In order to secure answers to critical questions of evolution of the Indian real estate market over the next few years, its direction and speed of growth and the distribution of incomes, etc., Ernst & Young and FICCI developed this thought leadership report. The results of this insightful report, we presume, would be invaluable to not only realtors but also the industry, the investors and the consumer both in India and abroad.

REWIND 06-07: HYPE TURNING INTO REALITY

Year 2006 started on a speculative note but as the year progressed, real estate industry outpaced the growth of economy with its explosive growth of 30 per cent p.a. The sector continued to be the chosen investment avenue as the yields were visibly higher than other options. In fact, yields from the investment in Indian real estate are among the highest in the world. Catalyzed by some key factors such as dynamic policy interventions, free-flowing cross-border capital, entry of large international players, domestic IPOs. increasing end-user demand and occupancy, strategic alliances, the sector is flourishing. Of late, there has been an increased focus from the developer side on creation of land banks, geographic expansion and raising capital to fund their extensive development pipeline. The Indian developers have been able to raise almost $4-billion, via the capital market in the past two years and further $4.7-billion is expected to be raised this year. As a result, several investment opportunities exist in many different product types and regions across the country. The flash back of trends and development in all major asset classes during 2006-07 would create a base for the future indications.

A) VARIOUS ASSET CLASSES

COMMERCIAL: As per industry sources, the supply of commercial office space was estimated to be around 45-50-million sq. ft. in the year 2006-07, which is further expected to grow to 60-65-million sq ft. in the year 2007-08. The IT/ITES industry is the predominant occupier of commercial office space in the country accounting for close to 70-75 per cent of all office space absorption currently.

RESIDENTIAL: Residential is the single most important area of property development within India, owing to certain reasons, making up for 75-80 per cent of real estate development activity. As per HUDCO estimates the country faced shortage of 31.1-million dwelling units in 2001. Going forward, the gap of housing unit shortage would widen to about 45-million units in the Eleventh Plan (2007-2012) as per the estimates by National Housing Bank [NHB). However, it was a mixed bag last year as on the one hand, roaring demand and decent supply resulted in healthy appreciation, while on the other, tightening of lending norms by RBI and hike in provisioning requirements for banks on home loans had some dampening impact, though overall absorption remained healthy.

RETAIL: Retail is actually a small part of the formal real estate sector with a strong potential for growth. In anticipation of possible future liberalisation of the retail sector to EDI, the year 2006 has seen an increasing trend of many Indian conglomerates actively buying potential sites and establishing chains, especially in top seven metropolitan cities.

HOSPITALITY: With growth in inbound tourism and increase in business travel led by growth in the services sector, this segment is recently witnessing major activities. The Average Rack Rate (ARR) and revenue Per Average Room (Rev PAR) grew by 27 to 30 per cent. Bangalore emerged a leader in terms of ARR and Rev PAR as far as geographical performance is concerned.

SPECIAL ECONOMIC ZONES (SEZ): Industrial Parks and SEZ remained in lime light. IT and ITeS and electronics sector witnessed the maximum number of approvals followed by bio-technology and engineering. Geographically, maximum number of approvals was bagged by State of Maharashtra, followed by Andhra Pradesh and Tamil Nadu.

B) POLICY & GOVERNANCE:

In order to provide a conducive investment environment and to remove some of the perceived barriers governments and official bodies at various levels have relaxed, rationalized or modified the regulations or policies impacting the real estate. One of the most important initiatives was the preparation of draft " Real Estate Management (Regulation and control) Bill' which would bring the sector under the scanner of a regulator. To address the issues such as affordable housing etc, a 'national Housing Policy and Urban Habitat Policy 'is also expected by the year end. Government is also examining the 'amendments' to the existing "land acquisition Act'. The concept of "Reverse Mortgage' was introduced for the first time and the policy is expected to be finalised shortly. Further, the National Housing Bank (NHB) has set up a Technical Advisory Group (TAG) to explore the possibility of constructing a real estate price index (RESIDEX). The Government has raised concern over excessive supply of capital in the sector and has tried to curtail the liquidity in the sector by increasing interest rates and risk weights for banks lending to real estate and restricting real estate companies from borrowing in international markets. On the other hand, the government plans to ease entry restrictions for foreign investors in the real estate sector. It is contemplating to reduce the minimum area criterion from 50,000 sq m to 10,000 sq m for commercial projects, and from 10 hectares to 10 acres for residential projects. Some initiatives and efforts are undertaken by state governments and their municipal bodies such as creating guidelines for the development of integrated townships, etc. Currently, a number of major metros are finalizing their master plans as well.

C) MOVING UP THE VALUE CHAIN:

First prominent trend observed is the forward and backward integration by several firms in the real estate value chain. This is firstly evident by the foray of construction and infrastructure companies into the developer space. Infrastructure and construction giants such as L&T, IVRCL, IDEB Inc, Lanco, Maytas, Madhucon, GMR, Nagarjuna Constructions amongst others are playing a big role in the Indian Realty Sector. The project portfolios of major national construction giants such as Unitech, DLE Sobha, Parsvanath, Ansal have scaled up drastically. The real estate sector has also witnessed diversification of project portfolios by some of the major developers. Developers specialized in a single asset class, have now ventured into multiple asset classes.

RESIDENTIAL IS THE SINGLE MOST IMPORTANT PROPERTY DEVELOPMENT IN INDIA MAKING UP FOR 75-80% OF ALL REAL ESTATE ACTIVITY

D) BROADENING OF CAPITAL MARKETS:

The year 2006-07 was marked with several companies being listed, both in India and in international markets and large amount of private equity inflow. The IPO market has witnessed the shifting of focus to the realty sector in the year 2006-07. Over 18 real estate and construction companies got listed since August 2006 to August this year and raised over US $4356.30-million from the public for various infrastructure projects. Most of the prominent real estate players like DLP, Parsavnath, Purvankara, Sobha, Kolte Patil and Omaxe came up with their public issues and the IPOs of most of them were oversubscribed reflecting keen interest of the investors in the stocks of the sector. Another interesting trend that was witnessed during last year was the listing of several Indian real estate companies on the offshore exchanges like AIM, Singapore listed REIT, Singapore Stock Exchange and Dubai International Financial Exchange to fund their spiraling business growth Private Equity emerged as the one of the most preferred options for the domestic as well as foreign investors. These funds are likely to dominate the transaction activities in this sector in the coming year also. It not only encouraged the developers to expand the scale and volume but also accelerated the development.

E) INTERNATIONAL INTEREST: