The Indian economy has transformed substantively over the last two decades, growing consistently at an

average of 8 per cent and is poised to take its place among the leading economies in the years to come.
Strong performance of the economy can be particularly attributed to healthy growth in manufacturing and
services sectors. The economic performance of India has provided strong impetus to the real estate
sector, which has been witnessing heightened activity in the recent years. Substantial enduser and
investor interest, large scale investment in infrastructure and rapid urbanisation have contributed to the
growth trajectory of Indian real estate. The real estate growth story is clearly visible in urban centres such
as Delhi, Mumbai and Bengaluru which have acquired global character and recognition.

INDIAN REAl ESTATE: RIdING THE GROWTH WAVE

The strong fundamentals of the Indian economy are having a favourable impact on all asset classes of
Indian real estate viz. housing, commercial – office space and retail and hospitality. In recent years, the
growth has spread out to tier-II and III cities as well.High growth in services as well as manufacturing
sector has resulted in high demand for commercial and industrial real estate.Further the economic growth
has trickled down to the large Indian middle class increasing affordability and affluence. Improving living
standards are driving the demand for better quality housing and urban infrastructure. In fact, housing in
India is today moving from being viewed as a purely basic need to an aspirational purchase. Though high
interest rates coupled with soaring property prices have temporarily impacted affordability of home buyers
the demand-supply mismatch and low home loans to GDP ratio in India (a meager 5 per cent as against
more than 50 per cent in US, UK and Germany) are expected to fuel demand for housing in the medium
long run. The growth of the sector has been complemented by favourable policy changes like
liberalisation of Foreign Direct Investment (FDI) guidelines and significant increase in investment on
physical infrastructure.

MARKET SIZE AND GROWTH

Estimate provided by ASSOCHAM, a leading industry body, suggest that the size of the Indian real
estate sector is around US$ 16 billion, growing at the rate of 30 per cent per annum. According to a
recent estimate by UBS the total size of the Indian real estate market in terms of total economic value of
development activity, is US$ 40-45 billion representing 5 - 6 per cent of GDP.

FDI Experience in Indian Real Estate

KEY HIGHLIGHTS:- The India growth story has become an established theme that has captured the
imagination of the world. India is on every international investor’s wish-list and among the
sectors that have the potential to become drivers of the new Indian economy in a global
scenario, real estate ranks amongst the top. The Government’s increased focus on attracting
investments and changing market fundamentals indicating good long-term growth prospects has
put the Indian real estate sector on the radar of many cross-border real estate
investors/developers. A number of global investors/developers are now keen on real estate
investment opportunities in India. Consequently, the share of real estate in FDI has been rising.
It has already risen from a low 4.5 per cent in 2003 to 25 per cent in FY06 and an estimated 26
per cent in FY07. With higher growth in FDI and even further increase in real estate’s share of
FDI it is expected that the sector would witness inflows to the tune of US$ 8-10 billion by
FY2010.

INVESTMENT MODELS

Real estate, being a capital intensive sector, offers crossborder investors with several investment
opportunities. Post the sector opening up for FDI inflows have been typically through multinational
developers or financial institutions/ venture capitalists. Pure play financial investors are placing their
money through strategic investments in projects/ companies. The investment through financial investors
comes primarily in the form of opportunity funds, private equity and venture capital. Some of the
prominent investment models are as follows:

Private Equity/Real Estate Funds (REFs):- This is evidently the most preferred entry route for overseas
investors. Currently most of the private equity investments are directed towards unlisted real estate
companies where the REFs purchase an equity stake and thereby partner in the growth plans of the
unlisted firm. Primary reasons of preference for this entry route are the lower transaction cost and a
potentially easier exit route, i.e. via a public listing. For example, Trinity Capital has acquired a 5.72 per
cent stakein a Mumbai-based real estate company, D B Realty at an estimated cost of US$ 51 million.

Joint venture:- While a few JVs are long term alliances for series of projects some of them are project
specific. The preference towards JVs by global developers is primarily to mitigate the risk associated with
entry in newer and emerging markets. The foreign developer primarily contributes capital, engineering
capabilities, brand, new construction techniques etc whilst the Indian partner brings in land, local
knowledge on market, consumer and regulations and resources in the venture. For example, MetroCorp
Housing Corporation has entered into a Joint Venture with Jurong International Group, Singapore to
develop an integrated township project worth US$ 116 million at Coimbatore.

Wholly owned Subsidiary:- A relatively less preferred arrangement few overseas developers are
developing projects on a standalone basis. Ascendas Pte, Asia’s leading total business space solution
providers, has a significant presence in India with a wholly owned subsidiary, Ascendas India Private
Limited.

Public Private Partnership (PPP) :-With the Indian Government undertaking several proactive initiatives
in physical, urban infrastructure development and encouraging private participation, the PPP mode
isopening several opportunities for foreign developers. Further various public sector enterprises are
unlocking land value in prime assets held by them. As per industry sources and the recent
announcements, the total committed FDI inflow in the Indian real estate market stands at over US$ 16.
billion. Major investors include developers/ investors from West Asia (especially Dubai), Indonesia,
Singapore and Malaysia. The investments from other countries are further witnessing a sharp growth.
Opportunity Spectrum
The phenomenal growth witnessed in Indian real estate has widened the opportunity spectrum of the
sector even beyond the established asset classes viz. commercial, retail, residential, industrial and
hospitality. This section maps the opportunity in both the asset classes and the emerging asset classes.

COMMERCIAL REAL ESTATE

The boom in the Commercial Real Estate (CRE) segment is being fuelled by a robust demand from
MNCs and corporate India alike, particularly from IT/ITeS, BFSI, Telecom and Pharma companies. In the
year 2006 supply of commercial grade A office space, remained concentrated in the top seven cities.
According to E&Y estimates total supply of commercial office space (grade A, non captive) in the National
Capital Region (NCR), Mumbai, Hyderabad, Bengaluru, Pune and Chennai together was recorded in the
range of 40-45 million sq. ft. The absorption was primarily driven by the IT/ITES industry accounting for
almost 70-75 per cent of the total absorption. The supply format was primarily in the form of IT Parks,
integrated campuses and a few SEZ development.

KEY GROWTH DRIVERS

Growth in IT/ITES Sector The primary growth driver of commercial real estate is the IT/ITES sector,
which, is growing at 25-0 per cent annually. Further according to NASSCOM estimates, India’s IT/ITES
industry is expected to grow to US$ 148 billion by 2012. As per E&Y estimates this translates into in
excess of 250 million sq. ft of commercial office space requirement by 2012 -13.

Growth in Knowledge and technology intensive sectors

Several other sectors such as financial services, biotechnology, telecom, pharma, insurance, and
consulting businesses are witnessing strong growth and have added to the rising demand.

Significant Growth in FDI

Progressive liberalisation and easing of FDI norms in various sectors have paved the way for growth in
FDI. This has further led to burgeoning demand for office space from multinational companies and other
foreign investors.

OUTLOOK

Over next five years, the commercial real estate market is expected to grow at a CAGR of 20-22 per cent
and would continue to derive its growth from the thriving off shoring industry. Over the medium term, the
further opening up of the economy is expected to lead to a broader occupier base. The supply of
commercial office space will remain concentrated in the suburban areas and in the form of IT Parks and
integrated campuses. Large supply of commercial space is also expected from SEZs over the next few
years.
Residential REAL ESTATE

Driven by increasing urbanisation, rising incomes and decreasing household sizes, the residential
segment in India has been on an upswing over the past few years. In terms of value, the residential
property market constitutes almost 75 per cent of the real estate market in India. The Working Committee
of the 11th Plan (2007-12) has concluded that the total shortage of dwelling units at the beginning of
Eleventh Plan Period i.e. 2007 was 24.7 million. E&Y estimates that more than 70 per cent of the
shortage of dwelling units is for middle and low income brackets. Several policy interventions and
initiatives are expected to correct this demand-supply gap. According to Census of India 2001 estimates,
30 per cent of the total population of India would be living in urban areas by 2011. The number of cities
with one million plus population is further expected to double from 35 in 2001 to 70 by 2025. India’s
‘Mega-Cities’ of Mumbai and Delhi would be the world’s 2nd and 3rd largest cities by 2015. With a rapid
influx of migrants in these cities there is a corresponding increase in the demand for space. Rapid
urbanisation is fostering real estate growth in India.

Increasing number of households

The growing popularity of nuclear families in India has decreased the average household (HH) size in the
country, leading to an increase in the number of households in the country. The average HH size in India
has declined from 5.4 persons per HH in 1981 to 5.1 persons per HH in 2001. In2001, there were roughly
192 million HH in India, about 40 million more than those in 1991.

Growing number of first-time home buyers

India has a much younger population compared to most other economies. Currently the population in the
working age group (16-65 years) is about 700 million representing about 64 per cent of the total
population.India is expected to emerge as the highest contributor to the global work force by 2010. Given
that a majority of the population would still be young the per capita income generation capability of India
would continue to remain robust. With the average age of home buyers declining fast the young working
population would further push demand for housing units higher.First-time home buyer numbers have
multiplied over the years and the median age of home buyers has reduced from 38 years in the early
1990s to about 28 years today.

Increasing income levels

The per capita disposable income has grown manifold in the past one decade. The current annual per
capita disposable income stands at around US$ 69 and is further expected to grow by 8-13 per cent in
the next five years. Robust economic growth, particularly in the services sector has led to an increase in
income levels in the country. Several studies have indicated that salaries in India have been increasing
by an average of 10-15 per cent on a year on-year basis. This has increased the affordability of homes
in spite of higher property prices and has further created more discerning buyers.

Penetration of mortgage finance

Over the past five years loan disbursals by housing finance companies have grown by 30-40 per cent
annually. However, despite such growth, mortgage loans are presently only 4-5 per cent of GDP,
primarily due to the low penetration of mortgage financing. Banks and housing finance companies have
planned to increase penetration aggressively.Most of the growth is expected to take place in the
midmarket and premium/luxury sub-segments. With the Emergence of SEZs has also given the Indian
residential segment a considerable push, with the Indian SEZ Act allowing for 65 per cent non-processing
development that includes housing and other support infrastructure.

RETAIL REAL ESTATE

The Indian retail industry is witnessing a structural change with individual small format stores making way
for large format shopping malls and hyper-markets. On the policy front, the partial relaxation in FDI
regulation (51 per cent FDI in single brand retailing) has provided a boost to the retail segment. Presently
the top seven cities of India account for a dominant share in mall space. The total organised retail space
absorbed for the year 2006-07 in the top seven cities was around 19 million sq. ft. The following chart
depicts the absorption scenario of organised retail space for the year 2006-07. National Capital Region
(NCR), one of India’s most affluent urban centres, dominates the absorption scenario followed by
Mumbai and Kolkata. Bengaluru is also emerging as a major retail hub owing to its cosmopolitan
character.

Growth In Organised Retailing

Retailing in India is witnessing a huge makeover. In recent years, retail has emerged one of the fastest
growing industries in the Indian economy. The industry is currently estimated to be about US$ 240 billion
in size and is growing at over 6-7 per cent annually. Organised retailing accounts for a small but fast-
growing share of the total industry; its share has more than doubled from 2 per cent in FY2003 to 4.4 per
cent (US$ 10.5 billion) in FY2006. Several factors such as increasing disposable incomes, rising
consumption due to increasing use of credit cards and easy finance options and shopping convenience
have further driven the growth of organised retail.

Entry of international retailers into India

India is attracting large international retailers to its doorstep. As per the latest AT Kearney Global Retail
Index 2007, India has been ranked the most attractive country for international retail expansion. Large
international retailers are attracted by the huge potential of the Indian retail industry and steady opening
up of the sector for FDI. Many international retailers are already present in the country primarily through
the franchisee route and are actively considering expansion. Besides several other large retailers are
planning to enter the country. These include Woolworths and Wal-Mart, who have already tied-up with
Indian partners and Carrefour and Tesco who are finalising their plans. In addition to larger retailers
entering the market and new retail formats being introduced, growth in demand is also expected to gain
momentum.

Entry of Indian corporates into Retail industry

Several Indian corporates including Reliance, Bharti, Tata amongst others have diversified into the retail
segment. Prozone, a 100 per cent subsidiary of Provogue (India) Limited a joint venture agreement with
the Omaxe Group, plans to develop India’s largest shopping malls across the country focused on tier two
cities. In a bid to offer products directly to customers at a competitive rate, large corporates are looking to
control the entire retail supply chain by forging tie-ups and opening company owned outlets having
footprints across the country.
Government and Policy Initiatives
As within other sectors in the Indian economy, one of the key drivers has been the changes in policy of
the Indian Government to a more liberal model. There has been a drastic curtailment in restrictive policies
such as the Urban Land Ceiling and Regulation Act, accompanied by major reforms in the Integrated
Township Policy. These changes have allowed the real estate development industry to take a significant
step forward, whilst international investors have brought both capital and expertise.With the liberalisation
of FDI rules and the emergence of real estate funds, the options available to both domestic and
international investors will continue to grow. Continuing the reforms agenda for the sector, the Securities
and Exchange Board of India (SEBI), vide its press release dated June 26, 2006 has approved the
guidelines for Real Estate Mutual Funds (REMFs) wanting to set up shop in India and may possibly
introduce Real Estate Investment Trusts (REIT) thereby continuing to widen the source of capital for the
sector.The sector has further benefited by a range of Government incentives including residential tax
breaks and the Special Economic Zones.

REGULATORY AND POLICY INTERVENTIONS

Special Economic zone: growth Engine of India

One of the principal interventions in regional development and the attraction of investment has been the
formation of Special Economic Zones (SEZs). The term SEZ is widely used in international regional
policy and many countries have developed variations on the model The SEZ Act of Government of India,
2005 has presented a lucrative development alternative for all the realty players. SEZs are specifically
delineated, duty-free enclaves outside the customs territory of India. SEZs are approved by the Ministry
of Commerce and can be set up by private developers or by central/state government or jointly by any
two or more of these. Businesses operating in SEZs enjoy a corporate tax holiday on export earnings,
indirect tax exemptions and liberal exchange controls. Developers also receive several fiscal benefits.
The income-tax incentives for a SEZ developer include a 10-year tax holiday; exemption from dividend
distribution tax; tax-exempt interest on long-term financing; tax-exempt long-term capital gains arising on
the transfer of shares in the developer’s company and no minimum alternative tax.

Key Players
Currently, the real estate sector is quite fragmented with most players having presence limited to select
cities or regional geographies and relatively few players having national presence. Ernst & Young
expects a radical change in the next 2-3 years with most of the larger regional players anticipated to
expand aggressively across the country. While at least 10 major developers are estimated to have a
national level presence, some of the well known city focused developers are expected to venture out into
other locations based in that region. Larger regional developers increasing their footprints across the
country include Rahejas (Mumbai), DLF (NCR), Ansals (NCR), Unitech (NCR), Sobha(Bengaluru) who
have already started penetrating other regions and have announced several projects.