Management for investment in real estate

8/9/2019 Management for investment in real estate

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GURU GOBIND SINGH

INDRAPRASTHA UNIVERSITY

SYNOPSIS

MAJOR PROJECT

MANAGEMENT FOR INVESTMENT IN REAL

ESTATE AND INFRASTRUCTURE THROUGH

|PUBLIC PRIVATE PARTNERSHIP}

SUBMITTED BY:-

MANOHAR LAL SANKHLA

ENROLMENT NO.-001669008

MBA (REAL ESTATE)

6TH TRIMESTER 2010

MASTER IN BUSINESS ADMINISTRATION (REAL ESTATE)

UNIVERSITY SCHOOL OF MANAGEMENT STUDIES

NEW DELHI


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SYNOPSISMANAGEMENT FOR INVESTMENT IN REAL ESTATE

AND INFRASTRUCTURE THROUGH |PUBLIC PRIVATEPARTNERSHIP}

INTRODUCTION

Indian Real Estate sector required enormous investment in about every

field primarily commercial, residential, retail, industrial, hospitality and

core infrastructure. Whilst investors and property developers are excited at

the potential opportunity of investment opportunities in real estate and

infrastructure projects.

India is undoubtedly one of the fastest growing market with an emerging

real estate sector. Housing, real estate and infrastructure development,

holds key to economic prosperity of our country because of its backward

and forward linkages with other sectors of economy and more than 250

ancillary industries. It also has a multiplier effect of 5 on income and 8 on

development.

The real estate industry has been growing at the rate of 25-30 percent year

on year basis in the past and has been meeting one of the essential

requirements of housing which is terribly in short supply. Contribution of

real estate Sector to GDP has been around 6.5% and it has been one of the

main employer for unskilled and semi skilled labour (32 million).

The growth of the sector is attributable to liberal fiscal and credit facilities

of the Government during 2003-2007 period when home loans were

available at 7-8% interest rate and credit for development at 12-13%, beside

income tax rebates on investments for construction and purchases. Liberal

equity and FDI policies of the Government had also helped a lot in meeting

the liquidity requirements of the developers.


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The financial meltdown, that developed into a global economic crisis, had

the real estate market across the globe reeling under its pressure.

Consumer confidence was down and companies were finding it difficult to

manage even their day-to-day operations due to a freeze in credit.

Investments and rentals had gone down to an all time low and vacancy

level had increased. Realty stock had eroded 80-85% against over all fall of

around 60%.

Faced with severe liquidity crunch, developers downsized their operations

in recent past, looking at survival rather than expansion. Developers also

tried to reduce cost by down sizing establishment, reducing employees

salary and improving operational efficiency.

Declining demand, coupled with large unsold stock and liquidity crunch,

had stalled new launches. Effect of economic crisis was more on over

leveraged developers in comparison to those confined to core business.

Commercial and retail real estate projects had taken back seat. There weresharp cut in prices and rentals to enthuse customers. Some developersdivested non-strategic assets and excess land banks to raise funds forresidential projects.

The real estate sector in India is attracting huge investments. Private

equity players are considering big investments, banks are giving loans tobuilders, and financial institutions are floating real estate funds.

With 100% FDI in real estate now being allowed, overseas developers

are also closely looking at the market.

International investors like the US-based Warburg Pincus, Blackstone

Group, Broadstreet, Morgan Stanley Real Estate Fund (MSREF),Columbia Endowment Fund, California Public Employees' RetirementSystem (CalPERS), Hines, Tishman Speyer, Sam Zell's EquityInternational, JP Morgan Partners and Amaranth Advisors have beenfound to show interest. A few funds belonging to Warren Buffet'sBerkshire Hathway are also interested.


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Indian institutions like HDFC, ICICI Venture and Kotak Mahindra are

launching funds to invest in real estate. HDFC, in association with SBI

and ICICI Venture, has already launched a real estate fund, while ICICIVenture is also tying up with Tishman Speyer, one of the leading owner-

developer-operator of upmarket properties in the world.

Most of these funds have been meeting investment bankers, banks and

housing finance companies in India to get a feel of the market. The

developers are looking to tie up with Indian companies, while the privateequity funds seek to test the market with small investments in big

projects.

The developers are expected to bring in at least $100m. The pure privateequity players are expected to be passive players. They are likely to takea smaller stake in specific projects along with an Indian real estatedeveloper. These investors would prefer board berths.

The combined investments by various groups into Indian real estate

market could go up to $1.5bn. Funds are looking at returns of around 16-20%. The IT and Outsourcing boom in the country has raised the needfor quality commercial, residential, hospitality and health care facilities

as well

It is expected that the developers will bring in 10% of their own money,and raise the remaining money overseas or in India. A group of NRIshas raised $150m under the Indian Real Estate Opportunities Fund andare scouting for projects in India.

HDFC, in association with SBI, has been raising Rs 750 crore with agreenshoe option of Rs 250 crore for a real estate fund. It is likely to

invest in residential, commercial, and in IT properties. Kotak is alsoraising a real estate fund while ICICI Venture is in the process of raisingRs. 750 crore real estate fund.


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AIM ANDOBJECTIVE :-The project aim to study thescenario ofreal estate and infrastructure in India. In this broader

framework an attempt has been made to achieve the

following speci

ficobject ;-

- Why Invest in India

- Real Estate Investment

- Major Investors in India

- Investors Choice

- FDI in Real Estate

- FDI Investment Policies

- Latest Developments in FDI-Preferred Cities for Investment

To study the fundamental factors affecting the real estate value.

To examine the present factors ofreal estate boom.

To present the future ofreal estate investment in India.

Why Invest in India?

The Indian economy and the real estate sector in particular are high on

its ride to prosperity. As Indias economic growth curve rises, real

estate India has emerged as one ofthe most appealing investment

areas for domestic as well as foreign investors. Indian real estate has

huge potential demand in almost every sector, but especially

commercial, residential, retail, industrial, hospitality, healthcare etc.But maximum growth is attributed to its growth from the booming IT

sector, since an estimated 70 per cent ofthe new construction is for the

IT sector.


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Investment scenario has certainly undergone a paradigm shift in India.

Gone are the days when potential investors used to sought after

investment options like equity bonds and park money in shares where

your return ranges between 5.55 to 6%. Data showcased by propertysurveys show that returns from rental incomes on investment in

commercial property in Indian metros, is around 10.5%, the highest in

the world.

Key Facts

Selling and buying Indian property is now considered as the most

profitable and attractive business opportunity in the present real estate

scenario in India. New demands have added to strength ofreal estate

markets across the commercial, residential and retail sectors in India.

Not surprisingly, demand for Indian property has been increasing

steadily for the past few years and it has exceeded supply.

There has also been an upward swing on the real estate price values in

the recent years. Due to the huge demand and rising prices, investmentand speculative interest in real estate is growing while excess money

supply, stock market gains and policy changes are adding to the trend

in favor of the real estate sector.

In the last one year, the capital values ofthe commercial office spaces

has increased by up to 40% owing to the increase in the demand from

IT / ITES and BPO sector across major metros in India.

India has a distinct regulatory and financing management in place.

Real estate boom in India is supported by its own flourishing economy

on a sustainable basis. Here, growth ofthe property market is not a


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result ofrenovation and overhauling; but rapid development that

witness for India riding the high growth wave.

Factors Favoring Investments

Tremendous growth has been taking place in both residential as well as

commercial segments that is attracting huge investments phenomenal

price escalation (more than 100% in several places) in last couple of

years.

Lower interest rates, easy availability ofhousing finance, burgeoning

income and better job prospects, increase ofnuclear families have

given a boost to the demand for residential properties in India. The net

yields (after accounting for all outgoings) on residential property are

currently at 4-6% p.a. However, these investments have benefited from

the improving residential capital values. As such, investors can count on

potential capital gains to improve their overall returns. Capital values in

the residential sector have risen by about 25-40% p.a in the last 2 years.

The retail market in India has been growing due to increasing demandfrom retailers, higher disposable incomes and opening up ofFDI in

Retail. The capital appreciation in this sector is close to 20-35% p.a.

However, the risks associated with this sector are higher as retailers are

prone to cyclical changes typical ofa business cycle. Changing

consumer behavior combined with increasing disposable incomes will

ensure further growth ofthe retail sector in India.


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absorbed.

Tier II cities are the ones which saw substantial IT activity and saw good real

estate growth in the last few years

Tier III cities are the ones that are yet to emerge as key IT/BPO destinations.

As the boom continues, the real estate investors from India and all over the

globe are setting up operational bases in the top cities Tier I and Tier II cities

to cater to the increasing gap between the demand and supply ofresidential

and commercial properties in India. They can be considered as the hottest

destinations with sustained buoyancy, offering double digit returns on real

estate investment.

The major investments in the corporate sectors mainly the IT and BPO

sectors are concentrated in the premier cities of India like Delhi, Mumbai,

Bangalore, Chennai, Kolkata, Hyderabad, Gurgaon,Chandigarh, Pune etc. The

real estate development in these cities in the last few years has been

phenomenal and the realty prices in these cities have also skyrocketed.

Real estate investors in any part ofthe world would always opt for cities to

set up homes or corporate offices where there is a planned outlay ofthe city

and its associated infrastructure. Coming to basic infrastructure and

investment options Delhi, Mumbai and Bangalore have emerged as the top

three investors choices for real estate investment.

The realty in hot metro destinations is driven by the global outsourcing wave

sweeping India. Asf

ar as the commercial, retail and entertainment segmentsare concerned; estimates suggest that by the end of2008, the eight largest

Indian cities will experience a supply ofaround 66 million sq ft ofnew retail

space through more than 200 proposed retail centers.


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Real Estate Investment in India

The growth curve of Indian economy is at an all time high and

contributing to the upswing is the real estate sector in

particular. Investments in Indian real estate have been strongly taking

up over other options for domestic as well as foreign investors.

The boom in the sector has been so appealing that real estate has

turned out to be a convincing investment as compared to otherinvestment vehicles such as capital and debt markets and bullion

market. It is attracting investors by offering a possibility ofstable

income yields, moderate capital appreciations, tax structuring benefits

and higher security in comparison to other investmentoptions.

A survey by the Federation of Indian Chambers ofCommerce and

Industry (FICCI) and Ernst & Young has predicted that Indian real estateindustry is poised to emerge as one ofthe most preferred investment

destinations for global realty and investment firms in the next few

years.

The potential of India's property market has a revolutionizing effect on

the overall economy of India as it transforms the skyline ofthe Indian

cities mobilizing investments segments ranging from commercial,

residential, retail, industrial, hospitality, healthcare etc. But maximum

growth is attributed to its growth from the booming IT sector, since an

estimated 70 per cent ofthe new construction is for the IT sector


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Opportunities for Investors in Indian Real Estate

India in the recent times has been the potential goldmine for investors

all over the world. With a booming economy and liberalized

government policies, investors from all over the globe are choosing

India as their business destination.

As Indian real estate rules the economic vibes ofthe country, the most

important beneficiary ofthe recent boom in this sector is the investors.

Driven by positive growth in the real estate scenario and the

Government of Indias decision to allow100% foreign direct

investment (FDI) under the 'automatic route' in the construction and

development there has been a significant rise in the number of Indian

as well as foreign investors in the realty sector.

While top developers in India like the DLF, Ansal, Omaxe, Sobha

Developers, Bengal Ambuja, Unitech, Vatika and Sahara Infrastructure

among a few have initiated large scale real estate developments in the

residential sector catering to all segments ofthe society. With more

corporate houses entering real estate, a corporatisation ofreal estate

can be witnessed.

Real estate is much more professionally managed with a number ofbig

players (developers as well as corporates) entering the business. Thereare no monopolistic positions in real estate, as there are more players

today in the development game. The greater the number ofplayers,

the healthier the competition and the beneficiary ofall this would at

last be the end-user.


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In the residential segment, with the increase ofdisposable incomes and

easy availability ofhome loans, most builders are trying to woo

investors with lucrative features and the latest inclusions are premium

luxury apartments and condominiums fitted with the most modernaccessories in home luxury.

The commercial ventures include state-of-the-art office spaces,

sprawling malls, multiplexes and retail outlets. Reports indicate that

around 200 new malls with a combined retail spaceofRs.2.5 crore/sq.ft

and investment ofRs.12.500 crore are expected to come up in this

year.

The boom and the relaxation in FDI are also attracting interest from

foreign investors to invest in India and many are seen tying up with the

local developers in expanding their business. As the competition in the

market is intense, builders are going out oftheir way to be different

and provide quality services.

Major real estate investors in the foray

Emmar Properties, ofDubai one ofthe largest listed real estate

developer in the world has tied up with the Delhi-based MGF

Developments to announce India's largest FDI in the realty sector for

mall and other facilities in Gurgaon. On the other hand, in a recent

development DLF and UK-based construction major, Laing O'Rourke

(LOR), has joined hands for participation in airport modernization and


Again, Morgan-Stanley Real Estate has announced that its investment

ofaround US$ 68 million in Mantri Developers Private Ltd, a private

Bangalore-based real estate developer. DB Real Estate, a unit of


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As the Indian real-estate companies are in the expansion process to

meet the demand for homes, offices and retail space as overseas

companies are allowed in more industries and faster economic growth

boosts middle-class incomes in the country. This has also generated theneed for funds for investment into the realty sector creating the need

for organized finance.

As India opens up its market to foreign players there is bound to be a

competitive edge to give quality-based performance for customer

satisfaction which will consequently bring in quality technology and

transparency in the construction and realty sector. And the ultimatewinner irrespective ofall is surely to be the buyers.

Real Estate FDI

India oftoday can be acknowledged as the one ofthe fastest growing

economy in the world and in this current economic status, real estate

has emerged as one ofthe most appealing investment areas for

domestic as well as foreign investors. And this high growth curve in the

real estate sector owes some credit to a booming economy and

liberalized Foreign Direct Investments (FDI) regime in the real estate

sector.

The Government ofIndia in March 2005 amended existing norms to

allow 100 per cent FDI in the construction business. This liberalization

act cleared the path for foreign investment to meet the demand intodevelopment ofthe commercial and residential real estate sectors. It

has also encouraged several large financial firms and private equity

funds to launch exclusive funds targeting the Indian real estate sector.


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Until now, only Non Resident Indians (NRIs) and Persons of Indian

Origin (PIOs) were permitted to invest in the housing and the real

estate sectors. Foreign investors other than NRIs were allowed to invest

only in development of integrated townships and settlements eitherthrough a wholly owned subsidiary or through a joint venture company

in India along with a local partner.

Some ofthe foAs Indian real estate rules the economic vibes ofthe

country, the most important beneficiary ofthe recent boom in this

sector is the investors. Driven by positive growth in the real estate

scenario and the Government ofIndias decision to allow100% foreign

direct investment (FDI) under the 'automatic route' in the construction

and development there has been a significant rise in the number of

Indian as well as foreign investors in the realty sector.




residential sector catering to all segments ofthe society. With morecorporate houses entering real estate, a corporatisation ofreal estate

can be witnessed.


players (developers as well as corporates) entering the business. There

are no monopolistic positions in real estate, as there are more players

today in the development game. The greater the number ofplayers,the healthier the competition and the beneficiary ofall this would at





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luxury apartments and condominiums fitted with the most modern

accessories in home luxury.





year.


foreign investors to invest in India and many are seen tying up with thelocal developers in expanding their business. As the competition in the















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Deutsche Bank AG, has set up plans to start a global fund that will

invest as much as US$ 300 million in India to tap an expected surge in

demand for property.

Vancouver-based Royal Indian Raj International Corporation (RIRIC) will

invest a whopping US$ 2.9 billion in a single real-estate project named

Royal Garden City in Bangalore. Estimated to be ofretail value Rs

41,000 crores, this project is to be completed in period of10 years.

Indonesia-based Siputra Selim group is slated to invest $200 million into

the housing sector in Kolkata.

Indiabulls Real Estate (IREL) is proposing to enter into arrangements

with Dev Property Development, a company incorporated in the Isle of

Man, whereby Dev shall subscribe to new shares and also acquire a

minority shareholding from the company, in Indiabulls Property (IPPL),

Indiabulls Real Estate (IRECPL) and Indiabulls Infrastructure

Development (IIDL). Dev has completed an initial public offering of its

ordinary sharesf

or a total amount of

Rs 12 billion or GBP 138 millionand shall be listed on the alternative investment market ofthe London

Stock Exchange.

As the real estate investments open up opportunities for the associated

fields like Home LoansandHome Insurance, a number ofglobal

insurance companies have shown interest in the sector. This include

companies like Cesma International from Singapore, AmericanInternational Group Inc (AIG), High Point Rendel ofthe UK, Colony

Capital and Brack Capital ofthe US, and Lee Kim Tah Holdings to name

a few.


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As the Indian real-estate companies are in the expansion process to

meet the demand for homes, offices and retail space as overseas

companies are allowed in more industries and faster economic growth

boosts middle-class incomes in the country. This has also generated theneed for funds for investment into the realty sector creating the need

for organized finance.

As India opens up its market to foreign players there is bound to be a

competitive edge to give quality-based performance for customer

satisfaction which will consequently bring in quality technology and

transparency in the construction and realty sector. And the ultimatewinner irrespective ofall is surely to be the buyers.

Real Estate FDI

India oftoday can be acknowledged as the one ofthe fastest growing

economy in the world and in this current economic status, real estate

has emerged as one ofthe most appealing investment areas for

domestic as well as foreign investors. And this high growth curve in the

real estate sector owes some credit to a booming economy and

liberalized Foreign Direct Investments (FDI) regime in the real estate

sector.

The Government ofIndia in March 2005 amended existing norms to

allow 100 per cent FDI in the construction business. This liberalization

act cleared the path for foreign investment to meet the demand intodevelopment ofthe commercial and residential real estate sectors. It

has also encouraged several large financial firms and private equity

funds to launch exclusive funds targeting the Indian real estate sector.


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Until now, only Non Resident Indians (NRIs) and Persons of Indian

Origin (PIOs) were permitted to invest in the housing and the real

estate sectors. Foreign investors other than NRIs were allowed to invest

only in development of integrated townships and settlements eitherthrough a wholly owned subsidiary or through a joint venture company

in India along with a local partner.

Some ofthe foreign players who have already tied up with Indian real

estate developers are Lee Kim Tah Holdings, CESMA International Pvt

Ltd., Evan Lim, and Keppel Land from Singapore, Salim Group from

Indonesia, Edaw Ltd., from USA, Emaar Group from Dubai, IJM, Ho Hup

Construction Co., from Malaysia etc.

Indian Real estate is on the high growthpath

In 2003-04, India received total FDI inflow ofUS$ 2.70 billion, ofwhich

only 4.5% was committed to real estate sector. In 2004-05 this

increased to US$ 3.75 billion ofwhich, the real estate shares was

10.6%.

However, in 2005-06, while total FDIs in India were estimated at US$

5.46 billion, the real estate share in them was around 16%. The Study,

nevertheless projects that in 2006-07, total FDIs will touch about US$ 8

billion in which the real estate share is estimated to be about 26.5%.


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Source: ASSOCHAM report

Guidelines for FDI application in Indian real estate The

Government of India has set up certain guidelines forinvestors willing to apply in FDI in real estate, which have conditions

like area, investment options and target for completion ofa project.

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) 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


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from completion of capitalization.

y The investor may exit earlier with prior approval from ForeignInvestment Promotion Board (FIPB).

3) Time frame & rulesy At least 50 per cent of the project to be developed within five years

from the date of obtaining all statutory clearances.

y Investor cannot sell undeveloped plots - where roads, water supply,street lighting, drainage, sewerage and other conveniences are notavailable.

REMF and REIT

One ofthe most anticipated promises for the Indian real estate sector,

which in turn will benefit developments ofhotels, has been the entry of

Real Estate Mutual Funds (REMFs) or Real Estate Investment Trusts

(REITs).

Industry experts believe that REMFS and REITS will definitely ensure

more availability offunds to the developers and faster growth ofreal

estate sector. A few real estate entities like HDFC Real Estate Fund,

ICICI-Tishman Speyer, Ascendas India IT Park Fund, Kotak Mahindra

Realty Fund, IDFC, and Edelweiss Capital have received approval and

started investing in real estate.

FDI in Indian Real Estate and Economic Growth

With this change in the government policy on FDI, all real estate

sectors, residential, commercial and retail are currently witnessing


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huge growth in demand. India, during the first halfof2005-06 fiscal has

attracted more than three times foreign investment at US$ 7.96 billion

during making it amongst the "dominant host countries" for FDI in Asia

and the Pacific (APAC).

India in the next five-year period is estimated to require investments

worth US $ 25 billion with the urban housing sector. This again has

opened up opportunities for foreign investments in the realty sector.

The Central government allowed up to 100% FDI for setting up

townships in 2002. However, the flow ofFDI investments has been

thwarted by the 100 acre criterion; since acquiring such a large chunk

of land was impossible in metropolitan cities and even satellite cities

and state capitals. But a landmark decision taken by the Union

government in 2005, where the minimum land area for development

by foreign investors was lowered from the earlier floor of100 acres to

25 acres has thrown open the lucrative parts ofthe Indian realty

market to global investors. Another perceptible spin-offofthe easing of

FDI policies will be the impact on quality and inevitable acceleration inconstruction activities.

Foreign Direct Investments in the real estate sector in India would also

contribute towards making the sector more organized. Besides

increasing professionalism in the sector, it would bring in advanced

technology and help in the creation ofhealthy and competitive market

environment for both domestic and foreign investors.

As Indian real estate rules the economic vibes ofthe country, the most

important beneficiary ofthe recent boom in this sector is the investors.

Driven by positive growth in the real estate scenario and the

Government of Indias decision to allow100% foreign direct


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investment (FDI) under the 'automatic route' in the construction and

development there has been a significant rise in the number of Indian

as well as foreign investors in the realty sector.




residential sector catering to all segments ofthe society. With more

corporate houses entering real estate, a corporatisation ofreal estate

can be witnessed.

Real estate is much more professionally managed with a number ofbigplayers (developers as well as corporates) entering the business. There


today in the development game. The greater the number ofplayers,

the healthier the competition and the beneficiary ofall this would at











year.


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market is intense, builders are going out oftheir way to be differentand provide quality services.












Deutsche Bank AG, has set up plans to start a global fund that will

invest as much as US$ 300 million in India to tap an expected surge in

demand for property.

Vancouver-based Royal Indian Raj International Corporation (RIRIC) will

invest a whopping US$ 2.9 billion in a single real-estate project named

Royal Garden City in Bangalore. Estimated to be ofretail value Rs41,000 crores, this project is to be completed in period of10 years.

Indonesia-based Siputra Selim group is slated to invest $200 million into

the housing sector in Kolkata.


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players (developers as well as corporates) entering the business. There


today in the development game. The greater the number ofplayers,the healthier the competition and the beneficiary ofall this would at











year.






Sample SizeOut of the total companies working in India in the field of real estatemajor players have been selected for the purpose of the study.

Research MethodologyThe present study is of analytical and exploratory nature. Accordinglythe use is made of secondary aswell as primary data. The secondary data


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is collected mainly through various newspapers, magazines, Internet andRBI review. To supplement the secondary data, some primary data hasalso been usedInternet and RBI review. To supplement the secondarydata, some primary data has which is collected through interviews and

personal visits to the various companies to know the present situation ofthe market.The present study is dependent more on secondary data.Primary data is not used due to the reliability of the data. The factors inthe present paper are the Macro Economic factors for which thesecondary data is more suitable and reliable. The collected in theaforesaid manner have been tabulated

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Management for investment in real estate

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