Download Growth Drivers

CONSTRUCTION
SECTOR IN INDIA
Chander Agarwal
Roll#22A
Indian Economy

Indian economy is the
fourth largest
economy in terms of
purchasing power
parity.

GDP growth rate
accelerated from
7.5% in 2004-05 to
9.2% in 2007-08

GDP growth rate
estimated at 7.8% in
2008-09
Contents
1
Indian Economy : Current Status of Foreign Direct Investment in Real Estate
Sector in India, its Growth and Key Drivers
2
Demand of Residential, Commercial ,Retail and Hotel Spaces with Major
Players In the Market
3
Tax environment – Law Models ,Guidelines for Investment for Developers &
Investors
4
Challenges facing Real Estate sector & future trends
Current Status of FDI
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India continues to be a favorite foreign direct investment
(FDI) destination as FDI trebled to US$ 11.4 billion in the
first half of 2007, from US$ 3.6 billion in 2006.
India has ranked second in capital market inflows and
fourth in mergers and acquisitions in Asia Pacific, with
transactions worth US$ 65.033 billion reported in the first
eight months of calendar 2007, according to Thomson
Financial..
With an estimated intangible assets component of 74 per
cent (as proportion of total enterprise value), India is just
behind US (75 per cent) and Switzerland (74 per cent),
according to Global Intangible Tracker 2007, the most
extensive global study ever on intangibles assets by the
London-based Brand Finance Institute.
Indian firms listed in the US have a reason to smile their total market value has grown by close to US$ 20
billion since the beginning of 2007.
Growth in Real Estate
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1.1% of the GDP constitutes FDI in Real
Estate Sector.
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Return in India range from 12-15%
compared to 3-4% in advance countries
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Merrill Lynch forecasts that Indian Real
Estate Sector shall grow from US 12Billion
in 2005 to US $ 90 Billion by 2015
Growth in Real Estate
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US $ 320 Billion investment is required in
next 5 years in infrastructures
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Real Estate Sector is registering an annual
growth rate of 30% Investment of US $ 16
billion expected over the next 5 to 6 years.
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Credit to the Housing Sector has continued
to be strong and benefited from low
interest rates and incentives.
Demographics and Development
Global urban population is expected to grow
from 2.86 billion in 2000 to 4.98 billion in
2030, of which high-income nations will
account for only 28 million out of the
expected increase of 2.12 billion (Source: UN-Habitat
1.
2004)
In India, 19.9% (in 2001 that translated to
~200 million) of total population lived in our
urban areas, and contributed 38.9% of GDP.
2.
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A simplistic but linked projection based on the
two statements above seems to indicate at least
500 million of India’s 2030 population could be
urban, but only by assuming that the rural-tourban population shift remains static, and zero
percent population growth!
State of the Real Estate Market
•
The sector remains largely urban & semi-urban, and
again, largely unorganized
•
There are less than a dozen developers in the
country who are able to deliver relative quality, and
operate in niche territories, although a few amongst
them are seeking to expand their geographical
footprint.
•
The sector has recently shown explosive growth,
and this growth was not caused by increased FDI
•
Nevertheless, many (incl. FIIs’) feel that prices are
overly rich and unsustainably high
State of Real Estate Market-2
•
•
•
A key question: Is relative pricing
predominantly set by investors or end users?
Industry sources say that end user buying has
gradually increased over the last ten years (to
60+% from 35%)
India could do with a clutch of quality foreign
developers to offer much needed competition
and improve the quality of our (perhaps
already improving) residential and office
offerings that mostly come to us from less than
a handful of Indian developers
Many of us are probably just as surprised as
others elsewhere how tenets of basic urban
planning especially related to primary
infrastructure are so casually ignored. This is
true in both tier-1 and tier 2/3 cities
Growth Drivers for Real Estate
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The robust growth in IT sector has pumped up the
growth in Real Estate Sector. An estimated 70% of
new construction is to cater IT Sector.
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Retail Sector is also growing at a fast pace . India is
ranked 5th in the list of 30 emerging retail markets
and 20% growth rate is predicted for the Organized
Retail segment by 2010.
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Spiraling demand for hotel rooms has brought
boom in Hotel Industry The demand supply
imbalance will continue to be over 50% beyond
2010, generating substantial business for real
estate.
Growth Drivers for Real Estate

Rapid Urbanization
Urban Population expected to touch 590 million
by 2030
Decreasing Household size: Average H/h size
fell from 5.4 in 1981 to 5.1 in 2000
Increasing working age population (Almost
64% in 16-64 age group)
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Market Structure
Highly fragmented and unorganized
Regional players are expanding to achieve a
Pan-India presence
FDI in Real Estate
Till recently, FDI in real estate was restricted to development of industrial parks,
hotels, integrated townships and SEZ’s. On March 3, 2005, Government of India
replaced the integrated township policy to permit FDI upto 100% in townships,
housing, built-up infrastructure & construction - development projects, under
automatic route (Press Note 2 (2005 series))
FDI is now permitted in:
 townships
 industrial parks
 housing
 resorts
 commercial premises
 educational institutions
 hotels
 recreational facilities
 resorts
 SEZ’s, etc
 hospitals
Growth Potential & Expected Trends
Key demand drivers
Residential
Office Space
Retail
• Increase in urbanization
& working population
• High disposable incomes
& aspiration levels
• Easier access to finance
• Fiscal incentives on
house loans
• India accepted as most
attractive destination for
IT & BPO services
• Entry of global brands
• Organised retailing only
2% of total retail industry
• India ranked as second
most attractive retail
destination by
AT Kearney
Hotels
• Increased business travel –
both domestic & foreign
due to buoyant economic
growth & growing FDI
• 2004 saw record tourist
arrivals of 3 mn. By 2020,
India is expected to be a
leading tourist destination
in South Asia with more
than 8 mn tourist arrivals
 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
Demand of Spaces
Integrated Town-ships
 Residential Spaces
 Commercial Spaces: Offices
 Retail Spaces: Malls & Shops
 Hospitality Spaces: Hotel Rooms
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Integrated Town Ships
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Central Government has sanctioned
setting of such Integrated townships
at
Gurgaon-Haryana
Hyderabad-AP
Mohali-Punjab
Chennai-Tamilnadu
Banglore-Karnataka
Kolkata-West Bengal
More Town ships are under
cosideration
Residential Space

Increasing income levels:
Average salary levels
increased by 13.5% in 2005

Easier access to mortgage, long
tenure loans and tax incentives
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Source : National Institute of Urban Affairs
Residential Space Contd….
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Segmentation
Broad categories include Low cost/Mid market/
Premium housing
Luxury segment growing annually at 25-30%
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Outlook
Current shortage close to 25 million units,
predominantly in middle and low income group
Expected to grow at CAGR of 18-19% up to by
2010
Mortgage finance will be increasing penetration
into the urban housing finance sector
Annual Home Loan Disbursal from Formal Sector
and Commercial Banks, HFCs & Coop Institutions
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Source: The Working Committee of the 11th Plan (2007-12)
Commercial Space
Growth Drivers
 Rapid Urbanization: Urban Population expected
to touch 590 million by 2030
 Decreasing Household size: Average H/h size fell
from 5.4 in 1981 to 5.1 in 2000
Increasing working age population (Almost 64%
in 16-64 age group)
Segmentation
 Commercial Space can be classified broadly into
Grade A and B
Business activity shifting from CBD to SBD and
from Tier I to Tier II & III cities
Retail Space
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Segmentation
Organized retail contribution to the retail industry
grew from 2% in 2003 to 4.4% in 2006
International retailers are present through
franchisee route
Outlook
FDI norms are likely to be relaxed in next 2-3
years
Organized retail expected to grow at around 30%
Share of organized retail, by sales expected to
reach 10% by 2010
Hospitality Space
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Growth Drivers
• More than 4.4 million international visitors
and 430 million domestic tourist visits in 2006
• Low cost airlines
• India requiring recognition as a medical tourism
destination
• International events such as Commonwealth
Games
• Emergence of India as a MICE destination
Market Structure
• Entry of several corporate houses such
as Reliance
• Existing hotel operators are scaling up
their operations
Hospitality Space
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Developers are tying up with major
international chains
Developers have set up RE funds to finance
their Ventures
Segmentation
Classification on the basis of Star Rating of
1 to 5 star deluxe
100,000 hotel rooms in India in various
categories, Five Star and Five Star Deluxe
contributing close to 30,000 rooms
Budget Hotels
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Indian Railways plans to build over 100
budget hotels on its vacant land near
railway stations across the country. It
wants to cater to people who travel by
trains extensively and provide them
facilities for a comfortable stay.
This is keeping in view the fact that
the railway traffic is growing over 17 to 18
per cent. Construction of budget hotels on
Railways’ land would be undertaken by
IRCTC under the Public-Private Partnership
scheme.
Major Players
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Real Estate Developers
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Indian:DLF,Unitech,Universal,Parsvanath,
Omaxe
Foreign: Ascendas, Emmar Group, Salem
Group,CESMA International,LJ Hooker
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REVFs/REMfs
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Indian: IDFC,Kotak Mahindra,Dewan
Housing,HDFC
Foreign : Black Stones, Dawnay Day,
Savvils,Macquaries Bank etc.
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FDI in Real Estate :Law
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100% FDI is allowed under automatic
route in townships, housing, built-up
infrastructure and construction
development projects (including but not
restricted to housing , commercial
premises, hotels, resorts, hospitals,
educational institutions, recreational
facilities and regional level infrastructure.

FDI upto 51% is allowed through FIPB
route in single brand retail shops.
FDI in Construction & Development : Guidelines
FDI backed projects would be accorded national treatment at par with local developers State Government’s/ Municipal bodies will now approve projects for constructiondevelopment involving foreign investment.
 Minimum 10 hectares/ 25 acres area to be developed for serviced housing plots
Developmen
t criteria
 For construction-development projects, minimum built-up area of 50,000 sq mts prescribed
 In case of a combination project, any one of above two conditions would suffice
Investment
conditions
 Minimum capitalization of US$ 10 million for wholly owned subsidiaries & US$ 5 million for joint
ventures with Indian partners
 Funds to be brought in within 6 months of commencement of business
 Original investment cannot be repatriated before a period of 3 years from completion of minimum
capitalization. Investor may be permitted to exit earlier with prior Government approval
Other
conditions
 At least 50% of project must be developed within of 5 years from date of obtaining all statutory
clearances
 Investor not permitted to sell undeveloped plots**
 Project to conform to norms & standards laid down by respective State authorities
 Investor responsible for obtaining all necessary approvals as prescribed under applicable
rules/bye-Iaws/regulations of the State
 Concerned Authority to monitor compliance of prescribed conditions by developer
* As per Press Note 2 (2005 series) dated March 3, 2005
** “Undeveloped” plot means where roads, water supply, street lighting, drainage, sewerage & other conveniences have not
been made available. It will be necessary that investor provides this infrastructure & obtains a completion certificate prior to
sale of serviced housing plot
FDI in Industrial Parks & Hotels
 FDI upto 100% permitted under automatic route in Industrial Parks (ie
Industrial
Parks
Technology Parks, Biotech Parks), approved by State Government
 Approval from Department of Industrial Policy & Promotion under Industrial
Park Scheme, 2002 is only for availing 100% tax holiday
 100% FDI permitted in Hotels & Tourism under automatic route
Hotels &
Tourism
 FDI in Hotels should not be governed by Press Note 2 (2005 series) –
clarification required
Special Economic Zones :SEZ
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SEZ is a specifically delineated duty free enclave
and is deemed to be foreign territory for the
purpose of trade operations and duty/tariffs. To
augment infrastructure facilities for export
production it has been decided to permit the setting
up of SEZ in public, private, and joint sector or by
State Governments of India .
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SEZ Act 2005 and SEZ rules 2006 have come into
effect which enable India to leverages SEZ, like
many East Asian economies. And to push growth
and investment to higher levels.
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Details can be had from www.sezindia.nic.in
SEZ – The Next Frontier
100% FDI permitted under automatic route for setting up of SEZs
Recent Developments
The Concept
 SEZ Act and rules implemented
Special Economic Zones
1
Fiscal Incentives
2
Regulatory
Freedom and
Hassle-free
Business
Environment
3
World Class
Infrastructure
Envisaged “Pillars” of the SEZ concept:
• A bundle of fiscal incentives to zone investors,
zone occupants and zone suppliers
• An overall zone governance that provides for
efficient unhindered business activities
particularly for export oriented enterprises
• Superior infrastructure of global standards
 Provides single window approval mechanism for
developers & units in SEZs
 Provides fiscal concessions for SEZ units/
developers - exemption from customs duty, excise,
Cess, service tax, income tax, stamp duty (under
Indian Stamp Act, 1899), etc
 Expected to trigger significant inflow of funds in
infrastructure, increase production capacity and
creation of new employment opportunities
Incentives & Facilities for SEZs.
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The incentives and facilities offered to the
units in SEZs for attracting investments
into the SEZs, including foreign investment
include:-
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Duty free import/domestic procurement of
goods for development, operation and
maintenance of SEZ units
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100% Income Tax exemption on export
income for SEZ units under Section 10AA
of the Income Tax Act for first 5 years,
50% for next 5 years thereafter and 50%
of the ploughed back export profit for next
5 years.
Incentives & facilities : SEZs
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Exemption from State sales tax and other levies as
extended by the respective State Governments.
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The major incentives and facilities available to SEZ
developers include:-
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Exemption from customs/excise duties for
development of SEZs for authorized operations
approved by the BOA.
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Income Tax exemption on export income for a block
of 10 years in 15 years under Section 80-IAB of the
Income Tax Act.
Incentives & facilities Contd.
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Exemption from minimum alternate tax under
section 115JB of the Income Tax Act.
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External commercial borrowing by SEZ units upto
US $ 500 million in a year without any maturity
restriction through recognized banking channels.
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Exemption from Central Sales Tax
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Exemption from Service Tax.
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Single window clearance for Central and State level
approvals.
SEZ Approval Status
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Total Investment in SEZs is expected to be
over US $ 10 Billion in next 5 years.
Consequent upon the SEZ Rules coming
into effect w.e.f. 10th February, 2006,
Twenty-one meetings of the Board of
Approvals have since been held. During
these meetings, formal approval has been
granted to 439 SEZ proposals. There are
138 valid in-principle approvals. Out of
the 439 formal approvals, 195 SEZs have
been notified. 237 SEZ have been
approved. So far 63-65 SEZ are
operational & functional
External Commercial Borrowings
 All corporate borrowers are eligible to raise ECBs up to a
maximum of US$ 500 million under automatic route
 ECB can be raised only for investment in real sector - industrial
sector including small and medium enterprises and
infrastructure sector in India, including industrial/ technology
parks and for working capital requirement
 ECB not permitted for real estate activities other than
development of integrated townships as defined by Press Note
3 (2002 series) (ie the 100 area criteria)
By implication, if ECB is not permitted for projects qualifying under Press Note 2 2005 series , corresponding changes
have been incorporated in the new ECB policy.
Foreign Collaboration: Business Models
PRIVATE EQUITY CAPITAL - Pure financial investment to provide base capital
required to undertake larger projects and reduce exposure to debt financing
JOINT VENTURE COMPANY – Foreign investor to contribute capital and
engineering capabilities. Indian developer to contribute land and local
resources. Both partners have joint ownership of project specific SPV.
JOINT DEVELOPMENT AGREEMENT – Foreign investor sets up Indian
presence and undertakes development activity. Indian partner contributes land
and receives deferred consideration in terms of share of development or share
of revenues.
Venture Capital Funds (VCF)
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In 2004 , SEBI allowed venture capital
funds to invest in local real estate.
So far over 30 Foreign funds have applied
to start operations in India.
VCFs invest in new properties with a lock in
period averaging about 7 years. VCFs and
Foreign Venture Capital Finds Investors
are exempted from the lock in period
requirements, if the shares were held by
them for at least one year at the time of
filing of the draft prospectus with SEBI.
US $ seven to eight billion is estimated to
flow into real estate in next 3 years
Real Estate Mutual Funds (REMFs)
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Recently SEBI has approved the scheme of
REMF.
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This scheme has objective of direct or
indirect investment in Real Estate Property.
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The units of REMFs will be compulsorily
listed in Stock Exchanges and NET ASSET
VALUE (NAV) of the scheme shall be
declared daily.
REMFs
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REMFs can invest directly in Real Estate
properties within India , mortgage, housing
lease, backed securities, equity shares
,bonds ,debentures of listed and unlisted
Companies .which deals in real estate
properties and also undertake property
development and other other securities.
FDI in Real Estate – Issues to be addressed

What constitutes ‘commercial premises’? Whether FDI permitted in malls/ shopping centres?

Whether ‘date of commencement of business’ implies ‘start date of construction activities’ or ‘date on
which agreement for construction/ acquisition of land are signed’?
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For sale of serviced housing plot, completion certificate to be obtained for entire project or only the
land to be disposed? Whether State laws to be amended to provide for requirement of issue of
‘completion certificate’?
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Whether FDI allowed in project specific SPV or also permitted in existing listed/ unlisted real estate
companies engaged in prescribed activity?
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Whether FDI permitted for acquisition of SPV’s which owns developed/ partly developed property and
intends to develop future properties?
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Definition of Industrial Parks for the purpose of FDI policy?
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In the definition of ‘undeveloped plots’, what does the word ‘other conveniences’ include?
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‘Built up area’ condition - To be fulfilled at initial sanction stage or at time of completion?
Future Trends for FDI
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Japan has committed over US$ 2.04 billion as assistance to develop nine
infrastructure projects in India.
Government Initiatives
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The sweeping economic reforms undertaken by the government aimed at
opening up the economy and embracing globalization have been
instrumental in the surge in FDI inflows.
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Restructuring the Foreign Investment Promotion Board.
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Establishment of the Indian Investment Commission to act as a one-stop
shop between the investor and the bureaucracy.
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Expanding the number of industries for which 100 per cent FDI is allowed
through the automatic route.
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Progressively raising the FDI cap in other sectors like telecom, aviation,
banking, petroleum and media sectors among others.
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Removal of the investment cap in the small scale industries (SSI) sector.
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With government planning further liberalization measures across a broad
range of sectors and continued investor interest, the inflow of FDI into
India is likely to further accelerate. Already, buoyed by the growth in FDI
into the country, the government has put a target to attract US$ 30 billion
in the current financial year (2007-08).
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Japanese Investment in India
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328 Japanese-affiliates in India (as of Jan.
2006)
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Location: Delhi 67
Bangalore 57
Mumbai 45
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Chennai 36
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Major Sectors :
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Automotive Components,
Trading,
Machinery, Electrical Goods,
Transport,
IT,
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Infrastructure
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Many investment from Japanese Affiliates in ASEAN, which does not appear in
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statistics
NO REAL ESTATE INVESTMENTS
THANK YOU
For Your Kind Attention