Dear Sir,
Your articles on Indian real estate were quite insightful (IBLJ volume I issue 9).
It’s true that Indian real estate has undergone a revolution, attracting domestic as well as foreign investors. This growth is being driven by India’s booming economy, a liberalized foreign direct investment regime and rising income levels of a growing middle class.The 2001 Census of India indicated that 41% of the population will live in urban areas by 2011. This will maintain the growth of the housing sector and other real estate components.
There are, however, some indicators that suggest a bubble. Unreasonably inflated real estate prices, higher vacancy rates in residential and commercial projects, undue delay in the completion of projects and the withdrawal of both domestic and international investors may suggest this.
Recent times also saw a fall in prices. However, a 10-15% correction in prices, a few vacant spaces and a little slowdown in the economy does not necessarily indicate a bubble. With families getting smaller and pay cheques getting bigger, people have become more willing to borrow money to invest in real estate.
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Research by Indicus Analytics predicts a demand for 24.3 million new homes in urban India by the end of 2015. Meanwhile, Merrill Lynch believes that a total investment of at least US$25 billion will be required in urban housing over the next five years.
Demand for commercial property has been driven by the success of India’s outsourcing, retail and IT sectors. The growth in the economy has led to the development of commercial property to meet the requirements of business needs, offices, warehouses, hotels and retail shopping centres.
The introduction of REITs and REMFs will boost access to capital while reducing its cost. These investment vehicles will also enable a new class of investor to participate in the property market.
The greater transparency and skilled management that REITs and REMFs will bring with them promise to introduce greater efficiency and better value for money into the real estate sector.
India has significantly higher rates of stamp duty and property tax than many other countries. This has led to many instances of non-registration of property transactions. Transparency and disclosure in the sector is also limited and the entry of new smaller and inexperienced players into the market has exacerbated this problem.
Land holding is also a concern. One cannot hold a piece of land bigger than the prescribed limit, though many states have repealed this limit. Examining the title of the property can also be a nightmare especially when the property in question is out of metro cities.
Foreign investors face additional problems in the form of heavy restrictions relating to the minimum size of the land, the total value of the project, the time for completion and the minimum time for the repatriation of funds.
India’s burgeoning real estate sector therefore has a gloomy side too. The government must ponder these negative factors and address them proactively in order to sustain and enhance the growth of this dynamic sector.
Ravi Nath
Partner
Rajinder Narain & Co
New Delhi
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