Commercial segment

analysis of real estate sector

Submitted by: ADITYA

  Roll No: FT-07-509
Batch: 2007-2009
CURRENT SCENARIO
• India’s real estate industry poised for a
landscape change: FICCI-E&Y study
• Industry expected to grow to $50 billion by 2010
from $14 billion currently
• Commercial office segment to require 367
million sq. ft. additional space by 2012-13
• Urban housing deficit to escalate to 22 million
by 2007-08
ROLE OF REAL ESTATE SECTOR IN ECONOMY
The real estate sector is second only to agriculture in
terms of employment generation and contributes
heavily towards the gross domestic product (GDP).
The real estate sector is also responsible for the
development of over 250 ancillary industries such as
cement, steel, paints etc.
A unit increase in expenditure in this sector has a
multiplier effect and the capacity to generate income
as high as five times.
DRIVING FACTORS OF COMMERCIAL
SEGMENT
IT and ITeS industry key driver for demand in
commercial office segment.
Rising incomes along with growing population
is another important factor of considering
commercial segment as an alternative investment
option.
Relaxation in FDI guidelines likely to
metamorphose the retail space.
 More factors of growth:

Recent opening up of sector to foreign investment

Foreign developers and investors will be making their

presence felt, largely through joint venture arrangements

Improved environment for debt funding

Increasing institutionalization of real estate investment

market
Cycle of real estate sector

Announce Collect
Schemes Advances

Complete
Acquire / Arrange
Projects
Land

Build
Credibility
FOUR C’S IN MARKETING OF COMMERCIAL
SEGMENT
Compliment

Curious

Control

 Commitment
TYPES OF COMMERCIAL REAL ESTATE

BUSINESS PARKS

IT PARKS

MALLS

SHOPS ( INCLUDING LSC, MLU)

CHARACTERSTICS OF COMMERCIAL REAL ESTATE
Tangible
Real estate is, well, real! You can visit your investment,
speak with your tenants, and show it off to your family
and friends. You can see it and touch it.
Requires Management
Because real estate is tangible, it needs to be managed
in a hands-on manner. Tenant complaints must be
addressed. Landscaping must be handled.
Inefficient Markets
An inefficient market is not necessarily a bad thing. It just
means that information asymmetry exists among participants
in the market, allowing greater profits to be made by those
with special information, expertise or resources.
High Transaction Costs
Real estate has high purchase costs and sale costs. On
purchases, there are real-estate-agent-related commissions,
lawyers' fees, engineers' fees and many other costs that can
raise the effective purchase price well beyond the price the
seller will actually receive.
Variability among Regions
While it sounds cliché, location is one of the important
aspects of real estate investments; a piece of real estate
can perform very differently among countries, regions,
cities and even within the same city.
Lower Liquidity
Real estate is more difficult to sell because deals must be
privately brokered. There can be a substantial lag
between the time you decide to sell a property and when
it actually is sold - usually a couple months at least.
Reform & law issues related to real estate
 Indian Registration Act, 1908

 Indian Transfer of Property Act

Stamp Duty

Rent Control Acts

Property Tax
Conditions for Foreign Investment in Real
Estate Sector in India
1) Minimum area
In case of development of serviced housing plots, 10
hectares (25 acres)
In case of construction-development projects, built-up
area of 50,000 sq m.
In case of a combination project, any of the above two
conditions
2) Time frame & rules
At least 50 per cent of the project to be developed
within five years from the date of obtaining all statutory
clearances.
Investor cannot sell undeveloped plots - where roads,
water supply, street lighting, drainage, sewerage and
other conveniences are not available.
3) Investment
Minimum capitalization
  for wholly owned subsidiaries - US$ 10 million
  for JV with Indian partners - US$ 5 million–, to
be brought in within 6 months of commencement
of business
Original investment cannot be repatriated before
a period of three years from completion of
capitalization.
The investor may exit earlier with prior approval
from Foreign Investment Promotion Board
(FIPB).
MAJOR PLAYERS IN COMMERCIAL SEGMENT
OF REAL ESTATE
DLF GROUP

UNITECH

ANSAL

EROS
WORKING STYLE OF MAJOR
DEVELOPERS

Increase land reserves in strategic locations

Move to a sales revenue based business model

Enhance execution capabilities

Profit sharing model to increase the

occupancy rates
3’Ps THAT PLAYS IMPORTANT
ROLE
1.. Pricing strategy:
 
Before pricing every successful player do a thorough survey of the market and try
to position the price on the lower side of market rate (i.e. other competitor’s price).
This strategy helps them to attract the new customers.
 
Also they offer uniform price to every customer this strategy helps in winning the
reliability. For example:
 
 
If you want to purchase a shop of 200 sqft. ,
 
Price of the shop will be = covered area of the shop * price/sq ft of covered area
2. Promotion strategy

Pre – launch offer

Flexible payment plans

Making property dealers their business partners and

promoting the project through them
Payment strategy

They offer different payment plans suited to the need

of the customers.(EX.)
1. DOWN PAYMENT
2. INSTALLMENT PLAN
3. 50-50 PLAN
4. NO EMI PLAN
Also the property must have three ingredients:
 
At the Right Place

 At the Right time

At the Right price

Benefits of having real estate in your portfolio

Diversification Value

Yield Enhancement

Inflation Hedge

Ability to Influence Performance

Various regulatory initiatives have been taken at different levels
towards streamlining and standardizing the capital flow in the
industry.
 FINANCING RESOURCES
Domestic sources External sources
Equity
Domestic developers (independently or in collaboration with International developers (independently or in collaboration
international developers) with domestic developers)

Public utilities (taking minority holdings) Equipment suppliers (in collaboration with domestic or
international developers)
Other institutional investors (likely to be very limited)
Dedicated infrastructure funds

Other international equity investors

Multilateral agencies (International Finance Corporation,

Asian Development Bank)

Debt
Domestic commercial banks (3-5 years) International commercial banks (7-10 years)

Domestic term lending institutions (7-10 years) Export credit agencies (7-10 years)

Domestic bond markets (7-10 years) International bond markets (10-30 years)

Specialized infrastructure financing institutions Multilateral agencies (15-20 years)

Bilateral aid agencies

 DEBT FUNDING
In the last three years, RE has been
one of the prime sectors driving the
credit growth with lending to the
sector rising by more than 500%.

• RBI has taken steps to stem the flow

of bank credit to the sector via
regulations and interest rates

• The hardening of interest rates have

had some effect on the markets
especially the residential sector, but
given the long term view and strong
fundamentals, the development
activity has not been noticeably
hampered.

• The restricted debt options are

making private and public markets
more attractive to most of the
developers.

• New models of project development

Deepening Capital Market
Public Equity Market
• IPO Market – Around 18 real estate and construction companies have went
public by now.

• Offshore Exchanges – A new trend has cropped up last year, several indian
real estate companies got listed on the offshore exchanges like AIM,
Singapore listed REIT, Singapore Stock Exchange and Dubai International
Financial Exchange.

Private Equity Market

•India has attracted the highest private equity at USD 2.6 billion in 2007

• The spectrum of private equity transactions ranges from project specific

Special Purpose Vehicle (SPV) to entity level investments.
CHALLENGES FACING REAL ESTATE SECTOR
LEGISLATION: Appose the implementation of
project.

TRANSACTION COST: Stamp duty is as high as 14-

15% in some states , stamp duty rates applicable for all
transactions.

TITLE: High percentage of land holdings /

Ownerships do not have clear titles.
LACK OF CORPORATIZATION:
Non corporatization restricts organized dealings and
hinders transfer of title.

ABSENCE OF REITs :
Absence of REIT has restricted retail investor
participation and limited capital flows.
CONCLUSION
Nascent stage and unlimited scope.
A huge demand for commercial building and urban
houses besides improvement in infrastructure .
Accelerating the organized retail market player like
wall-mart, Bharti reliance etc.
Dotted with SEZs, international standard warehouses
and specialized industrial spaces.
Why India has no mortgage crisis or
financial sector crisis.
Mainly because of the huge amount of black money in
Indian real estate. This has saved the Indian financial sector
in unexpected ways. This is because a large proportion, often
half, of almost all home purchases is paid in black money. If
a house is sold for Rs 100 lakh, the official registered value
will typically be only Rs 50 lakh, with the balance paid under
the table in cash..
A bank may loan Rs 50 lakh, covering the entire formal
price. However, the owner's contribution is not zero: he has
paid Rs 50 lakh in black. To preserve that black investment,
he will keep paying his installments even if house prices dip.
Thank you