Funding Real Estate in India

A staggering $90 billion by 2015 – that’s where real estate in India is expected to be, as per Merrill Lynch in its latest report.

As realty experts rejoice and real estate builders in India put in place their plans for a slice of the big pie, the RBI sounds a note of caution. The apex bank is apprehensive that the capital inflows that will pour into real estate in India should conform to FDI norms.

As the economy takes bigger steps, the demand for quality infrastructure and real estate will only multiply. At stake is the massive workforce that real estate employs – clubbed with construction and facilities, it is the 2nd largest employer in India. Moreover, through backward and forward linkages, 250 ancillary industries are dependent on it. Any hike or dip in real estate therefore, has a cascading effect on these industries and the workforce.

With this in view, real estate in India needs to be supported with concessions and sops, to enable it to contribute to at least 3 to 6% of the GDP, as against just 1% currently.

To finance the real estate projects, debt and equity can be used to advantage. Banks, non-banking financial corporations and external commercial borrowings (ECBs) could be sourced for funds. As for equity, investments can be made in the project directly or as an entity. FDI can be directed to finance the construction and development of residential or commercial projects. Returns on commercial spaces especially are very profitable, assuring 11 to 12%, with Greenfield projects pulling in between 20 to 25%. In fact, ASSOCHAM has projected a return of 26% for 2007 on investments in real estate in India as against 16% in 2006.

The impressive turnout by investment companies putting their faith in real estate in India is enlisted in the table below, compiled by Jones Lang LaSalle’s report for the 1st quarter of 2007:

Of late, investment companies in India have been seeking the Alternate Investment Market (AIM), London to raise capital for large-scale real estate projects. FDI through this source has so far come from Trinity, Eredene, India Hospitality Corp, Ishaan Real Estate Corp (K.Raheja), Unitech Corporate Parks, and Hirco (Hiranandani).

There has much debate on the real estate scene of late are we still
in the boom period, or has the boom gone bust? Is it a price correction
or a slowdown?
To keep speculation and inflation at bay, the Finance Ministry
stepped in with precautionary measures to pre-empt uncontrolled growth
of the property market in India.

Apart from internal controls on banks
and loans, the Ministry stipulated that if foreign institutional
investors wished to invest in pre-IPO placement of real estate companies,
such an investment would be treated as foreign direct investment.

This
would perforce ensure the lock-in period applicable to FDIs,
reducing the scope of speculation and pinning down more responsibility
on the investor. Another protective move by the Securities and Exchange
Board (SEBI) requires financial appraisal of the companies on the basis
of their development plans, and not on the value of their land
banks.

The valuers of these properties could soon be asked to register
on the SEBI. The real estate industry in India has evolved from
being a construction enterprise to a city building industry, and through
large scale infrastructure projects, a nation building behemoth.

As it
turns to more professional methods of governance and acquires
transparency and strict compliance to standards and policies, it offers
amazing opportunities for building wealth for all institutions, industries
and individuals connected with it.

Photo: Scope farms moinabad by Tahersn, licensed under CC0, via Wikimedia Commons.