and bridges, mass rapid transit, systems and manufacturing of building materials.
The minimum acreage that can be developed is 100 acres design keeping into consideration the local bylaws and regulations. The minimum capitalization would be US$5 million for joint venture with an Indian partner. FDI is however not being allowed in the retail sector. Generally speaking, real estate prices have stabilized to a great deal as the role played by speculation has started declining.
There are lot of changes being introduced in the Indian real estate sector especially with the cheap labour, pool of people.
The other major event in the introduction of REIT (Real Estate Investment Trusts). Currently mutual funds are not allowed to have direct exposure in real estate but they can make debt and \equity investments in the company.
The Indian version of REIT-REIS (Real Estate Investment Schemes) would enable investments by the small investor in the real estate sector and thus earn dividends on the rental income being paid. Also with globalisation, business are being forced to take into consideration contingency plans both in terms of additional space and geographical diversifications of their supply and manufacturing chains. In India access to a large pool of labour with good technical skills is resulting establishment of back office.
CORPORATISATION IS NECESSARY
Generally speaking, investment in real estate comes in various forms: sole proprietorships, partnerships of different kinds and corporations with limited liability. In many countries there are also Real Estate Investment Trusts. The promotion of Real Estate Investment Trusts (REITs), entities that own, manage ad operate income producing portfolios of real estate assets would have multiple benefits. Investing in REIT stock is akin to investing in a mutual fund. Whereas in the latter case an investor has a claim on underlying properties. Developments of REITs would professionalize and corporatize real estate operations and management. It would also give an opportunity to individual and institutional investors to add real estate to their portfolio, a problematic thing under usual circumstances because of the lumpiness of the assets and the low liquidity. In most countries, REITs are not subject to taxation at the corporate level and 90% of the income is distributed as a dividend payout. There are various regulations regarding share of income from real estate holdings, as well as restrictions on ownership concentration, and like mutual fund a REIT can be quoted at a discount or a premium to the underlying assets, i.e. the market capitalization and the net asset value are different . in the US for example, REIT stocks have become a very popular investment alternative in recent years, particularly in the wake of the bottom collapse.
Ness Wadia, Deputy Managing Director, Bombay Dyeing & Mfg. Co. felt that the two ‘C’s – competition and customers – would drive real estate towards corporatization. While FDI would a direct impact on construction cost, he added, “We need to think Global and act Indian,” he said, explaining that it meant taking up the best of were adhered to. Being environment conscious was important. He pointed out, while social obligations should remain in focus. The industry needs to partner with the government to sort out issues pending since long, he felt. He felt that corporatization of real estate would follow two routes:- one, where existing players move to becoming a corporate entity and – second, when corporates enter real estate. He stressed on the need for the industry to take very seriously the development of in-house skill-sets to deal with the regulatory environment.
Akash Deep Jyoti, Head-Infrastructure Sector ratings, Crisil Ltd felt corporatization would bring realness in real estate. Stressing on the importance of transparency, he mentioned simplified legislation and legislation to enable public – private partnerships as areas that needed looking into. As FDI makes inroads into the Indian real estate and as corporatization gains importance, rating of developers and their projects would be necessary, he felt. He pointed out that ratings scale followed by Crisil for builders and developers was the same as the on followed for Indian corporate bodies, which he said was a clear indicator of how Crisil considered real estate industry as a corporate entity. He pointed out that customer advances was the largest source of funding for real estate in Tier-1 cities, barring Mumbai, where the opposite was true. This was because Mumbai’s real estate could source funding from financial institutions, and he stressed that increased transparency and corporatisation would encourage wider participation in realty markets.
Anuj Puri, Chairman – Construction and real estate taskforce, CII pointed out that almost 75% of real estate industry comprises smaller, unorganized players, which places corporatization on the priority list. Private public partnership was a win-win situation, while FDI coming in will make financial reforms all the more imperative for the industry, which would increase the importance of rating for projects and builders.
A major change witnessed in the industry is the recognition of industry status itself. Five years ago, the real estate activity was considered to be a speculative activity with other negative connotations. This is not the case any longer. The government has made it mandatory that 3% of the incremental deposits of the banks would be deployed to the housing industry.
Real Estate markets are fraught with problems of information asymmetry, moral hazard, liquidity and heterogeneity. Market failures are therefore common and state intervention is imperative at many levels to ensure fair economic outcomes. Our assessment is that the share of real estate finance sector, as well as that of cluster of real estate related industries in India’s GDP is significantly less than corresponding shares in market oriented economics. For example, total outstanding mortgages are on an average about 40% of GDP for countries of the European Union, the US and Japan, whereas it is a relatively new activity in India. The recently concluded first ever survey of household amenities and assets by Census of India has thrown up statistics that clearly point to the immense potential that the sectors offer for growth. There are only 179 million houses for 192 million families in the country. there is thus significant gap of 13 million in availability of dwellings. The situation is in fact worse about 10% of the dwellings are vacant, perhaps because of the archaic rent Control Act. Close to 50% of the households live in non-permanent constructions. About one in every five houses has a concrete roof and only about a third have cement floors. About two-thirds of the residences do not get water at home and just over 50% of houses have electricity connection (though they may not be receiving any electricity because of the poor state of the electricity sector!). In short, the assessed gap in requirement and availability of housing in fact severely underestimates the real gap if bare minimum standards for space amenities are specified. There is therefore scope and a crying need for action by the government to improve the situation. Along with appropriate changes in the laws and the regulatory frame work, adequate public funding for the sector is called for to act as a catalyst for attracting private capital and management. The value in exchange for the public resources spent and in terms of an active public private partnership would be immense.