Real Estate Sector

Present Status
and
Long Term Solution

Submitted By: -
Ashish Khurana (72)
Section B
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Contents
Introduction .................................................................................................................................. 2
Financials...................................................................................................................................... 2
Market Size ........................................................................................................................................... 2
FDI in real estate sector ........................................................................................................................ 3
Contribution to GDP .............................................................................................................................. 3
Challenges .............................................................................................................................................. 4
High Prices: .......................................................................................................................................... 4
Declining Sales: .................................................................................................................................... 4
High Input Cost: ................................................................................................................................... 4
Approvals and procedural difficulties: ................................................................................................. 4
Empirical Data for Analysis ................................................................................................................ 5
S&P BSE Realty Index ........................................................................................................................... 5
NIFTY Realty Index ............................................................................................................................... 5
Opinion and Suggestion ..................................................................................................................... 6
Analysis on NIFTY Index ....................................................................................................................... 6
Analysis-Market Size ............................................................................................................................ 7
Analysis-FDI Inflow............................................................................................................................... 7
Analysis-Contribution to GDP .............................................................................................................. 7
Analysis-Long Term Future................................................................................................................... 7
References .............................................................................................................................................. 8

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Introduction
The Real Estate sector is a large, huge diversified sector comprising of four sub sectors - housing, retail,
hospitality, and commercial. The real estate sector is a critical sector of our economy. It has a huge multiplier
effect on the economy and therefore, is a big driver of economic growth. It is the second-largest employment-
generating sector after agriculture. This sector has been contributing about 5-6% to Indias GDP. Not only does it
generate a high level of direct employment, but it also stimulates the demand in over 250 ancillary industries such
as cement, steel, paint, brick, building materials, consumer durables and so on.
However, the real estate sector is experiencing excruciatingly slow growth in recent times. Poor
sales and high unsold inventory in the sector leads to almost flat prices. The property prices were
so high that common man was not able to buy a house in recent times.
Traditionally, this sector has seen a very high involvement of black money and cash transactions.
Sellers demand that 30 to 50% of the property's price be paid in cash. Buying house through part-
payment in cash is prevalent in India. Black money hoarders invest undeclared wealth in housing
via illicit transactions and lax regulations is considered the safest way to conceal black money.
To tackle the involvement of black money in the real estate, Government has taken few positive
and potentially long-lasting changes in the Indian real estate in last one year. The passing of RERA
(Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the
demonetization move will ensure that going forward, the sector will lose much of its historic taint
and become more transparent.
Experts say that after demonetization of high-value notes, Housing prices in cities across India
could drop by up to 30% over 6-12 months, wiping out the involvement in the black money in the
market. These steps will ensure that average consumer will be able to buy properties of their choice
at affordable prices, in projects which will assuredly be delivered on time.

Financials
1)Market Size

Expected growth of Real Estate

Market
853
900
Market Size (in $ Billion)

800 675
700
600
500
400 93.8
300 180
200 121
100
0
2010 2015 2020 2025 2030
Year

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According to IBEF and KPMG Report, the real estate market size in 2014 is 93.8 Billion USD and it is
expected to grow to 180 Billon USD by 2020 and to 676 Billion USD by 2025

In the period FY2008-2028, the market size of this sector is expected to increase at a Compound Annual
Growth Rate (CAGR) of 15.2 per cent. Retail, hospitality and commercial real estate are also growing
significantly, providing the much-needed infrastructure for India's growing needs.

2)FDI in real estate sector

Government of India fully opened FDI in real
estate in 2005. Previously, foreign investors
other than NRIs were allowed to invest only in
development of integrated townships and
settlements either through a wholly-owned
subsidiary or through a joint venture (JV)
company along with a local partner.
Indian real estate contributes roughly 5% of
the total FDI inflow since 2005.
Total FDI in the construction development sector
during April 2000September 2015 stood at around
USD24.156 billion. During April 2000-September
2015, total cumulative inflows in the construction
development sector accounted for 9 per cent of total
inflows in USD terms

However, during January-September 2016,Private

Equity (PE) investments by domestic and
international investors in the Indian realty market
declined 30 per cent year-on-year to US$ 2.5 billion.
3)Contribution to GDP
The real estate sector is the second largest employer, Real Estate contribution to GDP
which contributes 9% to Indias GDP. The industry
13%
Percentage contribution to

15.00%
includes about 10 lakh consumers buying houses
every year and 76,044 companies. 9%
10.00%
6.30%
Real estate contribution to Indias GDP is estimated to
GDP

5.00%
increase to about 13 per cent by 2028. Increasing
share of real estate in the GDP would be supported by 0.00%
increasing industrial activity, improving income level, 2013 2016 2028
and urbanization Year

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Analysis:
We can see from the above graph that NIFTY realty index continues to grow from last 1 year.But, there
was a sudden dip in November after government announced the demonetization policy.
After the demonetization move, the Nifty Realty index has been decreased by 20%. By comparison, the
Nifty50 index has slipped around 5%

Challenges
The key challenges that the Indian real estate industry is facing today are:
High Prices: Due to high prices of residential houses across India,it become extremely unaffordable for
an average citizen to buy a house in recent times
Declining Sales: Because of high prices of residential houses, sales were extremely slow and led to large
involvement of unsold inventory in the cities
High Input Cost: Rising manpower, increased cost of construction material like cements prevented
developer from bringing down the property prices.
Approvals and procedural difficulties: For getting approval of the project, developer needs to get clearance
from a number of civic authorities. This leads to the delay in the projects

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Empirical Data for Analysis

2 common index are used to measure real estate growth in the stock Company Mkt Cap
Name
market: (Rs cr)

S&P BSE Realty Index DLF 20,569.23

NIFTY realty Index
NBCC (India) 13,740.00

Oberoi Realty 9,393.36

S&P BSE Realty Index
The S&P BSE Realty index comprises constituents of the S&P BSE 500 Godrej Prop 6,550.40
that are classified as members of the real estate sector as defined by
Phoenix Mills 6,048.44
the BSE industry classification system
Prestige 5,838.75
Estate
Last year Trend of BSE Realty Index
1800 Indiabulls 3,564.38
Real
1600

1400 HDIL 2,664.78

BSE Realty Index

1200 Sobha 2,392.21

1000
Ashiana 1,396.08
800 Housing
600
Unitech 1,323.85
400

200

0 QTD YTD
Retur -
ns 16.90 -4.43%
Month (%) %

We can see from the above graph that BSE realty index continues to grow from last 1 year.But, there
was a sudden dip in November after government announced the demonetization policy.
NIFTY Realty Index
Nifty Realty Index is designed to reflect the behavior and performance of Real Estate companies. The
Index comprises of 10 companies listed on National Stock Exchange of India (NSE).
The weight of the 10 real estate companies and the trend of NIFTY Realty Index is given as follows:

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Companys Name Weight(%) P/E P/B Dividend Yield

41.37 0.92 0.57
DLF Ltd. 26.67
Oberoi Realty Ltd. 11.68
Delta Corp Ltd. 9.96
Housing Development and Infrastructure Ltd. 9.10
Prestige Estates Projects Ltd. 8.69
Phoenix Mills Ltd. 8.56 Since
Indiabulls Real Estate Ltd. 8.41 1 Year 5 Year Inception
Godrej Properties Ltd. 7.84 Std.
29.01 35.07 46.24
Unitech Ltd. 4.76 Deviation
Sobha Ltd. 4.32 Beta (Nifty
1.49 1.59 1.49
50)
Correlation
0.75 0.72 0.77
(Nifty 50)
1 5
QTD YTD
Year Year
Returns
4.14 22.31 19.91 -4.19
(%) #

Last 1 Year Trend of NIFTY Realty Index

250
NIFTY Realty Index

200
150
100
50
0

Month
Source:NSE

Opinion and Suggestion

Analysis on NIFTY Index
We can see from the above graph that NIFTY realty index continues to grow from last 1 year.But, there
was a sudden dip in November after government announced the demonetization policy.
After the demonetization move, Although the Nifty50 index has slipped by only around 5% but the Nifty
Realty index has been decreased by 20%.

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Analysis on Market Size

We can see that Market size of Real Estate Industry is increasing Year on Year.In 2014,Real Estate market
size was 93.8 Billion USD and it is expected to grow to 180 Billon USD by 2020 and to 676 Billion USD by
2025
So, we can expect lot of infrastructure development in the future.
Analysis on FDI Inflow
As we know that property prices were increasing after 2005 in all tier 1 cities because of development
of Private projects like DLF, etc and Government led initiatives like Metro,Rapid Metro Rail,etc.As a
result ,FDI inflow gradually increased from 2005 to year 2013.During this period,Foreign investors use
real estate market mainly to speculate on property prices.As a result, there was money inflow of more
than 8 Billion USD from foreign investors during 2005-2013.
But, after 2013, Property market become saturated in prices and there were no buyers who could afford
property at such a high price. So, due to saturation in real estate after 2013, Foreign investment saw a
gradual dip.
Analysis on Contribution to GDP
Real estate contribution to GDP show a continuous upward trend YoY. Real estate is the second largest
employer and contribute 5-15% of Total GDP
It is because of increasing government led infrastructure projects like Delhi Metro, Rapid Metro
(Gurgaon), etc and various private construction projects developing in the Tier1 and Tier 2 cities.
Analysis-Demonetization
The growing flow of FDI into Indian real estate is encouraging increased transparency. Also, Developers
have revamped their accounting and management systems, in order to attract funding.
After demonetization, black money will be suddenly being wiped out of the market, a lot of investors
who have been investing in projects with unaccounted-for money and raising prices to book profits
will be eliminated from the system, thereby aiding a much-needed correction. The luxury and high-end
segments of residential real estate will also see a major impact from this exercise, since it is another
area which has seen a lot of payments done in cash. The legal banking/financing channels have
accounted for only a small part of all transactions in this space. The demonetization move is likely to
result in luxury property prices dipping by as much as 25-30% as sellers struggle to offload properties
to generate liquidity. This means that luxury home buyers will suddenly have a much wider bandwidth
of options to choose from.
Analysis on Long Term Future
In the long term, the Indian real estate sector will emerge stronger, healthier and capable of long
periods of sustained growth. As of now, there is no reason for developers and investors who have
conducted their dealings transparently and legally to panic. It will essentially be business as usual for
them.

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References
http://www.ibef.org/industry/real-estate-india.aspx
http://www.livemint.com/Politics/7OqlH8FC5TtrlMhbQdehbO/News-in-numbers--Real-estate-
sector-contributes-9-to-India.html
http://www.ibef.org/download/Real-Estate-January-2016.pdf
https://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Indian-real-
estate-Opening-doors.pdf
http://www.moneycontrol.com/indian-indices/cnx-realty-34.html
http://www.asiaindex.co.in/indices/equity/sp-bse-realty
https://www.nseindia.com/content/indices/ind_nifty_realty.pdf

Management Accounting Assignment